Financial Times, UK - January, 2007

For young Indian professionals living in Europe or the US, the lure of the home country, enjoying the most rapid growth in its history, has never been stronger. In all, perhaps, but one respect: soaring property prices.

So sharply have costs risen in Cities such as Mumbai, Bangalore and New Delhi over the past two years that even the richest members of the returning Indian diasporas can find themselves struggling to step back on to the property ladder.

“We had a pretty healthy budget of Dollars 1.5m but were quickly priced out of prime buildings in south Mumbai,” says Sunaina M, a former manager of a US mutual fund who left New York for India last January with her venture capitalist husband. “After looking for almost a year, we threw in the towel, increased our budget and settled for a small three-bed in a not-so-great building with no view and lousy common areas,” she adds, requesting that her family name remain confidential.

In some areas, property prices are approaching London or New York levels at a time when, although middle-class salaries are rising fast with wage costs at India’s top 200 companies jumping 21 per cent in 2006, incomes remain a tiny fraction of those in the US.

“The Indian market is overhyped and overvalued,” says Siddharth Yog, of Xander group, an India-focused property investment.

Prices are up 60-120 per cent in 18 months. Depending on the location and building, says Rohit Gera, of Gera Developments, which specializes in the west coast.

Real estate watchers say it may be less than a year before the air gets sucked out of some of India’s more egregious localized property bubbles. But such predictions have been common for months and the market shows no sign of cooling.

“There is a lack of good data, but over the last couple of months, in certain areas, we seen a lot more speculators coming into the market than first-time buyers and that’s not encouraging,” says Rohini Malkani, an economist at Citigroup in Mumbai, pointing to rocketing prices in neighborhoods in Gaurgaon, a satellite city of Delhi. “If there’s downturn, prices will be stable in city centers but projects in Peripheral areas will see much steeper declines.”

In posh, old money south Mumbai, spoilt sellers can pick from lines of willing buyers. “It’s reaily up to the vendor, “says Anjai Hazari, founder of Hazari realtors, a Mumbai estate agent. “Prices are sky-high for decent buildings and available properties, even for those with Dollars 1.8m-2.2m to spend can be counted on two hands.”

”It’s likely there will be a bloodbath in areas where speculation rather than end-user demand has been driving the market,” says Mr. Gera. His company is investing Dollars 125m (Euros 94m, Pounds 63m), with backing from Citigroup Property Investors, on building 650, high-end apartments on a 2m square foot plot in Kharadi, a suburb of Pune, in Maharashtra. Apartments priced from Dollars 1.4m-Dollar 2.2m will be marketed to managers from companies such as fiat, John Deere, LG and Swarovski with factories in a nearby industrial zone.

The sharp rise in prices has been driven by the easy availability of cheap capital. But there are Indian-specific factors at work too. Banks have been cavalier, with loans for housing rising by more than 50 per cent year on year on year credit to commercial real estate more than doubling. “I know of one retail consumer buying a house who has seven mortgages on the same salary,” says Mr. Yog. “Bank just don’t talk to each other”

In December, the central bank, in a belated move aimed at mitigating the risk of a housing-related banking crisis, increased the amount its own capital banks must set aside against property loans. It lifted the credit reserve ratio by 50 basis points to 5.5 per cent. With consumer price inflation hovering about 7 per cent, economists expect further interest rate rises early this year.

This would affect the fin-ances of tens of thousands of middle-class Indians who have consumption, a drop in housing wealth would hurt.

The potential impact on India’s growth rates, 9.2 per cent in the quarter to end-September, will be magnified if it is accompanied by a slump in the stock market.

The Sensex has risen by 46 percent since the start of last year and more than doubled over 24 months. Yesterday, it broke the 14,000 barrier to close at a record high.

“The toughest call is to time the coming correction but we believe it is likely to be sharp.” Says Ridham Desai, an equity strategist at Morgan Stanley.

“The market is firmly anchored in India’s long-term story driven by an extremely low price of risk. We think the price of risk could rise in 2007…. That could have implications for Indian equities especially given the rich valuations at which they trade and the possibility of a cyclical slowdown in 2007.”

Most economists think the “inevitable” correction to equity and property market bubbles will not have a lasting effect on the overall economy.

Subir Gokarn, chief economist at the Crisil Centre for Economic Research, says; “There has been a wealth effect from rising equity prices, but I do not see it as a dominant determinant of Indian growth rates. The corrective process in the real estate market is for prices to plateau rather than crash”

For émigrés returning in droves, India will, for the foreseeable future, remain a country where it’s easier to find a great job than a place to live