Over the last few years there have been two emerging economies around the world which have stood out from all of the rest. China and India have emerged from the shadows and led the worldwide economy on an upward spiral due to their massive internal investment which has impacted upon both investment and commodity markets. However the situation seems to be changing with India in particular under severe pressure and feeling the after effects of a period of massive economic development which has given rise to something of a hang over.
There have been some rather alarming forecasts for the immediate future of the Indian property market with many experts suggesting that property values could fall by between 15 and 20 percent over the next six months. While even compared to the currently depressed markets of the US and UK this kind of short-term reduction in property asset values is startling to say the least.
Reasons for the expected fall
There are many reasons why the Indian property market seems to be set for a major fall which include:-
Lack of finance
Over the last few months we have seen a gradual tightening of the Indian financial sector with the Reserve Bank of India increasing interest rates in an attempt to combat the ever growing threat of inflation (very similar to the situation in the UK earlier in 2008). This squeeze in available finance has impacted heavily upon the property market where many investors had over extended their exposure, fully expecting the recent rise to continue indefinitely.
Not only has the increase in mortgage rates, which have gone from around 7% to 12%, impacted heavily upon domestic and speculative investors put developers have also seen the disappearance of essential finance to complete there many ongoing projects. Those developers looking to arrange finance are seeing the banks demand more and more collateral which many have been hard pressed to provide.
As we have seen in so many developed and developing property markets the speculators have literally dumped their investments on the market and disappeared. Not only have they in many cases taken substantial losses to reduce their exposure but they have also forced property prices lower and lower thereby impacting upon domestic property investors who have not only seen the value of their properties reduce put in some cases their mortgage repayments increase by upwards of 50%.
With only genuine property investors, i.e. those with a long-term view, left in the market there is no choice but for property developers to reduce their prices accordingly to try and stimulate any kind of demand.
As we saw in the UK, the Indian government’s hands are tied because of the need to combat inflation in the short term, which has forced interest rates higher in order to stifle demand. This growing downward pressure on the Indian property market has obviously impacted upon the economy as a whole leading to reduced consumer spending, reduced demand for office and retail space and significant financial troubles for many as the worldwide credit crunch begins to impact upon the financial market.
As we mentioned above the Indian economy has only really come to life of late and as such many who had until recently enjoyed a lucrative lifestyle, investing in property, seen their income increase substantially and welcomed a general improvement in the standard of living have been hit hardest. The disappearance of the more speculative end of the investment spectrum has left something of a void in the economy where supply has overtaken demand for many products, assets and services.
It would be wrong to suggest that this is the end of the economic boom in India but as we have seen in the UK there is very little assistance which the government can offer in the short term until the threat of inflation – which if left unchecked would seriously undermine the future of the economy – is under control. While interest rates are not expected to rise substantially in the short term they will not fall until inflation starts to weaken.
The property company sector has been one of the main beneficiaries of the ever-growing Indian economy with many millionaires created over the last decade. However, many of these companies over extended their finances in the boom times and are starting to pay the price now that asset values are under serious pressure. The banks are also experiencing the worst aspects of the worldwide credit crunch which has forced many to reconsider loans made to the property sector, putting further pressure on property companies.
Many property companies listed on the Indian stock market have enjoyed something of an “Indian summer” put recently their share prices have collapsed to but a fraction of their recent highs. There is still value in the sector for those companies which are able to withstand the worsening financial situation but at this moment in time that the vast majority of investors are not willing to take such a risk.
The Indian economy has been so strong of late that it was inevitable we would see some kind of consolidation phase which in the long run is healthy for any new and upcoming market. However, this consolidation phase seems to have occurred at the same time as the worldwide credit crunch thereby forcing many speculative investors to literally run for the hills. A number of investors who targeted the so-called hotspots in the Indian property market have suffered severe losses over the last few months and been forced to reduce sale prices to crazy levels.
When inflation is firmly under control we should then see some activity from the government who will be anxious to ensure that this short sharp shock to the Indian economy is not allowed to fester and turn into a serious downtrend. The Indian property market still offers substantial potential for long-term growth in asset values and is one which will be under close scrutiny from many local and overseas investors for signs of bottoming out and recovery.