MUMBAI: Investment demand for real estate in the metros, rather than the demand from those who want to stay in the house they are buying, seems to have outpaced the rise in home prices in these cities compared to in the smaller ones. And this faster pace of rise in real estate prices in the metros may eventually turn out to be its own undoing, a report by Japanese financial services firm Nomura pointed out.
The report by Sonal Varma and Aman Mohunta of Nomura said that the growing divergence between real estate prices in the metros and the non-metros cannot be solely due to supply factors. "It also appears to reflect growing investment demand, which is typically concentrated in large metro cities due to higher liquidity. In contrast, the economic slowdown over the last few years has likely affected real demand in non-metro cities," the Nomura analysts said. According to the RBI's house price index, residential property prices in India have grown at a compounded annual growth rate of 21.4% between January-March 2009 and October-December 2012.
Further, there has been a large divergence between growth in metro1 cities (CAGR of 24%) and non-metro cities (15%), even more so in the last year, the report pointed out. "Given elevated house prices, subdued job markets and lower household incomes, real demand should remain subdued. Consequently, in the absence of real demand, investment demand alone may not be able to sustain the excess return in metro cities," the Nomura analysts said.