Is the real estate bubble big enough to naturally burst in 2014?

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Political uncertainty, liquidity issues, high interest rates and cautious sentiments are expected to underpin the real estate sector during the year The author is the founder and managing Director of Liases Foras, a leading non-brokerage real estate research firm, known for its unbiased prognosis.

One of the primary concerns for the real estate sector in the coming year is very clearly this: Will the much talked-about asset bubble inflate further or will it burst?

2013 was mired in existing challenges such as subdued sales, piles of unsold inventory and builders going bankrupt. These problems will continue in 2014 as well, and, given economic instability, matters could become worse. However, it is very difficult to forecast anything in India as the real estate market is not subject to a fixed pattern. A great degree of political uncertainty, liquidity issues, high interest rates and cautious sentiments are expected to underpin the real estate sector in 2014 too.

It is an established fact that the real estate bubble in the developed world is a creation of the central banks’ strategy of keeping interest rates at a very low level. This excess money has also trickled into the real estate markets of emerging economies as overseas investors began to look for alternate investment avenues.

Due to the affordability factor for buyers and the perpetual liquidity crunch, the government is coming up with many ways to infuse funds into the sector. In case more money is available due to more FDI or other alternative methods, we may see the process of correction being deferred and the market becoming inefficient. And if realty fails to attract that money, then a sharp correction will follow and affordability will be maintained.

Another concern in India is the increasing bank lending to the real estate sector. Latest figures released by the RBI indicate that the total exposure to this segment has surged 17.3 percent to Rs 9.33 lakh crore during the financial year ended March 2013. This expansion needs to be viewed in light of the steep acceleration in housing prices in all tier I and a couple of tier II cities in 2012-13.

What is alarming is that the increase in exposure to the real estate segment is followed by the rise in the non performing assets (NPAs) as well. A correction could lead to reduced value of bank collaterals, thus more NPAs, which could then lead to an automatic cycle of an inherent correction in the economy.

No asset class including real estate can remain inflated for an indefinite time. At some point, these will become big enough for a crash.A sudden fall, however, will be detrimental to the financial system and the economy at large. Therefore a slowly deflating bubble which implies a phased price correction is actually something that is desirable, and 2014 just seems to be a ripe time for that.

No asset class including real estate can remain inflated indefinitely. At some point, it becomes big enough for a crash… 2014 is just ripe for that

http://www.moneycontrol.com/news/features/is-real-estate-bubble-big-enough-to-naturally-burst-in14_1024858.html

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