By Manish Bhandari, CEO, managing partner, Vallum Capital Advisors
The favorable demographics, acute shortage of housing, easy credit condition and high velocity of illicit money in the economy over the last few years has made Real Estate (RE) as one of the most preferred investment in India. A decade of super turbo charged Bull Run has resulted in Real Estate emerging as one of the biggest consensus investment trades in our society. Real Estate has the highest allocation in the household portfolio. This consensus trade is also supported by multitude of other factors like high inflation, negative return in comparison to inflation by Fixed Deposits, chequered performance of equities, and the ease of investing illicit wealth in the Real Estate sector. The crescendo that Real Estate, as an asset class, will generate positive return under any economic condition has grown louder day by day. The discovery of this elixir by Land Baron’s has displaced industrialists and even erstwhile Maharajas, in most of the cities of India. Inadvertently, the “soaring property prices“ is the key to all the social conversation these days. This unprecedented wealth creation in such a short span of time is baffling and perplexing.
A recent survey by ASSOCHAM has revealed that 82% of Indian youth finds real estate as one of the safest and preferred investments avenue. Today, Indian Real Estate is one of the most expensive pieces of land in comparison to cross country per capita income. The opaqueness in pricing due to fractured approvals, non standardization of products, dispersed buyers and diversion of cash flow as well as loose regulation has devoided these assets, of rationality in pricing. I am bewildered by everyone’s growing belief about the infallibility of Real Estate prices in India.
The term “bubble” refers to a situation where excessive future expectations lead to rise in prices. The “amplification mechanisms“, whereby, a large increase in asset price is followed by a higher demand, as investors think that further increases in prices will follow. This “super-exponential” acceleration in prices due to a positive feedback (or “pro-cyclicality”) leads to formation and then maturation of a bubble, which has happened in case of the Real Estate prices in India.
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