Real estate prices in India are logic-defying, and to an extent, inhumane. It is difficult to think how urbanisation can increase in the country over the years, with house prices shooting through the stratosphere to totally unaffordable levels. High interest rates and a sinking economy seem to have caused no damage to the demand and pricing for real estate. Prices in Gurgaon are far more than Hong Kong and other prosperous areas of the world, despite sub-standard quality of life in the city, something that even Economist is balking at. Developers earn an operating profit margin of over 50% on sales (before interest payment). That is higher than most business sectors that I know of, especially for an area that does not require any special skills, apart from what KP Singh (the owner of DLF, one of the largest real estate groups in India) calls bribing officials for facilitating quicker disposal. Indian buildings and towns are no feats of civil engineering, are extremely expensive despite cheap labour, and shoddily constructed.
Unlike China, the Indian government is not interested in controlling the bubble, as real estate is the sector where most of the politicians have invested their ill-gotten money. The Vadera-DLF link is now public news. Everybody and his uncle seems to be in the real-estate business now. If you revalue the land to its current value, most of the Indian businesses would have pathetic RoCEs (return on capital employed). Promoters are thinking about monetisation of their land banks to keep the cash flow machine chugging along.
Sadly, real estate has been the culprit behind most of the economic disasters in the past thirty odd years. The most famous being Japan. Land was believed to be scarce on the island, and the growing economy made homes affordable for the populace. That was enough for the developers to play on. Prices soon touched unbelievable figures...and then collapsed, taking the Japanese economy along, which has been stagnant since then. Among the more recent ones, US housing bubble stands out, although the country has still managed to recover within four years because of the strength of the dollar, commendable policy action (partly because people could learn from Japan's mistake), and the entrepreneurship skills of the US population. However, Iceland and Spain have suffered badly, and the latter might take entire Europe along into a long, painful recession. China has been quick to react to asset bubbles, but the country still remains vulnerable to the housing sector. India, meanwhile, has its eyes closed till disaster strikes. The worst hit would be the newly established small-time businessmen in the sector, who have been lured into the bubble. They would be the ones left holding the baby. I shall write more on this later...till I am proved wrong.
Unlike China, the Indian government is not interested in controlling the bubble, as real estate is the sector where most of the politicians have invested their ill-gotten money. The Vadera-DLF link is now public news. Everybody and his uncle seems to be in the real-estate business now. If you revalue the land to its current value, most of the Indian businesses would have pathetic RoCEs (return on capital employed). Promoters are thinking about monetisation of their land banks to keep the cash flow machine chugging along.
Sadly, real estate has been the culprit behind most of the economic disasters in the past thirty odd years. The most famous being Japan. Land was believed to be scarce on the island, and the growing economy made homes affordable for the populace. That was enough for the developers to play on. Prices soon touched unbelievable figures...and then collapsed, taking the Japanese economy along, which has been stagnant since then. Among the more recent ones, US housing bubble stands out, although the country has still managed to recover within four years because of the strength of the dollar, commendable policy action (partly because people could learn from Japan's mistake), and the entrepreneurship skills of the US population. However, Iceland and Spain have suffered badly, and the latter might take entire Europe along into a long, painful recession. China has been quick to react to asset bubbles, but the country still remains vulnerable to the housing sector. India, meanwhile, has its eyes closed till disaster strikes. The worst hit would be the newly established small-time businessmen in the sector, who have been lured into the bubble. They would be the ones left holding the baby. I shall write more on this later...till I am proved wrong.
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