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Is there a property bubble? Not yet, says a UN report

Written by: Staff

New Delhi, Apr 02: As the real estate prices are touching the rooftop and costs of flats have gone up to Rs 50,000 and Rs 70,000 per square foot in Mumbai and Rs one lakh per square yard in Gurgaon, the question arises whether there is a bubble building in the Indian property market? Have heart ! According to a UN Report, even as the collapse of the speculative property market could be more devastating than a stock market crash, there is no bubble as yet in the Asia Pacific Region.

''Evidence of a property bubble in the region in the strict sense of the word has not been found except in particular locations'', the just released report of the UN Economic and Social Commission for Asia and the Pacific (ESCAP) has said.

The real estate prices, along with the runaway rise in the prices of gold and the stock market has somewhat made investors nervous.

According to analysts, when an upmarket flat in Mumbai fetches better price than a similar flat in a New York, it is but natural that the questions arise about sustaining the trend.

However, going by its own parameters,the ESCP report is yet to be convinced whether there is anything terribly wrong with the housing and the real estate markets in the Asia -Pacific region, including India.

''It would be safe to conclude that, while some Asian and Pacific property markets are certainly overheated, there is no property bubble of the magnitude seen in the past decade'', the report said.

It also said that with the property prices softening in developed countries, investors are likely to look for profitable avenues in the A-PAC region. However, the countries with scope for the highest returns suffer from either high risk (absence of a developed legal system, in China) or barriers to entry (individual foreign investors cannot buy property in India as yet).

Regulators in many countries have also learned from the experience of the Asian financial crises of 1997-98 and are more likely to intervene swiftly against speculative activity in real estate this time, as happened in China in 2005. A comparison of the prices shows a minimum of 20 per cent increase in third quarter of 2005 as compared to the same quarter in the previous year in India while it was only 6.6 per cent in China and 14.1 per cent in Hong Kong China. A 20 per cent increase in the real estate prices in the major Indian cities against an average inflation of 4.5 per cent is seen quite high.

While the ESCAP report did not find the bubble building as yet, it warned that were a bubble formed its collapse would be much more devastating than a stock market crsh. If property prices crash, borrowers are left with huge personal debts that can lead to bankruptcy and misery for themselves and their families. ''There is another important social dimension to the problem. The construction sector is a major employment generator in both rich and poor countries'', it said.

The UN agency has its own norms for judging whether there is a bubble or not. Before a bubble forms, the real estate market usually displays evidence of buying and selling to take advantage of the captial gains available in the market rather than for owner occupation. In principle, there is nothing wrong in borrowing to buy real estate for investment rather than for owner occupation. The action can be regarded as rational profit-seeking behaviour so long as borrowers are able to sell at a profit. '' The buying becomes speculative when people begin to borrow to buy, regardless of price or of their ability to service the debt, in the expectation of selling at an even higher price. Since prices cannot rise forever, some speculative buyers will inevitably take a loss. Losses on assets purchased with debt generate systemic risk that might affect the health of the financial system, and that is why real estate bubbles or potential bubbles have policy implications for government and central banks'', the report said.

By one estimate, half of all private sector jobs created in the US since 2001 have been in housing-related sectors. In developing countries, too, construction, with its many low-skill jobs, is a major employer, often acting as a ''pull'' for surplus in agriculture. ''A real estate collapse can therefore jeopardize the future of tens of thousands of workers living on the margins of the economy'', the ESCAP said.


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