In our previous articles, we discussed the real estate market in Japan and the United States. These markets are in developed countries, and their economies have a high level of self-sufficiency. India, on the other hand, is a developing country with a different situation. In the 1990s and early 2000s, India experienced rapid growth. This rapid growth was largely driven by service exports, mainly to the United States. Globalization has completely changed the economy, and the real estate market has seen a newfound volatility. This article will trace the evolution of the Indian Real Estate Market from a safe-haven conservation market to a speculative market driven by leverage.
Conservative Market of 1980
India was mostly a country of poverty before the 1980s. After 200 years of British slavery, India gained its independence in 1947. The land was left destitute and poverty-stricken. The poverty created a risk-averse mentality. Indians had witnessed exploitation by both the British and local landlords. They were, therefore, increasingly wary of debt. The economy was built on hard work and saving. Investments were made, then cash purchases were made. Any form of debt was viewed with disdain.
The real estate market of India in the 1980s was hardly active. It is because people did not want to borrow money to invest in property. Their incomes were also limited, so the only way they could buy a house was to save for several years.
Boom and Bust in 1990
In the 1990s, a lot changed. India experienced one of its first bull markets. Investor confidence was high, and the stock market was on fire. Harshad Mehta, a little-known broker who had been working the streets for years, was now one of the most prominent names in the stock exchange.
Millionaires are made overnight by people who have realized their gains. Investors who realized their gains found the real estate market to be a safe place to invest their money. This increased amount of money created a boom in the real estate market. This same market, which hadn’t moved more than a few percentage points over the last few years, was now moving at over 10% per year!
The party ended soon. The regulators discovered that Harshad Mehta was swindling bank investment money. Harshad Mehta used the ill-gotten funds to boost the market and then sold his investments for inflated prices. The market crashed when the scheme was exposed. The index of the stock market was reduced by 50% from its peak. Investors sold their stocks to cover their losses, which had a negative impact on the real estate market. The property market was under extreme downward pressure, and prices fell by more than 40% within a few years.
The Boom of 2000
From the early 1990s until early 2000, there was a slowdown in the real estate market. From the year 2000, this situation changed again. India has reaped many benefits from globalization. India’s large English-speaking and technologically advanced workforce allowed a significant amount of Information Technology (IT) to find its way into the Indian market. Unemployed Indians suddenly found themselves in a high-paying job.
The American job market also brought American culture into the real estate market. As Indians became more wealthy, they began to abandon conservative values in favor of borrowing money to purchase their own homes. The mortgages that were once the exception suddenly became the norm.
This led to a market bubble in India of unprecedented proportions. Millions of Buyers who were previously not in the market suddenly gained the ability to purchase. Banks were also lending heavily to this group. The newly created purchasing power flooded the market. Indians, who were conservative and risk-averse, suddenly began taking more risks. The prices rose by more than 15% annually. This trend has lasted for more than a decade. The home prices in India are now at least six times higher than they were at the end of the 1990s. The market has remained stable despite the slight slowdown in 2008 due to the United States subprime mortgage crisis.
Stasis from 2010 onwards
In 2010, Indian middle-class buyers still haven’t been able to fulfill their aspirations. The reality of unsustainable prices is catching on. While almost all workers in the middle class aspire towards home ownership, only a few can afford the high prices on the market that have been prevalent since 2010.
The property market has stagnated in price since 2010. According to the worldwide standards of an affordable mortgage, no more than 35 percent of your monthly income should be used for your mortgage payment. There do not appear to be any Indian cities where an average worker could afford to buy a house on this budget.
It has led to the belief in India that the real estate market must be in a bubble. The developers and buyers are currently waiting and watching a standoff. Both parties hope that the other party will relent. Neither party has conceded in the last five years. The answer to the question of how long this standoff can last will come with time.
Some cities in China have seen their property prices fall, while others have stagnated. According to the current market sentiment, China’s real estate prices are about to undergo a major correction.