Indians have recently seen a rapid rise in their salaries and real estate investments. I strongly feel that we are in a state of housing bubble which is set to crash soon. There are several reasons behind this theory and I will pick them up one by one.

1. Ratio of Salary to Real Estate Prices:
One of the most common theories given by the "bulls" of real estate market is that the salaries of Indian workers have risen substantially in the last decade or so. Well, that is true but the prices of Indian real estate have risen at a far greater pace. An average price of home, commercial real estate or even a farm land has gone up by a minimum 5-10 times in the last 10 years. Prices of the real estate holdings have been doubling every couple of years, while the salary of an average person has not been keeping up even close to that pace. A large percentage of people are investing not because of their personal need but because they have simply seen their next door neighbour make bunch of money in real estate recently. This is a typical indication that a bubble has already formed.

2. Excessive Inventory:
A large percentage of flats lie vacant in most metropolitan cities. People have been buying them for the purpose pure investments. They usually plan to hold them for a few years and then sell it at a higher price later few years later. In most cases the rent generated from these properties does not come even close to what banks offer in savings/FD accounts. Builders have been building up complexes and commercial buildings and a large percentage of them are being sold to investors and not real people who are buying to live there. This frenzy cannot continue for ever.

3. Rupee Strength:

With the rise of Indian economy, foreign money has been flowing into India and the demand for Rupee has gone up. This means over time Rupee will strengthen in the coming years putting pressure on manufacturing and IT industry which has primarily fueled the economic boom in India for the last 10 years. India is at the risk of losing the status of a place to find super cheap labour. Indian government has been trying to control inflation but it continues to stay at elevated levels.

4. Wealth Disparity:
Most of India's population is composed of lower-middle class and poor people. These people have hardly seen their share go up, in fact poor have become poorer in the last 10 years. An average farmer, clerk or a government employee has felt it harder and harder to keep up with the inflation. Most wealth in India is still is held by just a small percentage of individuals.

5. Only Certain Metros Have a Crunch of Land Resources:

Metros like Bombay, Delhi and Bangalore are facing a bit of real estate shortage because of excessive influx of people looking for jobs, but the price appreciation across the nation and even the farming lands are totally unjustified in my opinion.

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Sent by Rajat