Recent months world is facing economic avalanche. Govt of India claims that Indians are farely safe. though there would be some impact but it wont be at magnitude of US and Europe.
Let see how this economic avalanche is going to effect real estate market in India, specially assets bought on loans.
Story Begins, Mr X bought a apartment for 40 L Rs from a private builder sometime in 2002-2007. he paid 10 L down payment and got financed rest 30 L from some bank for 20 years. he would pay about 27~30 thousand Rs as monthly installment to bank(EMI). Between 2000-2007 property price inflation was very high. and investing in real estate was considered best investing option, even on bank borrowed money. because you need to pay just 10~12% interest rate and property inflated at 25~50 % per year. all win-win game for people, banks and builders.
So how long this is going to last ? year 2008 is a worst time for world economy. Though main impact is on western nations. but Indian economy is coupled to west in last few years. now west is going down and there is a sense of fear in India. Banks are not easily lending money to corporate and individuals. there is sense of distrust. not many people are buying new homes. this resulted in down sale for private builders. Private builders have taken heavy loans from banks for these projects at high interest rates. and due to decreased sale private builders are unable to pay back bank loan on time.
All this has resulted in deflation of real estate market. coming back to Mr X, who bought a house for 40 L, now in year 2008 his house's market value is deflating fast and if this economic slide continues then his house's market value may go down under 20 L.
Now why will he pay back 40 L loan with heavy interest for 20 years for a property of 20 L ??? Makes sense?
Mr X defaults bank loan and bank takes over this property. Can bank sell this property for 40 L in current scenario ? No way. This means bank will also suffer loss. If Indian banking goes in dull days then need not say what will happen to Indian economy.