Rising Bubble

By Ramesh Akkineni

From an article in Financial Express by Sucheta Dalal

‘Every big bull run seems to lead to a property bubble, as confident investors and companies drive up prices by parking at least a part of their profits in real estate. In 1994-95, at the height of the primary market mania, listed companies raised vast quantities of money through Initial Public Offerings (IPOs) and rights issues. A large chunk of money raised was invested in property, creating a huge bubble, which burst just after the primary market in equities went dead.

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 Sensex. 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.’

‘Property consultant Sunil Bajaj says these aggressive bids are only possible as the entire business is bankrolled several times over by housing finance companies and aggressive private banks. For instance, banks and housing finance institutions are fuelling and funding large bids by becoming partners in the real estate deals. The Leela Business Park and the Glaxo property deal in Mumbai are examples. Banks also fund construction by offering construction finance. And finance individuals to buy offices or apartments in the constructed property. Housing financiers, in a bid to book business, have increased their own risk, by offering to fund 100% of the property cost, including stamp duty and registration charges and more.

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.’

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