Can realty ever face a bear market scenario?

Stock markets trends are generally categorised as bull market or bear market. In contrast, real estate in India is often described using the expressions bullish market, upbeat market, wait-and-watch market and pessimist market. Does that mean a bear market scenario is not possible in real estate? Or, is it because real estate as an asset class has an altogether different means of cost and benefit analysis.

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What is a bear market?

Let us first understand what a bear market is. In stock markets, a bear market is when prices decline by more than 20% from their immediate highs. By application of the same definition as with stocks, it will take a correction of 20% to define real estate as a bear market.

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.

In real estate, a correction of even 10% is akin to market mayhem since this is an asset class that is not only less prone to volatility but also cyclical to rebound and has less supply, as compared to the standing and pent-up demand in the market.

Some developers have been so confident about the non-probability of the bear market that they do not even mind a buy-back if prices fall up to 20%. Developers are well aware of the fact that no buyer or investor would sell off at a time of a 20% fall. This is also because the transaction cost itself is around 5%-9%, depending upon the city. So, a loss of booking of around 30% for a non-perishable commodity like housing is just not possible.

Has Indian real estate witnessed a bear market in the past?

During the global meltdown of 2008, triggered by the subprime crisis, the housing market went through severe stress in the US. 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.

“I am not saying that we have not seen bear market in real estate. 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% but it may have corrected by 10%-15%. It was a global crisis and if you qualify a 15% crash as bear market, then of course it was that,” says Abhishek Kapoor, CEO, Puravankara.

Is the slowdown in Indian realty a sign of a bear market?

Abhishek Kapoor, CEO, Puravankara, asserts that it is not possible to have a bear market in Indian real estate, under present circumstances. On the contrary, in the upcoming festive season, he foresees growth. He attributes this improved performance of large corporations, which is likely to be followed by small and medium enterprises in the next two to three quarters. On the ground, we are neither seeing price reduction nor reduction in demand.

Aditya Kushwaha, director and CEO, Axis Ecorp, maintains that real estate has a strong support level not only in the domestic market but also from the international market. NRIs are putting money in the NCR, Bengaluru, Chennai and Goa, among other places. A 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 much discount to the Indian customers, because of the competitive market but are offering a bit extra to the NRIs, he adds.

“So, a bear market is not possible due to multiple factors, ranging from the festive season to NRIs inflow. In many of the markets, there has been a jump of 20% in property prices. In the past, the bear market was momentarily witnessed but today’s market is a market of hope and optimism,” says Kushwaha.

See also: Unsold housing inventory: A symptom and not the cause of the housing market’s woes

Bear market and Indian real estate segments

Furthermore, the bearish stock market is generally across the market index, which is not the case with the real estate market. For example, 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.

Is a bear market possible in real estate?

Unlike the stock market, where a bear market brings opportunistic investors to Dalal Street, in recession-led real estate, a bear market is the time when the investors turn to alternative asset classes such as gold.

Real estate losses are generally not due to a ‘bear market’ but de-growth of the asset class. In other words, the opportunity cost of the money employed, ROI, rental returns, etc., are calculated 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. However, this notional loss cannot not be termed as a bear market.

While one cannot rule out a bear market in real estate, it is a rare occurrence and can only happen when there is a broader economic downturn and most likely, a recession.

(The writer is CEO, Track2Realty)

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Ravi Sinha

Ravi Sinha is a journalist with nearly two decades of cross-discipline media exposure. He is the CEO of real estate think-tank group Track2Realty. He has been writing extensively on the real estate sector for nearly a decade. Evaluation of real estate brand performance is his expertise and he has immense insight into consumers’ psychograph in the property market.

Twitter: https://twitter.com/ravitrack2media