I have been hearing lot of expert opinion on real estate prices in India, and of course speculation whether the prices will fall down and how people and builders will hedge the risk going forward.  To start with, India had a good growth story from 2001 to 2007….six years back when I first came to mumbai, the prices in the busiest metro in India – mumbai were in comparison to its other metro in competition – yes Delhi ! However, things changed in 2-3 years and Mumbai saw an awesome 300% rise in property prices! I remember when I graduated from IIT, prices in nearby places were horrendous and searching a place to stay in the city and that too under heavy rain was a mammoth task…even when the demand was huge and prices were rising there was a big section of individuals who were investing in property expecting handsome gain going forward.

In late 2007 and early 2008 conditions start to deteriorate and prices became stagnant, someone told me the other metro Delhi and Noida has already been corrected to 30% in June, however, mumbai was one place which has to see correction. Finally with the fall of Lehman Brothers – the final nail in coffin came when Lehman filed bankruptcy protection and its investment and correlation with other major Indian banks and institutions were disclosed. {Normally private placements and inter-bank lending is not filed – it is not mandatory} Credit crunch was very much visible in early October 2008, when India’s second biggest financial institution ICICI Bank saw significant deterioration. However, the bank’s investment in Lehman of $200 million was known before hand, the Company had filed that, but its exposure to secondary credit markets in the US were not known, speculation at Dalal Street helped the bank to loose its 2/3rd market capitalization in 30 trading days.

Once banks came down, big real estate houses started feeling the heat, the projects slowly were cancelled and credit crunch was clearly visible. It was when mumbai saw price detoriation inspite of demand and bigger Industry than other metros. HDIL, Unitech, DLF, Reliance Industrial Infra, Jaicorporation were among big names in large caps and mid caps, saw 70-90% detoriation in the price and significant downfall in market capitalization. In late October the Reserve bank of India had two things to fight with Inflation and credit crunch – both entities have inverse correlation, however cooling of Crude and commodities somehow helped the central bank to reduce rates, and with the effect – Call rates {overnight interbank lending rates} which was hovering around 24% cooled to 15-15.5% levels.

Real estate prices will see more downfall in major metro cities, I believe 30% correction from here, will be a good price to acquire more of real estate in metros. Also, the benchmark prime lending rates of various banks should come down, given RBI will be reducing CRR and repo rates – which might drive prices to some stable levels.  I still believe in India’s growth story and I still believe India will outperform in South Asia going forward, I keep my fingers crossed for next elected government in March.

Vivek Misra