The high appreciation rates that India's property market is currently witnessing, is due to the Home Loan Interest Rates reduction that the National Democratic Alliance government instituted after 2001. In early 2004, home loan rates sank to a record low of 7.5 per cent and this paved the way for the alarming spiking that typified the country's property rates in many Indian cities.

The very amenable borrowing rates encouraged individuals to avail of home loans to buy residences, while up to then actual property purchase had only been an option for the considerably rich.This resulted in a huge demand for quality real estate all over the country post 2003. Since March 2005, Indian real estate rates have displayed an unstoppable upward curve. This is directly related to the opening up of foreign direct investment in real estate. The market has been expanding at an unbelievable rate of 100 per cent plus. This can also be traced to the heightened NRI interest in real estate.

Many presently feel that the Indian real estate market is a bubble, and will eventually burst. It is true that residential rates in many Indian cities like Mumbai and Delhi are comparable with property rates in the West now. However, let us take an investor's point of view of this phenomenon. Behavioral finance has repeatedly proved that whenever asset prices start escalating, the initial interpretation has been of a 'bubble'. In-depth analysis of price appreciation in real estate and the reasons thereof would help in comprehending these fears. Price appreciation in real estate is backed by the following fundamentals:

Rising income levels, resulting in increased demand for quality constructions and aspirations for better locations in residences. IT / ITeS continues to be a major revenue driver and rising outsourcing trends have driven demand for office space. Hospitality industry is operating on more than 85 per cent occupancy in major metros and rising business activity is resulting in increased investment in hospitality.

A recent hike in interest rates and inflation has a far reaching impact on real estate stocks, which are trading at 20%-40% below their 1 December 2006 levels. “Market capitalization weighted index”, SENSEX ran up near 1.77% - from 13844.78 on 1 December to 14,090.98 on 13 February 2007.
Market participants are the situation to be a double whammy of high property rates and increasing interest rates and inflation figures. High prices and interest rates are believed to be the factors contributing to the fact that real estate prices have become stable, says Hitesh Kuvelkar, associate director with First Global, who recently conducted a five city (Delhi, Bangalore, Chennai, Pune, and Mumbai) survey on property prices.
Nowadays, a few people are showing inclination towards making prospective investments in real estate, says Kuvelkar further. Supporting his statement, Rajen Shah, Chief investment officer of Angel Broking too finds real estate prices to have gone through rooftop substantially on land bank stories with unrealistic valuations. The real estate had witnessed a nice hike in the past two years. However, such a correction is needed and good for the market. The fall in real estate stocks may affect plans of the property developers who are planning to raise initial public offering (IPOs).
The inflation does not seem to take a downturn in near future, and the Reserve Bank of India (RBI), while trying to keep it under control, will tighten liquidity further thereby bringing an increase in interest rates. The trend is likely to remain so for sometime as the inflation is an election issue. Likewise, the real estate prices are expected to remain stagnant.
Not everyone is of the same view regarding the increase in prices of residential property. The economy of the country is growing at the rate of 8-9% and salaries have gone up higher seven to eight times as compared to what has been pad the four years back, while there has been no change in the housing loan rates. They are still moving at the snail’s pace.

Despite the plea by Finance Minister P. Chidambaram to the chief of all the banks regarding the issue of increase of Indian Home Loan Rates, banks are increasing the home loan rates bya steep one percentage. This can directly affect the Real Estate Industry.
The values of residential real estate have remained flat for the last three months and in north India have started falling. The latest rise in interest rates could accelerate the fall, say real estate experts.
Interestingly, prices of commercial property across the country are still going up and analysts expect that trend to continue.

Lets see where it all leads the Indian Real Estate.

Personal and Real Estate Loans as well as credit card withdrawals may become expensive, with RBI on Wednesday asking banks to set aside more money to cover risks on advances to these sectors while raising key short-term lending rates to curb inflation.

While borrowing for buying shares too could become costlier, housing loans may not be impacted as they are not touched by the measures announced by RBI in the third quarter review of monetary policy. In the review, RBI increased provisioning requirement for the four sectors to two per cent. It means that banks now have to keep two paise for every rupee given to these sectors. A hike in this rate is aimed at increasing the cost of retail and housing loans to prevent overheating in these rapidly growing sectors.