No bubble like situation in real estate sector - Assocham

Profitability of realty majors declined by 56 per cent in the first half of 2009-10, which contradicts concerns over formation of a housing bubble in the country, industry body Assocham said today.

"Financial performance of realty majors during the first half of current fiscal shows grim picture of the sector with a decline of 56 per cent in net profit, dampened by 51 per cent rise in financial charges and interest cost," Assocham said.

The total income of realty majors declined by average 40 per cent in line with the fall in net profit whereas the total expenses of sector registered an average decline of 35 per cent despite an increase of 51 per cent in interest cost.

To prevent any formation of asset bubble, RBI in the quarterly monetary review last month asked banks to keep more money aside while giving loans to commercial real estate.
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Role of the Reserve Bank of India(RBI) in the growth and slowdown of the Indian real estate market

Before January 2006:

Home loans formed 11% of the total outstanding credit of scheduled commercial banks in March 2005, up from just 2.4% in Mar 1990.

The sales value of housing construction has witnessed an exceptional leap from Rs176.1mn in 1991 to Rs41.82bn in the year 2006.

Lower interest rate regime has played a pivotal role in the process.

After January 2006:

Reserve Bank starts raising interest rates to curb inflation and prevent the economy from overheating.

RBI has raised the repurchase rate or the rate at which it injects funds into the banking system, to 7.75 percent.

Since December, RBI has increased the cash reserve ratio by 2 percentage points to 7 percent to slow down loans growth.

Because of the hike in interest rates the eligibility of the borrowers has come down by roughly 28%.

The result is market has slowed down and home prices have dropped by 25%. But India's inflation has slowed to a two-year low.

Indian real estate: slowed down, subdued, tranquilized!

"The Reserve Bank of India (RBI) should immediately review its monetary policy to remove its excessive focus on taming inflation only and concentrate to reduce mortgage rate" said ASSOCHAM Past President and Chairman, DLF Universal, K P Singh while he was releasing the ASSOCHAM Study on `Reality Check on Real Estate’ with its President, Venguopal N. Dhoot.

''...because of mortgage rate and monetary policy, there is no doubt that the market has subdued at this moment temporarily,''K P Singh, in Hindu Business Line.

"I don't agree with the monetary policy and I want the interest rates to be reduced. The earlier they do it, the better." Singh, the fifth-richest Indian according to Forbes in March, said, in Bloomberg,"Due to the increase in the mortgage rates, the market is subdued and suppressed temporarily"

Related Story

"Sale of residential property dropped by over 70 percent in May-June 2007," the Associated Chambers of Commerce and Industry report

"Sale of residential property dropped by over 70 percent in May-June 2007," the Associated Chambers of Commerce and Industry report

"Growth in home loans may slow to 17-20 percent in the financial year 2007/08,"

"Mortgage loans grew by 26.6 percent in 2006/07, lower than 29.1 percent in 2005/06"

ASSOCHAM Past President and Chairman, DLF Universal, K P Singh released the ASSOCHAM Study on `Reality Check on Real Estate’ with its President, Venguopal N. Dhoot.

Who will enjoy reading this report? Nobody! right? Better read this post, you will enjoy it, all reports paint rosy picture:

11 tier II Indian cities, such as Surat, Chandigarh, Nagpur, Vadodara, Visakhapatnam and Jaipur, are emerging as growth and investment centers: survey

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