Real Estate Bubble Around The World

Most of the ETFs and Mutual Funds at the different Asset Managers are losing value, as can be noticed from the website of any one of the companies. One of the exceptions is the equity in the rising markets. This sector has matured seemingly and unaltered by the Recession in the US. India is one of the four countries Goldman Sachs pointed out as the leaders in FDI and development along with China, Russia, Brazil (BRIC) in the coming years. Along with China, India too has enjoyed booming exports and growth rates of 8-9% in the last few years, but India`s major economic strength is stated to be internal, or consumption based, rather than a focus on exports solely.
At the heart of the boom in India is its real estate, which unlike Communist China`s, is privately owned. Real Estate prices in India have been growing at a rate of 30-40% for the last few years. Investment banks and Hedge Funds around the world have been investing more and more in the Indian Real estate, driving the prices higher. As per the Associated Chambers of Commerce and Industry of India (Assocham), the Indian realty sector is likely to see high growth rates in 2008. DLF, one of India`s premier Real Estate Development companies recently sold 49 % stake in its seven townships to Merrill Lynch and Brahma Investments to raise Four hundred twenty million dollar. Wachovia Bank picked up a 15% stake in another Indian Real Estate company for fifty nine million dollar. These US banks are the same ones that have lost billions in the US real estate market in the last 1year.
A comparison of the Real Estate prices in New Delhi and Chicago reveals the following figures:
* Condos in New Delhi, India: 2-bedroom, 1000 sq. ft. apartment for $200,000. [$200 per sq ft]
* Condos in Chicago, USA: 2-bedroom, 1000 sq. ft. apartment for $400,000 [$400 per sq ft]
The above has occurred despite the fact that the median income in Chicago is 50 times that in New Delhi.
Clearly, the House price increase in India is an unsustainable bubble. Such land or property bubbles have propped up in Russia, China, Ireland, etc. A bubble is characterized by low income to price ratios (when property rises a lot while income does not), or rent to price ratios(when property rises and rent does not). Such bubbles are financed by low interest rates, bad financing, or too much Foreign Direct Investment. Assuming there is a huge bubble in India, larger than that of the United States, this would have the same effect(if not larger) on the Indian Equity markets as has the US Real Estate on the US stock market. Studies show that a person is 2 times more likely not to spend his money if his house price falls by $1 than if his stock falls by $1. Tell that to Walmart, Carrefour and other Retail Stores that intend to open shop in India this year. As a bubble bursts, banks that lent the money always get into trouble as they recover less than what they lent, the low liquidity of the banks would cause lower business and a stock market crash.

One Comment

  1. jay
    Posted May 19, 2008 at 1:39 pm | Permalink

    And don’t forget the interest rates difference.

    ~12% in india and ~6% in US. So even though the price 200000 looks 50% less than chicago, in terms of monthly payments they are a lot closer.

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