After two years of rapid price increases (100% rises since early 2005) the Indian property market seems to have stalled. The Hindustan Times reports that volumes of property deals are reckoned to be 50% down in the last two months. The paper also reports that prices of some types of property are beginning to fall, particularly in less prestigious locations. Premium locations such as Cuffe Parade in Mumbai still enjoy stable prices.
The Reserve Bank of India has been sending signals about its concern over the real estate market for a considerable time. Lending for commercial real estate investment had risen by 84.4% in 2006-7 with lending for residential purposes rising 32% in the same period. In a highly regulated financial system the central bank clearly has a crucial part to play and, although it has a number of policy tools at its disposal, it is always in danger of causing distress to inflated markets as well as avoiding threats. In recent months it has orchestrated the following changes in conditions:
- The RBI has introduced focused constraints on lending to the real estate sector (eg. higher interest rates for home loans) which had been growing at a rate of 30% a year.
- It has raised interest rates to cool the economy as a whole
- By lowering the ceiling on interest rates for foreign sourced capital (from 200 basis points over 6-month LIBOR to 150) this month it has squeezed this kind of funding for smaller property companies: domestic banks are generally charging rates of 14 to 15% for lending to the sector
- It is planning to prevent financing of “integrated townships” through foreign capital
- The RBI has forbidden banks to issue loans against NRE (non-resident Rupee accounts) and FCNR (foreign currency for non-resident accounts) deposits of non-resident Indian to slow speculative investments in real estate and the stock market. Non-resident Indians are calculated to have invested $600m in Indian property in 2006.
- Additionally foreign investments in real estate are now subject to a three year “lock-inâ” period whether they are foreign direct investments or flows arising from American Depositary Receipts (ADRs) or Global Depositary Receipts (GDRs).
So the first question to be asked; “are these policies going to bite?” has already been answered affirmatively on the basis of the growing evidence of slow down. Even without perfect control over foreign exchange movements the RBI can still have a considerable impact. The second important question remains to be answered; is this going to be a swift correction soon got over or are the harmful effects going to be longer lasting?
Although, there are enough potential property purchasers waiting for better price environment before they buy, there are a number of potential hazards for the market. Firstly, there is the danger of defaults both among developers and householders and the consequent risks for the banking system. There are also signs that individual property investors are no longer willing to sink capital in development projects pre-launch (i.e. before construction), thus cutting off one of the cheaper sources of finance for developers.
In conclusion it looks as if the fundamentals of the property industry are sound in the long-term but that the boom may be derailed for longer than just a few weeks. Indian Realty News and the Economic Times of India will no doubt be covering the unfolding story. Comments from others with direct experience of RBI policies would be most welcome.