Is the Real Estate Bubble Big Enough to Naturally Burst in 2014?

Political uncertainty, liquidity issues, high interest rates and cautious sentiments are expected to underpin the real estate sector during the year

By Pankaj Kapoor
Published: Jan 2, 2014
The Mumbai Metropolitan Region market is seen as an unproductive arena
Image: Getty Images
The Mumbai Metropolitan Region market is seen as an unproductive arena

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. The only positive energy in this sluggish sector springs from the fact that the sales, though slow, are not stagnant.  

India’s real estate market has been faltering for quite some time as the economy remains under stress. Realty prices have been surging in an unprecedented manner unlike income levels which are not rising. The price increase is mostly speculative and can be attributed to the predominantly capital-driven nature of the sector.

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.

While the cause might be the same at home, the movement of capital across the various geographies in India needs serious analysis. Let us look at each of the significant markets to understand the creation of the asset bubble.

The MMR (Mumbai Metropolitan Region) market has a characteristic of its own (see MMR graph). There is huge latent demand but exorbitant prices make property unaffordable for most buyers. The price level here is way above the average price level of India but the annual acceleration is not very steep; in fact, it has been almost stagnant for quite some time. The realty cycle in MMR follows a long drawn pattern and has a low theta (angle of correction). The graph illustrates that the annual price growth post the 2008 meltdown touched 48 percent owing to substantial money coming into the MMR markets and then, after peaking at 54 percent in the second quarter of financial year (FY) 2010-11, the bubble started deflating.

After that, the MMR market with sky-high price levels and declining sales velocity was considered an unproductive arena and the funds inflow reduced. By sales velocity, we mean the ratio between monthly sales and total supply. The price rise after this, though persistent, has been comparatively slow. It is also interesting to note that even after a slow growth rate of prices, the pace of offtake has been slowing.

NCR (National Capital Region, which includes New Delhi), on the other hand, is an entirely investor-driven market. A lot of property is being sold in sectors which may remain uninhabitable for a long time. The price rise post FY 2010-11 continued to be sharp and persists even today. After touching the threshold of 27 percent year-on-year in the second quarter of FY 2012-13, the growth rate has started to peter out. One can already see the correction in the secondary market in NCR. The situation indicates that the existing bubble in tier-I markets like NCR and MMR are at the threshold of bursting. Owing to the high level of unsold stock in these markets, the prices might soon begin to tip off.

Illustration: Sameer Pawar


After burning their fingers in saturated and unproductive markets like MMR and NCR, investors shifted focus to IT hubs, Pune (see Pune graph) and Bangalore, in FY 2009-10. Both these cities, with similar dynamics, became a favourite with every PE investor and began to see a huge influx of funds. But this is where the problems started arising. The cities witnessed about 20 percent price rise in FY 2012-13 when their sole driving factor, the IT sector, was not doing well.

These two cities are classic examples of how prices get inflated due to a massive influx of money. The FDI and PE funds flooded both these markets and led to a surge in the price levels, making it more of a speculative investor-driven market. Thereafter, these prices are rendered unproductive and that leads to a sales decline. The slowdown has thus created a downward pressure on prices and correction may begin after two to three quarters.

Chennai, though touted as one of the best performing markets today, has inherent issues of its own. The improvement in performance stems from the fact that the city is expanding at a fast pace. When one sees the market from an efficiency point of view, there are various lacunae: The month’s inventory still remains quite high and the prices have surged over the last couple of quarters. However, the secondary market correction has already begun in Chennai since the past two quarters.
Kolkata and Hyderabad are the only two geographies which are efficiently priced; since the investor participation is nil, there is no sudden spike or speculative tendencies. Both these markets are in a productive spot and have never had an asset bubble.

Not all geographies are affected by the asset price bubble; those that are not influenced are the ones which have not attracted a great deal of investment. Also, people often tend to wonder ‘why the bubble’ since there haven’t been many land deals. But this is where the cascading aspect of realty comes into effect. Few land deals in the city centre can affect or result in escalating land value thus disturbing the urban economic balance.

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.


(This article is excerpted from the latest Forbes India 10 January, 2014 issue which is now available at news stands and book stores. You can buy our tablet version from

  • Manpreet

    Hi All, I am confuse with this article. Once side it is saying price will be corrected and other side, I still see housing price is going up & up every year by 2X form. I am from Kanpur, I can see local market house price is just double in 1-2 years time-frame. how could this happen. When will it stop. I am working in USA and I am not able to buy a good house because of so much money and due to interest rate of course. When i can not buy a house in india then what the hell, locals who are not earning in 20 lac figures but able to buy those properties and enjoying the growth and same time, People like me are afraid and not getting any return like locals. So confusing. I can not pay 10 lac rs as interest for a house yearly it is not affordable at all. How are the affording it and why the hell, it is not bursting.

    on Dec 29, 2014
  • Ebm

    recently heard a prominent VC guy in Bombay mentioned that in general Indians tend to invest their money (savings) in real estate; which should be about 30% of Indian yearly GDP. Also the fact that previous regime/ officials (current) did so many misdeeds must have fueled markets even in bad times (of course this money doesn\'t fall under GDP #s). Wht this article has triggered in my mind is that the 9.33lakh crore real estate loan exposure so far over all these years (i guess $180 billion) sounds peanuts for almost $2 trillion economy and proves this is all black money. perhaps just the tip of the iceberg is in Switzerland; rest\'s here. @writer: any knowledge on markets (tier III) where prices are fair and investors have not flaked in yet? black money is fine in small markets i guess.

    on Nov 25, 2014
  • Karan Madan

    Interesting , true and practical knowledge.I wonder why people have been investing in indian real estate after 2008 and how much money has been lost. People should invest in rising market like Dubai.. Below are 20 reasons to invest in Dubai. 1) Highest Rate of return on Investment in the world. Last year average property prices went up by 30% 2) Rental Yield is minimum 8% to 14 % per annum. 3) Safe haven for investment 4) Tax free- No capital gain tax, No tax on rental received, no yearly municipal tax. etc 5) Residency visa. If the investment exceeds AED 1 Million. 6) No lock in period. Anytime exit. 7) Free hold property-residential apartments, hotel apartments, serviced apartments and villa/plot- title of the deed. The property will be registered at Dubai land Department. 8) Hotel apartments give the option of profit sharing at 40: 60 percentages. 9) Easy payment plans up to 3-4 years linked to construction strictly under the supervision of RERA. 10) Property can be owned by single or two members and passed on to the legal heir at the time of death. 11) RERA- Real Estate regulatory authority- keeps a strict check on the completion and delivery of the projects. 12) World class construction quality and infrastructure. 13) Zero maintenance. And no hassles of travelling regularly. 14) Cash or cheque (black or white or combination) – both options available. 15) Safest, easiest and most convenient as crime rate is lowest in the world. 16) Hub for global investors. Centralized location to all European, Asian and American countries 17) Close proximity to India. Two and half hours of flight 18) After buying property in Dubai, bank account can be opened and rental income can be deposited. 19) Only two things needed- Money and passport. No stamp duty, no attorney fees, no legal hassles. Registration of property at Dubai land department takes half an hour. 20) Best architects, engineers, Developers like Emaar/ Damac/ Versace/Fendicasa. 21) Open a door for other opportunity in Alien country.

    on Aug 8, 2014
  • Neelkanth Valley Khopoli

    I think no situation will change. Real estate market in metropolitan cities will remain high.

    on Jul 22, 2014
    • Sikandar Muqbil

      The forces of demand and supply will cause the property bubble to burst. At current interest rates it is in the interest of builders to take loans to build these projects, and with skyrocketing prices, apparently 30 percent in the last FYI, it is inevitable that it will fall, as at a point there will be too many expensive properties, and not enough money or people to invest in them. The time of the collapse may be uncertain, but the certainty that it will burst-like all property bubbles have in the past- is ever-present.

      on Nov 11, 2014
  • Jimmy Carter

    I agree with the points mentioned in the article. The main thing is the lack of employment and very low salary of people. Otherwise need of the flats is always there. Lots of projects undergoing to cover those needs. Take an example of Uma Aangan which is on developing phase to provide Affordable flats in Jaipur The link is :

    on Jul 8, 2014
  • Bala Dhas

    nice article, i like it, pune real estate east side like kharadi is one of the best locality in pune

    on May 31, 2014
  • Shyam

    This is great site for know about real estate .....thnks for valuable articles...

    on May 23, 2014
  • Clover Builders

    Nice Post..

    on May 12, 2014
  • Devang D Patel

    \"Mumbai has maximum inventory of unsold homes at 155.27 million sq feet i.e approximately 250000 houses which is equivalent to 40 months of unsold inventory. Unsold inventory denotes the number of months required to clear the stock at the existing absorption rate. An ideal scenario implies inventory should be in a range of 8 to 10 months. But Mumbai will take 4 years to sell these houses despite a slew discount rates, new launches and back room negotiations. Same is the situation in NCR, Chennai , Kolkata, Banglore and Tier II cities. Builder\'s face huge cash crunch after RBI put brakes on 20:80 Ponzi scheme. This crisis will worse post 16 May if there is Hung Parliament. India to expect big real crash in next 6 to 10 months\"..... Dean Baker...renowed Economist who predicted 2008 US crisis. His advice to indian consumers...\"Indian consumers should be smart to defer their decision on investing in real estate .... and be greedy to sell their current exposure in real estate\"

    on May 2, 2014
  • Varun

    I agree fully with the article. I lived in US, Bangkok for many years and travel extensively in Asia. Mumbai's prices are more like HK and SINGAPORE and infra and real economy like Kenya. Two things need to happen to sustain prices - infra improvement I.e. travel to work in less than an hour and higher incomes with lower inflation. None of this ofcourse can happen. An avg. Person including taxi drivers make usd 30k in sg and hk. I.e. 18 lakh rs plus govt. And housing benefits. An avg person (not ambani) in mumbai makes 3 lakhs annually. Hence price correction is imminent. Pls note...price is corrected even if prices remain same for 5 years. In bangkok after super growtg post asian 1997 crisis, prices remain same. In India a govt. Tax free bond gives 9 % per annum. The rent you pay is not even 2% in mumbai of value. Hence in 5 years wity prices the same you get property 35% cheaper. Even a long sideway movement in prices is a correction.

    on Apr 27, 2014
  • Tamil Arasu

    The author has presented thoughtful reasons to support his title question. There are some excellent comments here as well. There could always be some geographical variations in the pricing but in my view there are compelling reasons that entire India will see a big bubble burst. I have elaborated my reasons in the follwing article here:

    on Apr 24, 2014
  • Yezdi

    The real reason for the fall is lack of jobs and people getting laid off their jobs.. The people are not sure whether their job will be there or no so they do not want to put their money and get stuck as real estate is not liquid money like Gold which can be exchanged for instant money with companies like Muthoot etc.. It is always safe to have your money by your side as it can be used at your disposal.. Bank's have added to the woo by their steep interest rates.. Even if you get into your home it is like paying a rent .....Expenses have gone up by 80% may be more in last 3 years.. Meeting house needs is not easy for a middle class any more..

    on Apr 22, 2014
  • Rahul Jain

    Real Estate rates can fall any day, but now it has become really difficult to buy a Property. Kolkata and Hyderabad are the only two geographies which are efficiently priced. Since the investor participation is nil, Both these markets are in a productive spot and have never had an asset bubble. -------------------------

    on Apr 18, 2014
  • Muthu Swami

    When it comes to purchasing a home it's not just a house that you are looking for, the entire package counts. You have to spot the best of the lot and find the best of the REAL estate developers in Bangalore

    on Apr 16, 2014
  • Online Real Estate

    Yes this is true situation but we do hope for a better future .....

    on Apr 16, 2014
  • Shriganeshkrupa

    Being a property consultants in thane i can say that the blog on property is very informative,as per the experts, Bubble is expected to burst by Nov.2014

    on Apr 14, 2014
    • Saro

      Now we are in Feb 2015, did we see the bubble burst now ?

      on Feb 12, 2015
  • Uday

    Real estate prices are so high that the common person can not dream of a 1bhk in Mumbai even with a loan. Second- the inflation is very high , increasing our daily expenses. How can one Save for the Down payment? Many Developers ask for cash portion of few lakhs. Also the Bank loan interests are very high 10 to 12 %. On top of this the Govt. is increasing the Taxes eg Vat,Servicetax etc.on house purchase.So. Who is buying the Property?Only investors with lot of cash, Politicians. Very Obvious.

    on Apr 3, 2014
  • Jyoti - Pune

    I second with your comment. Indian Real estate price is no where meeting the consumer needs. It may fall any day as its has become really difficult to buy a Property. As an example for people salary range between 8 lakhs - 14 lakhs INR , looking for 2 BHK in Pune comes arround 60 - 70 lakhs. Any downfall in individual's job (Including IT market uncertainity) may lead a sub crisis in Indian Market. Also the inflation rate of indian econoy is too high to maintain expenditure along with huge housing EMI's. All buyers should think before buying in such inflated property rate as this kind of article always mislead a buyer.

    on Mar 23, 2014
  • Jagdish

    Don\'t know about another city but bubble in Mumbai is a day dream, if you mean by correction of 5 to 10% that is not a bubble burst, to me its like discount. Its a big nexus between builder, media and so called analyst. Builders keep increasing the price steadily every month, simultaneously the media, analyst keep customers hanging saying there will be price correction. And then one blue moon the builder starts giving discounts, media and analyst cry bubble burst tells customers to buy. And the smartly fooled customers rush to the sales office of these builders. 2008 is one such example.

    on Feb 20, 2014
  • Anthony A

    The prices of the new projects are at its peak/Inflated and unreasonable thereby unaffordable. These prices are nowhere near to reality. The builders will not correct the prices to avoid any Panic in the real estate market. The real estate bubble is on the verge to burst in India. Premium builders are giving high discount on the total sale value which includes registration costs.The Home buyer should be patient or should go high Bargain on the current prices.

    on Feb 9, 2014
  • Sammy

    Read this. You will get a better picture

    on Feb 7, 2014
  • A.k.rajagopal

    real culprit of this scenario not only politicians and black marketeers also bankers who are giving enormous loans to the builders and buyers who indirectly promote the business

    on Feb 7, 2014
  • R. Sri Rama Raju

    Perfect job done

    on Feb 7, 2014
  • Devath

    Main reason for down of real estate market in 2013 is political paralysis. Due to its mismanagement and poor communication gap between the investor and€“ Government, Real estate market has been affecting a lot.

    on Jan 12, 2014
  • Nitin Garg

    Dear Mr Kapoor, after two thorough readings of this article I am still unable to understand this: The Price and Sales Velocity graphs for MMR do not match with your text. You say that the price has been growing, but at a slower pace. However the graph shoes that the grey part (price) is going down throughout. I think if we swap them (grey LHS for Sales Velocity and blue RHS for Price), it makes more sense.

    on Jan 6, 2014
  • Properties In Bhubaneswar

    Yes, political issue is one of the main causes for the down of the real estate market in 2013. I crossed the finger that this type of stagnancy will never face by our real estate market of India in 2014. My best wishes are with the investors. And one more thing, I request to the builders to price the flats in such a manner which will be affordable by all types of people.

    on Jan 6, 2014
  • Swati

    The Real estate bubble has to burst. The sooner it burst the better. The price that most builders quote these days are sky-rocketing. The amenities provided is minuscule and there is no value for money in any of the projects. The quality of life that we get after investing so much of life savings is abominable. For same price, one can get much bigger accommodation in many parts in US compared to India. One cannot understand, with Rupee so cheap compared to dollar and all the raw materials so much cheaper, why does the rates have to go so high? True, India is a growing economy, but with rapid growth, the funds are not getting allocated into manufacturing, due to over regulation in labor market. Hence, all the excess money always gets transferred to real estate in hope of stability. This is fueling excess demand. Government slackness and lack of alternatives is making real estate sector a ticking time bomb.

    on Jan 6, 2014
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