An interesting column appeared in the Financial Times two months back, where a reader questions why Real Estate prices in third world countries like India, tend to be even more than those in the US. The article itself got a lot of responses from readers.
Real estate prices in India have been on an upward spiral for some time now – and we all know that. The trend is not only limited to the metros, but also visible in tier II and tier III cities as well. But why these prices have actually upshot comparable cities in developed countries brings some interesting arguments to the fore.
The biggest impediment of Indian development is infrastructure, and that leads to bad connectivity of places, thus exponentially increasing demand for well connected cities. But these factors have been present forever in India. So What is driving the Indian real estate prices today?
Here are the top factors:
- Greater liquidity – Perhaps never before has there been so much money in the market. And all of it is chasing just a little available land.
- Foreign Institution Investments – Most real estate investments are open to FDI. Its not only money which we Indians are earning, but money the multi-nationals are putting into Indian Real Estate. This has been discussed Indian Business Review in its Real Estate Reports.
- NRI capital – It’s no longer a minor part of the investment. For example, visit any of so called “rural areas” in Punjab, and you will see that the villas there are perhaps are bigger than many in Delhi or Mumbai. So real estate prices are moving up in these smaller cities as well.
With all these factors, it becomes a simple equation of Demand and Supply.
And because land in India is not available in plenty (ie, land/person is much less than most countries) and most Indian families value investment in land as the best investment – so that is also big reason for increasing prices.
As most of these factors seem likely to stay around for the foreseeable future, places like Delhi and Mumbai are competing with London, New York and Tokyo, for the costliest real estate per square feet.
There are two factors that affect real estate prices regardless of the market: building costs (materials and labor); and cost of financing. The cost of home building has and always will increase over time. Events such as a devastating hurricane or other natural disaster can drive up building costs quickly, but over time, price increases tend to follow inflation.
What is also common in all real estate markets is the cost of financing or mortgage rates. Over the past three years, record low rates have reduced the monthly costs of borrowing. It is the affordability of monthly mortgage payments more than anything else that determines how much a buyer is willing to spend on a home.
A lower interest rate means a buyer can have a larger mortgage to buy more house. Add this to a limited supply of available housing, and price increases follow.For more one can view-realtydigest.blogspot.com