Is the property boom already a bubble?

By Rex Mathew
02 December 2006

Property prices across the country have gone sky high, raising fears of overheating, and property stocks are getting astronomical valuations. Are we seeing 'just the tip of the iceberg' as the bulls say or is this already a bubble?

"Buy land, they are not making it any more" — Mark Twain

One of the biggest beneficiaries during most periods of sustained economic expansion is the property sector. Real estate prices firm up initially on genuine demand for new commercial space, production facilities and housing. Then, as always, speculators take over and prices soar to unrealistic and unsustainable levels which trigger a collapse later on. As veterans in the property sector say, in real estate gravity always comes into play.

It has been no different in India over the last few years. After the crash in property prices in late nineties, the sector was in a limbo for many years. Property development was one of the least fashionable businesses as inventory of unsold properties piled up. That has all changed in the last few years and some of the new entrants to the country's list of dollar billionaires are property developers.

The RBI has been warning banks about rising real estate prices and asking them to be prudent in lending to the real estate sector for quite some time now. Even so, property prices in the big cities have only gone up - in some cases the growth has been around 40 per cent annually for the last few years. The developers have already moved into smaller cities, where the rise in prices have been nothing short of phenomenal.

Behind the boom
Every boom, irrespective of the sector, is based on very sound economic logic of demand and supply conditions. As the good times extend further, future projections take the place of real demand and supply conditions and the rally is stretched further. In this phase, the rise in prices would be very fast and it attracts a lot of speculators who do not have the staying power. The rally becomes a full blown bubble which breaks at some point, taking down even genuine investors.