Indian Real Estate Market Will Crash in 2014
The potential factors that can affect the home prices moving up and why Indian real estate market is overdue for a correction are discussed on this page.
The inflation rate, annual change in consumer price index from year 2000 is given below:
Jan 2001 : 3.50%
Jan 2002 : 5.25%
Jan 2003 : 4.00%
Jan 2004 : 3.00%
Jan 2005 : 4.50%
Jan 2006 : 5.70%
Jan 2007 : 6.70%
Jan 2008 : 4.00%
Jan 2009 : 6.50%
Jan 2010 : 6.20%
Jan 2011 : 9.80%
Jan 2012 : 8.00%
Jan 2013 : 7.00%
Jan 2014 : 6.00%
NOTE: The above data is not an exact figure and only a rough estimate. To get the correct inflation data, look into indian government websites publishing CPI data.
The CPI (consumer price index) data for the last 14 years suggests that the average inflation per year is around 6%. Eventhough Indian market experienced more than 12% inflation rate during some months in 2010, 2011 and 2012, it comes down when it averages for the last decade.
Cumulative Inflation went up by 80% since Jan 2001 to Jan 2014. This inflation rate is based on CPI and we can not directly corelate to the housing market. The actual inflation in food prices would be much higher compared to CPI. Since Indian market is an emerging market, it may be unrealistic and would be conservative to compare the inflation data with real estate by considering the population and demand of new homes.
Alternate realistic method is comparing with the Gold prices. Gold Prices spiked around 500% since Jan 2001 (12624.00 INR) to Jan 2014 (79175.00 INR). This may make sense to compare the rise in home prices in Indian Real Estate Market.
If a land selling around 500 Rupees per Sq. Feet in 2001, should be selling now around 2500 Rupees in 2014. In other words, if you can buy a single family home at cost of 2 lakhs in 2001, should be trading around 10 lakhs in 2014. But it is trading around 25 to 30 lakhs in Major cities in India. Current Real Estate Market is priced by 100 to 150% premium even if we give enough weightage to the population and demand forecast for homes in India.
If you can buy an apartment for about 50 lakhs in a major city in Inda, then it is worth is only 20 lakhs by giving all weightage to population and growth forecast. It is called speculative bubble and it is not a surprise to see these kind of bubbles. Japan already experience massive bubble much bigger than (at least 5 to 10 times) Indian Market, but crashed during 1989 to 1991. US markets experienced the similar crash between 2006 and 2010.
People belive many hard to belive scenarios only when it happens. We can expect to see the major correction in real estate market by at least 30%. Note that the correction can happen only the interest remains high and unemployment rate goes up in India. The term layoff is very common in developed countries in North American and Europe but not in India. But this statement may not be TRUE in the future.