Indian Real Estate Bubble

What is Indian Real Estate Bubble?

Well, you have to first understand that, what is financial bubble and why it occurs? A Bubble means increased speculative activity in the particular economic sector because of high appreciation of capital in that sector. Say for Example, Dot-Com Bubble. In 90s, investors have found the tremendous potential of Technology. And thus more and more investors have started investing in that sector. So speculators also started investing in that sector and as a result, artificially high valuations of the Assets occur which is known as a Bubble.

The same story is of Indian Real Estate Bubble. Means after the year 2003, Banks has started giving home loans liberally for housing development in India and at a same time, the government also had started giving the tax breaks on home loans. Thus borrowed Capital (Home Loans) in the real estate sector became cheap. Interest rates on home loans were all time low.

Thus because of this easy availability of the cheaper Borrowed Capital to invest in Real Estate super imposed on Tax breaks has attracted Speculators. So Now the Speculators had started investing in the real estates. They have leveraged their money. Means they have started putting Rs.1 Crore as down payment  and rest of the 90% (9 crore) as a home loan (Borrowed Capital).

This is how the demand for the real estate artificially gone up during the past decade. During the peak time, if you own a piece of real estate 60 Km away from the main city area than also it would be worth of crores. But all of these demand was artificial. Because not the real middle class people need those homes. In fact, during the peak time, middle class simply couldn’t afford the housing because the prices of real estate were so much hyper inflated than it was almost impossible for middle class to buy a new home.

But after the 2007, Housing Bubble in the USA burst and thus the borrowed capital in this sector was stopped becoming easily and cheaply available. This Speculation in this sector ends and thus the burst of the Indian Real Estate Bubble.