Over the last few years the Indian real estate market has attracted the attention of both domestic and foreign investors. It is a country with an enormous population, a growing economy, deep rooted interest in real estate although everything is not as rosy as it could be in India. Many real estate investors looking towards India recently have been scared off by the relatively high inflation figure which is decimating real family incomes on a year by year basis.
At the moment inflation in India is running at around 9.5% if we take a five-year average and this is starting to have a major impact upon economic growth which is now at a ten-year low of just 5%. When you also take into account the fact that government bond yields are running at around 9% and mortgage rates are in excess of 10% then perhaps the situation in the Indian real estate market is not as positive as many would have you believe.
Falling real incomes
If you bear in mind that mortgage rates across India are now in excess of 10% with inflation averaging around 9.5% over the last five years, the maths are fairly disturbing. Someone taking out for example a Rs.1 million mortgage with a Rs.1 million income will see their mortgage repayments remain steady while their household income after one year of inflation at 9.5% will have fallen (in relative terms) to Rs.905,000. This is the stark reality facing many real estate investors in India and at this moment in time it is difficult to see any real short-term improvement.
Quote from PropertyForum.com : “It may well be that problems within Europe are forcing European and American real estate investors to look elsewhere but there is no doubt that interest in the Asia-Pacific is growing.”
Despite the fact that China and India have been relatively strong of late, as the two up-and-coming economic powerhouses, they are now starting to show signs of fatigue.
Real estate lending in India
While many who have taken out mortgages, and are now seeing their real household incomes fall due to relatively high inflation, are struggling the situation is becoming even more difficult for others. Indian real estate lenders are now tightening their loan criteria and asking for larger deposits or collateral against property purchases. This is almost certain to price more and more people out of the Indian real estate market, which will reduce demand, which will reduce prices which will then put many real estate investors and homeowners in a very difficult situation.
It can be very easy to take your eye off the ball with regards to the underlying cost of real estate investment finance, but it helps nobody if inflation is 9.5% and property prices are rising by less than inflation. The Indian government will need to come to the aid of the economy although bringing inflation back into line could see interest rates rise in the short term with the hope they can be reduced in the medium term.
The economic problem developing in India, when taking into account rental yields of 2.5% and inflation of 9.5%, is not helping the real estate sector. It will be interesting to see how the authorities react to the ongoing problems and indeed whether they are able to bring inflation back under control and ultimately breathe life back into the economy and the Indian real estate sector. On the surface the Indian real estate sector seems to be in a fairly good position but if you dig deeper you will see that in relative terms this is not necessarily the case.