The report of an impending housing recession in the US housing market is a worrying factor for a section of analysts in India. As per the reports coming out of the US market, the pricing remains firm but the sales have slowed down. As per a report by the NAR (National Association of Realtors), the home sales have slowed down for six consecutive months in July. Track2Realty reports.
Memories of the last housing recession in 2008 are still fresh in the minds of the Indians. The housing crash post the Lehman crisis leading to global financial collapse had its effects on the Indian housing market as well. Though the Indian housing market didn’t go through as severe a Bear Phase as the US and some other economies of the world, the house prices in India too had crashed to anything between 10-20 per cent.
Analysts are hence keeping a close look at the developments in the US and they have some basic questions to answer:
Slowdown in sales indicates impending recession in the US housing market. To what extent would it affect India?
Will a US housing market recession affect the Indian housing market as severely as in 2008?
Slow sales but prices being firm is common in both India and the US. Isn’t there a similar kind of impending recession?
What are the common and differentiating factors of the US and Indian property market?
Analysts tracking the economies of both the countries maintain that in the US market, home sales have been contracting and over the last 12 months there is almost 20 per cent contraction. So, the median sales prices have contracted as well by almost 20%; it is reflecting in the demand offtake. There are several parameters to look at – one is the impending recession in the US economy as a whole because of GDP contraction in the last two quarters; second is the extraordinary rise in the mortgage rates from 3.3 per cent to almost 6 per cent.
So, there is a significant increase in the EMI and the affordability of mortgage home buyers. Clearly, there is fear of economic recession and hence little conservative approach to putting in the large investment of new homes.
Amit Goenka, MD & CEO at Nisus Finance admits the crisis in the US housing market when he says that given that cost has gone up because of commodity prices, home savings have gone down, and inflation is at its peak. In the backdrop of all these the home sales have suffered and there is downturn in the US housing market. It doesn’t look like a reversal in one or two quarters but appears that it will take a year or two of further contraction. This is the biggest slowdown in the last 10 years. He, however, doesn’t agree that it will affect the Indian housing market.
“Unlike Lehman crisis affecting the Indian housing market as well, it doesn’t seem to be so because even in 2008 the Indian real estate market actually started to boom in 2009-10. The Indian real estate was not that adversely impacted for more than four to six quarters whereas the US economy suffered for three years almost. I don’t see any difference even in the current environment. The prices at both the countries are firm because the margin of correction has gone down with the rise in the input cost which is not in sync with the rise in the sales price. So, there has been limited room for any sort of price cut, says Goenka.
Abhishek Kapoor, CEO of Puravankara dismisses the assumption when he says that there are two very differently unique situations. What is happening today is very different from what happened during Lehman in 2008. Lehman was a global financial crisis driven by integrated financial institutions which was a failure of some of the largest financial institutions of the US. It had a direct impact on all markets across the world.
This time during Covid different economies in the world have taken different paths to recover. While the US doled out trillions of dollars towards giving money into people’s hands, India was far more prudent. There had been no over spending. India was conscious that if you spend and then you create a deficit and you land up with a very high inflation.
“Biggest differentiating factor between the Indian and the US market is to have almost negligible default of home loans here. If you compare it with the US, the kind of distress that is there with the home loans is huge. Instances of foreclosure are negligible in India, compared to the US housing market. Second fundamental difference is that it is not investor driven demand; it is end user driven demand. Will there be a shift in sentiment? The answer would be probably yes. Will there be a fundamental shift in the buying behavior? The answer is a clear no,” says Kapoor.
The industry insiders are unanimous that the Indian housing market is least affected because of the domestic production of major raw materials as against the import driven economy of the US. India is quite self-reliant in terms of building & construction materials. In the US, the prices are firm just because the inventory is less and that is why it is a sellers’ market. India doesn’t have that challenge because the inventory creation is very fast. Post Covid, the number of new inventories here has actually tripled in the last 12 months.
Also, the US market doesn’t have much off-land sale; most of the sales happen towards the end of the production cycle. In India, people prefer off-land purchases in order to plan their investment over a period of three to five years. Home buying has not slowed down in this part of the world despite of an increase in 100 BPS repo rate. Of course, there is a bit of caution now that there might be some slowdown after the euphoria that we witnessed in the last 18-24 months. So, euphoria may not continue and some sort of slowdown or taper may soon happen.
But by and large the Indian housing market can’t be corelated with the US market under any situation. There are some common factors but the factors that are very different are more – like our GDP growth is the highest in the world; companies are growing with their market cap; extraordinary increase in IT industry who are the largest segment of buyers; and interest rates have risen but they have not doubled. There is not much difference between the deposit rate of 5 per cent and the borrowing rate of 7 per cent in India. So, the difference between mortgage rate and deposit rate is hardly 2 per cent. Internationally, it is between 3-4 per cent today.
The US is also witness to the slowing migrant demand which is not a case with India. Now the US is tapering the migratory demand because of visa rules and sanctions against some of the countries. City expansion and urbanization is at a faster pace in India, compared to the US. The US also has always been an asset light economy where people preferred to have lesser assets whereas India has always had asset heavy economy where the bulk of the money has been into housing and gold and other real assets.
Ravi Sinha
#RaviTrack2Media
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