I’m for Sale, But at My Price!

Understanding the Rise & Rise of Real Estate Prices In India - Part II

If home prices have risen disproportionately with increases in personal income and interest rates, then there is a cause of worry. Moreover, when expectations of rapid price appreciation appear to be a major factor behind the strong housing market, the results are discomforting. The volatility in the price has to be driven by changing fundamentals rather than personal agenda of a handful of investors. Weaker fundamentals and non-transparent policies cause price declines in those countries with inelastic supply like India.
But basic fundamentals like inflation and nominal interest rates on the one hand, and housing prices on the other have a far reaching and seep impact on the prices if the market is driven by fundamentals. This link suggests that long periods of elevated inflation followed by a sharp deceleration of price growth may, in the shorter term, breed misalignments between house prices and longer-term determinants of residential real estate values.

Situations like this might call for greater caution on the part of monetary authorities. The feedback from property prices to credit growth is strongest in countries with a greater prevalence of variable rate mortgages and more market-based property valuation practices for loan accounting. In these countries the risk of a build-up of mutually reinforcing imbalances in the real estate market and the financial sector is more pronounced, indicating that authorities should closely monitor developments in property values