The Reserve Bank of India(RBI) puts out the sectoral deployment of credit data at the end of every month. The latest data for the one year period ending March 20, 2015, shows that lending to the commercial real estate sector by banks grew by 8.9% to Rs 1,68,000 crore. The overall lending by banks on the other hand grew by a very similar 8.6%.
The 'limited land' argument to justify high real estate prices is as old as land being bought and sold. Nevertheless, in most cases there is enough land going around. This is reflected in the American context in the fact that real estate prices have barely risen over the last 100 years, once they are adjusted for inflation.
In the United States, the 20 City S&P/ Case- Shiller Home Price Index, the leading measure of US home prices, rose by 13.6% in October 2013, in comparison to a year earlier. This means that real estate prices in October 2013 had risen by 13.6% in comparison to the same period last year.<br /><br />
The irony is that the American politicians helped by the Federal Reserve created a real estate bubble to address income inequality. Once that bubble blew up, they started printing money. And that in turn has led to more inequality. The solution has aggravated the problem.
Banks have direct and indirect exposure to real estate. When the bubble bursts, they are left holding worthless piece of collateral. Banks fail leaving depositors in the lurch and the whole financial system collapses if the government and central bank do not step in and bail them out.
The trouble is that the dazzle of efficient market hypothesis has blinded economists so much that they cannot spot bubbles anymore. Hence, it is important that economists junk the efficient market hypothesis, and start looking at a world where bubbles are possible and keep popping up all the time. Else, we will have more trouble ahead.<br /><br />
The Western central banks primarily the Federal Reserve of United States and the Bank of England, have been printing money (or quantitative easing as they like to call it) at a very rapid rate since the start of the financial crisis in late 2008. The idea is to print and pump money into the financial system and thus ensure that there is a lot of money going around, leading to low interest rates.
There is simply too much inventory available for property builders to not offer discounts. It's time for buyers to drive hard bargains.
What experience and history teach is this - that nations and governments have never learned anything from history, or acted on principles deduced from it". And why should this time be any different?
The interesting thing is that large population-shortage of land is a story that real estate investors need to tell themselves. Even speculators need a story to justify why they are buying what they are buying.<br /><br />
The bright spot in all this is that India undertook path breaking reforms in early 1990s led by Prime Minister Manmohan Singh, who was the FM then, and the country is now looking to embrace hard economics to bring it out of the mess it is in at present.
Property prices have held up better in this slowdown that other asset classes. This means property has nowhere to go but down in this climate
India's poor run will stop sooner than later and it will be despite the government. Take, for example, the IT sector. Infosys and Cognizant have guided for slower growth this year, but the fact is that their hiring plans are still robust with each of them planning to up the workforce by over 20 percent.