Is Gurgaon Real Estate a Bubble Ready to Pop?
- Gaurav Gupta
- Oct 5, 2023
- 7 min read
Updated: Nov 6, 2023
Lately, with the soaring property prices, it's a question on many people's minds - is Gurgaon Real Estate a bubble? It's a valid concern, but let's take a step back and look at the bigger picture and uncover the critical factors that drive market cycles.
As a seasoned Real Estate consultant, specializing in serving investors, I recognize that the real estate market is far more than just buildings; it's a complex ecosystem governed by market cycles.
Now, to explain this concept, let's look at what's happening in Gurgaon Real Estate. Think of it as a small picture that represents what's going on in the entire residential real estate market in India.
Real estate markets are cyclical. To succeed as an investor, it's crucial to stay vigilant, monitor market trends, and consider external economic factors.
In a nutshell, all aspects of real estate, including supply, demand, prices, rentals, and vacancies, follow a cycle closely tied to local and national economic trends. This pattern is known as a "Real Estate Cycle" and typically consists of four main phases.
Change is inevitable; it's just a matter of when!
Supply and demand for properties can fluctuate, and interest rates rise and fall based on the economy. We'll have good times and challenging times. However, the ability to anticipate these changes and make timely decisions is what sets apart a great investor from an ordinary one.
Phase#4 - Recession (2013-'19):
For close to 7-8 years, even during times of economic growth and job creation, the real estate sector appeared to be in a state of hibernation. While the Indian economy thrived and equity markets flourished, the real estate market remained oddly stagnant.
During the lull years from 2013 to 2019, builders didn't launch new projects because of a lack of liquidity and demand. This caused a slowdown in new construction and resulted in a gap between supply and demand.
Comparatively, during these years, equity investments often outperformed real estate. The preference for renting over buying was partly due to the perception that property values were not appreciating rapidly during this period, making rental properties a more immediate and flexible option.
Then, along came the global pandemic, serving as a universal wake-up call.
Investor's Strategy - During a recession, there are more properties available than people want, leading to empty spaces and lower rental growth (below inflation). Some savvy investors may swoop in to buy properties at steep discounts or from lenders who've taken them back. They'll then follow the 'Buy and Hold Strategy', waiting for the economy to bounce back and prices and rents to go up before selling.
Phase#1 - Recovery ('19 - Present)
People across the world suddenly recognized the paramount importance of having a secure and comfortable home. This newfound appreciation for the value of homes was further stoked by historically low-interest rates and supportive government policies.
These factors combined to ignite a surge in the desire to own homes. For many of us, the capability to purchase homes had been there all along, but it took these circumstances to spur action.
In my view, what we've seen so far is just the beginning of real estate bouncing back, like the first step of a comeback, after enduring nearly a decade of stagnation. The real growth and expansion of the sector are yet to unfold.
The residential sector had hit rock bottom, seemingly lifeless. Despite the growth in job opportunities and wealth creation, one crucial thing was missing: people weren't buying houses.
The Nifty Realty long-term graph tells a compelling story. After a staggering 14 years of consolidation, we're witnessing a breakout. This isn't the hallmark of a bubble; it's a return to normalcy, a remarkable resurgence. It serves as a visual testament to this shift. It underscores that what we're witnessing isn't an overheated bubble but rather a revitalization of the real estate market. It's a return to the fundamental human need for homes, backed by economic factors that couldn't be ignored any longer.
Investor's Strategy - In the recovery phase, as occupancy and rents start to rise, although not as fast as inflation, it's a great time for real estate investments. Prices are lower than before, especially for properties in financial or physical trouble, which may or may not need fixing up. For investors buying these properties, there's a good chance of a high return on investment through operations or resale.
Phase#2 - Expansion (Present - ?)
At present, India's real estate sector is worth around USD 477 billion, making up 7.3% of the total economic output. However, looking ahead to 2047, it's predicted that the real estate sector in India will grow significantly, reaching USD 5.8 trillion and contributing 15.5% to the total economic output.
As for India's economic growth, it's remarkable. While we used to think the world was interconnected, now it seems India is detached from global economic fluctuations. The country is thriving, even when global events don't seem to affect it. This robust growth gives me confidence that the real estate market is poised for significant expansion.
Gurgaon's Real Estate Riding the Wave of India's Transformation
A significant portion of India's population, roughly 80-90 million people, relies on just a few major cities to offer promising job opportunities, particularly for the educated workforce. Among these, Delhi-NCR, and more notably, Gurgaon, stand out as the epicenter of new job creation. It's crucial to understand why this region is poised to be a prime destination for job seekers.
Gurgaon, with its proximity to the national capital, Delhi, has emerged as one of India's prominent employment hubs. Its strategic location, well-developed infrastructure, and a thriving corporate ecosystem make it a magnet for professionals seeking career growth.
1. Rising Housing Demand: India's rapid urbanization is on a trajectory to reach an estimated 600 million urban residents by 2050.
2. Rising Disposable Income: The Indian middle class is experiencing substantial growth, accompanied by increased household disposable income.
The real estate landscape is evolving, driven not only by housing but also by significant infrastructure improvements planned in the coming years. This means that almost every place is becoming self-sufficient and attractive in its own way. So, it's not just about where you live; it's about what suits your style and what the future holds for each location.
Investor's Strategy - In a high-demand phase with rising prices and low vacancies, many investors buy or renovate properties to rent or sell. With a strong economy and job growth, there's high demand for commercial and housing spaces. During this upswing, investors focus on developing properties that match market demand to sell for profit or secure good rental income
It prompts a crucial question: when will the real estate market peak?
As new construction projects near completion, the balance between supply and demand becomes a pivotal factor. When the scale tips towards an oversupply of properties, vacancies increase, and the growth in rental rates and property prices may slow down or level off. A prime example of this occurred about a decade ago when the real estate industry faced a downturn. In response to these challenges, innovative niches like senior citizen living and student housing emerged.
To assess the market before it heats up excessively and potentially surpasses the fundamentals, we need to rely on certain key metrics. These metrics serve as valuable tools to gauge the presence of a housing bubble:
1. Housing Inventory:
Assess for abrupt shortages (bull market) or excess supply (bear market).
When a bull market is approaching, there is suddenly a shortage in housing inventory. This means that there will be no homes available on the market!
On the other hand, during a bear market, there is a sudden increase in the housing inventory. Therefore, there are multiple homes available in the market. However, very few buyers are willing to purchase them.
2. Absorption Rates:
Absorption rates indicate the number of homes sold within a specific timeframe.
An increasing absorption rate suggests a bull market.
Conversely, a declining absorption rate indicates a bear market.
3. Wages vs. Capital Values:
Affordability can be assessed by comparing the annual wages of an average person in a neighborhood to the prevailing property prices there.
This comparison helps determine how many years someone would need to work to afford a home in that area.
Typically, a range of 5 to 10 years is considered affordable. If you can buy a house with your entire annual wages in 5 to 10 years, it's feasible to afford one with a 20-year mortgage.
However, if this number exceeds 20 years, it suggests a housing bubble.
High prices may be attributed to the dominance of investors in the market, leaving average individuals as tenants rather than homeowners.
4. Rental vs. Capital Values:
Changes in the economic fundamentals of a property affect both its rental and capital values concurrently.
During a housing bubble, speculators drive up capital values in anticipation of further gains.
However, rental values often don't rise because tenants don't perceive increased property value.
This results in a significant gap between rental and capital values, a clear indicator of a housing bubble.
Today, the Indian real estate market stands as a mega-market comprising numerous small micro-markets. Within this expansive arena, each category represents a substantial addressable market. There's a rich tapestry of segments, including mass housing, senior living, bachelor living, premium living, and uber luxury. Each of these categories offers unique opportunities for developers and investors.
Right now, it's luxury and larger homes that are selling well, but how long this trend will last is uncertain. However, when times get better like they are in residential real estate right now, developers often shift their focus back to what's currently selling, rather than sticking with the innovative niches they explored during tougher times.
In the ever-changing world of real estate, it's imperative to learn from history and adapt to the evolving landscape. The real estate market's peak may remain uncertain, but with the right metrics and insights, you can make informed decisions and navigate this dynamic industry effectively. Stay tuned for a more in-depth analysis of Gurgaon's Real Estate.
Food for thought: *At the cost of oversimplifying it - India's population is similar to China's, so to be in a space like China's oversupply scenario, India's market would have to expand by around 3x to 4x its current scale?
Your insights matter! Share your comments below, and don't forget to hit that 'Share' button (If you found this post insightful) to spread the knowledge with friends and family who might be interested in real estate.
We're here to serve your curiosity about real estate in Gurgaon. What more would you like to know? Tell us your burning questions, and we'll make sure to address them in our upcoming posts. Your voice guides our content, so let's keep the conversation going!
Comments