Interestingly, the property market has remained subdued for exactly as long as the primary market remained dormant. Despite hefty and well-warranted sops on home loans and a low interest rate regime, the realty market took a decade to recover from the post-1995 slump. Suddenly now, property prices have zoom-ed, despite home loan rates having risen and increase in supply of good housing stock and land (in Mumbai, with the constant revision in floor space index and development of vast textile mill lands) and generous funding of builders and developers by banks and housing finance firms.
Leading builders would correctly argue that it is probably a more important barometer of economic health than the Sen-sex. After all, there is a worldwide bubble in real estate in all major cities of the world. In most of these markets, the boom is due to low interest rates and massive funding available to borrowers. Often, property investment is an alternative to the capital market.
But in India, the runaway increase in real-estate prices seems to sustain itself on the feel-good factor emanating from the liquidity-driven capital market bull run. Yet, the recent spurt in property rates, especially in Mumbai, lend credence to the suspicion that lenders, builders and land-owners are creating a vicious cycle, where they will have to keep pushing up prices to keep the funding alive. Consider the signals. Indiabulls Financial Services, which recently raised large cash from investors, started India Properties, as a joint venture with Farallon Capital, to acquire Jupiter Mills of the National Textile Corporation in Mumbai for Rs 276.6 crore. This was followed by an even more stunning purchase, of NTCs second mill, a 17.5 acre property, at Rs 702 crore by the DLF group of Delhi. The sale of two others, Elphin-stone and Kohinoor Mills, are expected to fetch similar prices.
Many believe the price of the DLF purchase will work only if property rates remain at the present high, or rise further. But the notion that property rates will not be impacted by a significant increase is supply is itself curious. Moreover, the sale of mill lands is the subject of litigation which could not be quashed, despite a concerted plea to the Supreme Court by the mill owner lobby. The Mumbai high court, which is hearing the case, has not stayed any construction on the land, but made it clear that it will be at the builders risk.
Property prices have suddenly zoomed and the reasons seem unsustainable
Banks and financing institutions may be getting dangerously extended
Is there an element of multiple funding or creative financing in these transactions Are banks and institutions extending themselves dangerously here Only the Reserve Bank of India can find out. But the warning bells are already ringing and the RBI needs to act now, to avoid a new set of bad loans in the housing and construction sector, with a negative impact across the economy. In the past, the central bank had issued general warnings and expressed concern about real estate funding. But sources say it was reacting more to the disclosure of specific frauds, such as the one involving United Bank of India (UBI), where a small businessman colluded with bank officials to siphon off over Rs 30 crore in the form of individual housing loans of Rs 1 crore each. Such localised frauds are a worry, but the bigger picture is getting even more worrisome.