Stock market is generally defined as the ‘Bull market versus Bear Market’. In real estate, the expression has generally been all about ‘Bullish Market’, ‘Upbeat market’, ‘Wait & Watch Market’, and ‘Pessimist Market’. ‘Bear Market’ as a term has generally not been used in the context of the housing market. Track2Realty questions why? Is it because a ‘Bear Market’ is just not possible in real estate? Or is it because real estate as an asset class has an altogether different means of cost & benefit analysis.
Let’s first understand what is a ‘Bear Market’? In stock exchange, a ‘Bear Market’ is the market when the prices decline by more than 20 per cent from their immediate highs. By application of the same definition as with stocks, it will take a correction of 20 per cent to define real estate as a ‘Bear Market’. But then in stock market there is benchmarking called sector index which is missing in the case of real estate.
Whether or not the last peak price was highest itself is a debatable subject in the property market. This is more so because in the secondary market, the transactions are often wayward depending upon the impulse of the buyer or the seller.
In reality, a correction of even 10 per cent is akin to market mayhem and the opportunistic operators (read underwriters) enter immediately into the housing market when the prices have just corrected, not even crashed. Then this is an asset class that is not only less prone to volatility, but also cyclical to rebound, and less supplied than standing and pent up demand in the market.
Some of the developers have been so confident about the non-probability of the ‘Bear Market’ that they don’t even mind a buy-back if prices fall up to 20 per cent. In this market gimmick the developers are well conscious of the fact that no home buyer or investor would sell off at a time of ‘if-at-all’ 20 per cent fall. This is also because the transaction cost itself is around 5-9 per cent depending upon city to city. So, a loss of booking of around 30 per cent for a non-perishable commodity like housing is just not possible.
Certain questions that self explains about feasibility of real estate ‘Bear Market’
Is a housing ‘Bear market’ possible when the product is non-perishable?
Aren’t houses bought with longer holding period than stocks?
Haven’t organised investors better holding capability in real estate?
Won’t the housing defaults lead to foreclosure before the market crash?
What conditions could lead to a housing ‘Bear market’?
Industry point of view
Abhishek Kapoor, CEO, Puravanakara asserts that it is absolutely not possible to have a Bear Market in Indian real estate under present circumstances. On the contrary, in the upcoming festive season he foresees the next level of growth coming in. This is because after the large corporations, now even the small and medium enterprises are expected to pick up in the next two to three quarters. On the ground, we are neither seeing price reduction nor reduction in demand.
“I am not saying we have not seen Bear market in real estate. What I am saying is that moving forward I don’t see that happening. I maintain that a Bear Market could be possible but definitely not in the foreseeable future in Indian real estate. In the past too, it has actually not been a Bear market but during the global recession in 2008 prices may not have corrected up to 20 per cent but may be corrected by 10-15 per cent. It was a global crisis and if you qualify a 15 per cent price crash as Bear Market then of course it was a Bear market,” says Kapoor.
Aditya Kushwaha, Director & CEO of Axis Ecorp believes as things stand today in India, any Bear market is not possible in the foreseeable future and one shouldn’t even think about it. Real estate has a strong support level not only in the domestic market but also from the international market. NRIs are putting money everywhere, be it NCR, Bengaluru, Chennai or Goa. Favourable dollar realisation is also leading to NRIs’ money inflow. Secondly, there are many attractive schemes for the NRIs in the Indian market. A number of Indian developers are doing road shows for the NRIs in the overseas market. They may not give that much discount to the Indian customers because of competitive market but are offering a bit extra to the NRIs.
“So, a Bear Market is not possible due to multiple factors, ranging from festive season to NRIs inflow. I rather feel in many of the markets there has been a jump of 20 per cent in the property prices. In the past, the Bear Market was momentarily witnessed but today’s market is a market of hope and optimism,” says Kushwaha.
It is not that real estate has been completely immune to the ‘Bear Market’. But that has been a one-off case when there had been a global economic recession. In recent memory, a ‘Bear Market’ engulfed real estate in 2008 during the global financial crisis. Triggered by the subprime crisis the housing market went through severe stress and in the US many of the home buyers had to face foreclosure. In India too, the effects were quite visible and in many cases the home buyers owed more on their homes than the worth of the house in the market.
But generally the real estate market and the stock market tend to have a low correlation. Of course, buyers of both asset classes are bullish or bearish depending upon the macroeconomic outlook in general, but bearing of one asset class does not necessarily affect the other one.
Furthermore, the bearish stock market is generally across the market index, which is not the case with the real estate market. For instance, the housing market may be witness to a slump but commercial properties may behave differently. Even within the commercial spaces, the office market and the retail spaces may show different growth or degrowth trajectory, depending on what is driving the ‘Bear Market’.
The argument is not to say that a ‘Bear Market’ is not possible in real estate. However, it is a rare occurrence and can only happen when there is a broader economic downturn and most likely recession. Unlike the stock market, where a ‘Bear market’ brings opportunistic investors to Dalal Street, in recession-led real estate, ‘Bear Market’ is the time when the investors run for alternative asset classes, most likely the gold.
Real estate losses are generally not due to ‘Bear Market’ but the de-growth of the asset class. In other words, the opportunity cost of the money employed, ROI, rental returns etc are calculated as against the mostly borrowed money to buy a house. In contrast, investors generally do not invest in the stock market with borrowed money. Home prices have either remained the same in the last few years or have not kept pace with the inflation in the market otherwise. Now that notional loss could not be termed as ‘Bear Market’ by any stretch of imagination.
Ravi Sinha
#RaviTrack2Media
Track2Realty is an independent media group managed by a consortium of journalists. Starting as the first e-newspaper in the Indian real estate sector in 2011, the group has today evolved as a think-tank on the sector with specialized research reports and rating & ranking. We are editorially independent and free from commercial bias and/or influenced by investors or shareholders. Our editorial team has no clash of interest in practicing high quality journalism that is free, frank & fearless.
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