Sunday, January 11, 2009

Real Estate can Witness Major Collapse in the Next 6 Months

Real estate majors are pulling out of most projects and it is feared that the realty market will collapse in six months. Several giants are about to be wiped out. May be the true impact of the crisis will be felt after the Parliamentary elections. Real estate majors are rumoured to be pulling out of Uttar Pradesh and putting a stop to most of their ongoing housing projects. The reason is simple. The flats and offices they built are not selling and the consumers and housing loans they banked upon are ending up in default. The whole sector is in turmoil because there are instances where one person has invested in up to six to seven flats in the hope of making a killing by selling them and has now defaulted on the loans he took because the flats are not selling. The middle class dream of sudden riches is now over in India.

Most of the speculation took place in Uttar Pradesh and Delhi where the real estate market was simply soaring and then came reality. Now the same flats which were going for a crore are available for lakhs and worse is about to come. In six months the market despite the currency flow from banks will come under selling pressure and will also come face to face with the fact that people tried to speculate beyond all imagination in this sector. In this case the market will see the artificial demand generated by speculation vanish and be replaced by simple economic sense. The prices will fall. The boom will end in a bust.

While in the metros Mercedes, BMW and gold medallions are failing to lure home buyers this season, resulting in a 50 per cent dip in purchases in both premium and mid segments with experts predicting distress sales in six months.

The high cost of home loans, land acquisitions at high prices, a dip in demand from non-resident Indians and the general liquidity crunch are also compounding the woes of realty majors. In places like Lucknow realty developers were quoting as much as Rs.4 million/Rs.40 lakhs for mid segment housing which was quite unrealistic. Now, the same flats may see distress sales in the next six months. According to sources in the construction business builders who bought steel at Rs 55 kg are now refusing to honour their payments to suppliers, as the same material is available for Rs 35 kg. Prices of land, cement, steel and flats all are expected to halve very soon. The worst is yet to come. May be the true impact of the crisis will be felt after the Parliamentary elections.

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