Real Estate on FIRE, yet again!

Real Estate sector was riding the market wave yet again, today. Just like the arrival of tiny birds called 'swallows' marks the beginning of summer, the arrival of a phenomenon in the Indian real estate market is also known to signal the beginning of a season. The season of a rise in property prices that is. And what is this phenomenon? Well, it's nothing but the tendency of brokers to start underwriting more and more properties so that a perception of scarcity can be created.

As per a leading daily, the nexus between the builder and the broker, which pushed property prices to record highs in 2006 and 2007 in the NCR (National Capital Region) is back in business and hence, buyers better watch out.

How has Reality stocks performed in the stock markets? After a quick analysis this is what I found…

The below chart shows the degree of speculation that has led to the rise of realty stocks since the broader rally began on 9th March 2009. While the realty index has surged by around 187% since then, the average P/E multiple of the index has risen by almost 423%[oops!!!], or a multiple of 5 times the P/E that these stock were trading at in March! Thus to conclude, it's entirely the case of P/E expansion that has caused the rise in realty stocks while corporate earnings have remained under pressure. The same conclusion, though to a lesser degree, also applies to metal, power, pharma, and small-cap stocks. Is this sheer speculation or the undervaluation correcting itself? More a case of the former than latter is what I think.