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India: Housing boom declines, hinting at slower economy

International banks expect real estate prices to fall 25 percent, and annual GDP growth to slow.

By Mian RidgeCorrespondent / August 8, 2008

Housing: Share prices of DLF, India's top property developer, have fallen.

Anna Zieminski/AFP/newscom/file

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New Delhi

Glistening marble floors. Landscaped lawns. A golf course. This $1.5 million-a-pop housing development is one of the plushest yet in Gurgaon, a satellite city on New Delhi's edge that has become an icon of booming India.

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But 18 months after they went on sale, half the houses in the first phase of construction stand empty and unsold, as India's once-booming housing market slows down.

A recent report by HSBC Bank predicted a "sharp slowdown" in residential demand in most Indian cities and a fall in home prices of between 25 and 30 percent.

Many fear the housing sector's woes bode ill for India's slowing economy. Rising inflation and shrinking credit look poised to slow steady growth here, and several international banks have revised their 2008 growth forecasts down to around 7 or 8 percent.

Signs of slowdown

While many countries would envy that kind of growth rate, the slowdown represents a disappointing turn for India, where only months ago there was talk of hitting double-digit growth.

At the start of the year, India was surging ahead. Gross domestic product growth hovered around 9 percent, as it had for the past three years. A surge of foreign investment boosted a buoyant stock market.

But, driven largely by soaring oil prices, India's inflation has rocketed to a 13-year high of nearly 12 percent. Last week, in an attempt to curb inflation, India's central bank raised interest rates for the third time in two months to a seven year high of 9 percent. Most analysts here believe economic growth will be sacrificed to bring down inflation.

India is also dealing with a potentially big increase in its fiscal deficit, which many expect will be higher than the current official target of 2.5 percent of GDP.

But the property sector has been the biggest loser of India's slowing economy. While India's main stock market index has had a rough year – due in part to the withdrawal of large amounts of foreign investors' cash – real estate firms have seen drops of 40 to 70 percent on year-highs.

The combination of high inflation – pushing up the cost of building materials like steel and cement – and resulting high interest rates has resulted in a "double whammy" for property developers, says Jai Mavani, executive director the Indian branch of KPMG, a financial services company. Expensive credit is deterring buyers, while property developers are finding it harder to raise funds.

Freddy Rebeiro, an architect, is among many first-time buyers who have decided to sit back and wait out the market. "It's not just high property prices. We will be dependent on loans and right now they are prohibitively expensive," says Mr. Rebeiro, adding that he has watched friends "take the plunge and regret it."

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