Reports of an impending housing recession in the US are a worrying factor for a section of analysts in India. As per a report by the National Association of Realtors, home sales have slowed down for six consecutive months in July, 2022 even though pricing remains firm. Memories of the last housing recession in 2008 are still fresh in the minds of Indians. The housing crash following the Lehman Brothers collapse and the global financial crisis that followed, had its effects on the Indian housing market, as well. Although the Indian housing market did not go through as severe a bear phase as the US and some other economies of the world, prices in India, too, crashed between 10% and 20%.
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Differences and similarities between US and Indian property markets
Analysts tracking the economies of both the countries maintain that in the US market, home sales have been contracting. Over the last 12 months, there is almost 20% contraction. So, the median sales prices have contracted, as well, by almost 20% and this is reflected 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, while the second is the extraordinary rise in mortgage rates from 3.3% to almost 6%.
So, there is a significant increase in the EMI and the affordability for mortgage home buyers. Clearly, there is fear of economic recession and hence, there is a conservative approach towards putting in large investments on new homes.
Amit Goenka, MD and 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. He, however, does not agree that it will affect the Indian housing market.
“Unlike the Lehman crisis affecting the Indian housing market as well, it does not seem to be so, because even in 2008 the Indian real estate market actually started to boom in 2009-10. Indian real estate was not that adversely impacted for more than a few quarters whereas the US economy suffered for three years almost. I do not see any difference in the current environment. Prices in 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.
See also: Is real estate helping or hurting Indian manufacturing and ‘Make in India’?
Lehman crisis vs Covid economic crisis
Abhishek Kapoor, CEO of Puravankara, maintains that 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.
“The biggest differentiating factor between the Indian and the US markets, is that we 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. The 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.
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 and construction materials. In the US, the prices are firm just because the inventory is less and that is why it is a seller’s market. India does not have that challenge, because the inventory creation is very fast. Post-Covid, the number of new inventory here has actually tripled in the last 12 months.
Also, the US market does not 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 an increase in the repo rate by 100 BPS. 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.
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Housing demand in India and the US
Nevertheless, by and large, the Indian housing market cannot be correlated with the US market under any situation. There are some common factors but the differences are more – for example, our GDP growth is the highest in the world; companies are growing with their market cap; there is extraordinary increase in IT industry whose employees 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% and the borrowing rate of 7% in India. So, the difference between mortgage rate and deposit rate is hardly 2%. Internationally, it is between 3%-4% today.
The US is also witness to the slowing demand from migrants, because of visa rules and sanctions against some of the countries, which is not a case with India. City expansion and urbanisation is happening 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 an asset heavy economy where the bulk of the money has been into housing and gold and other real assets.
(The writer is CEO, Track2Realty)
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
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