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Saturday, September 25, 2010
Is Indian realty sector hurtling towards another bubble?
Avalid question - and one being asked by almost everyone looking for property in Mumbai , Delhi or any of the other city where real estate prices have spun out of control - still, speculating about real estate bubbles on the Indian property market without looking at the facts is the work of a doomsayer, not an analyst.First, a much-required definition: What is a real estate bubble? How does it happen?A real estate bubble happens when the cost of homes climbs unrealistically fast. In a normal market scenario , prices do rise, but only in tandem with the rate of inflation or a rise in middle-class incomes. When a real estate bubble goes critical and finally bursts, the prices of the same homes come crashing down and the real estate market takes a nosedive.In nature, a bubble is the most energy-efficient configuration for something as fragile as a stretched sheet of soap water. As long as it is not acted on by an external force, it can stay that way for a long time. In a way, that is true for a real estate bubble as well - unless something happens to disrupt the status quo, it will prevail. Fortunately , it is not the nature of the property market to leave a real estate bubble alone for too long. The artificial pressures that create it are always defeated by the pressure of demand for rationality. Once demand for irrationally priced properties drops sufficiently, the bubble bursts.
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