By Anuj Godhani
When the prices do not match the demand, and the supply keeps increasing, the equilibrium can only be achieved with fall in prices. Unfortunately, the Indian housing market isn’t abiding by this simple economics.
The Current State of the Housing Sector
[su_pullquote align=”right”] The air inside a balloon could either escape slowly, or it could burst out.[/su_pullquote]
The housing prices in India are steadily increasing. Unsold inventories are piling up. The prices have gone tenfold in few cities, but at the same time, the houses aren’t getting sold. These two figures indicate that the Indian housing market isn’t at an equilibrium. Rather, there exists a bubble. The air inside a balloon could either escape slowly, or it could burst out. Looking at stubborn prices, there only means a burst in the Indian housing bubble situation.
But, the scenario isn’t that bad. India has witnessed a continuous growth in money supply. The increase in liquidity has found its way to the real estate market. The housing price index, Residex was 198 in last quarter of 2012 compared to 238 in first quarter of 2015. The astonishing part is that money supply and housing prices have shown similar movements. Thus, it is the monetary injections that have led to this surge in prices. The debate though is if India going to witness a crash?
Given the stubborn prices, the realty market sustained the fall in demand because of the ease of liquidity in the market. Private equity players have invested heavily in real estate, and because of the easy cash to refinance loans, the prices haven’t looked down. On top of the ever-flowing cash, the realty sector has been backed by the black money. Developers enjoy this support. They need cash to pay the tax hiding landowners and sometimes, to get their projects approved. With such backing, the sector has formed a bubble with artificial prices and rising unsold inventories. This could indicate that the sector would face a crash in coming years with the prices taking a sudden dump.
The Alternative Scenario
However, the situation isn’t that worse as the sector has picked up corrective measures. The RBI data on sectoral deployment of bank credit suggests that the growth rate in credit to commercial real estate sector has shown a downward trend from 7.5% in 2015 to 2.8% in 2016. If the lending goes down, developers would be pushed to lower the prices.
The fall will take place gradually. Such a situation would be better than a sudden fall in prices. Those predicting a burst argue that the black money policies of the ruling NDA government would decrease the demand even further. The real estate would further loose investment and cash to sustain. With this broken support, the market could soon face a crash. The argument does not hold as there occurs a time lag for the policies to show effects. During that period, the market can adjust itself by bringing down the prices slowly. The prices have threatened the affordability issue in housing.
Conclusion
The cause of this bubble is the never ending cash flow to the real estate compared to the easy credit in US 2008 housing bubble.
In US, easy credit increased the demand in the housing sector, which inflated prices that the buyers couldn’t actually pay for. However, the developers did receive that money, leaving the banks to fail.
In India, the developers have cash backing, creating a similar effect. In both the cases, the money kept flowing to the developers and created an artificial rise in prices. The lack of data in Indian scenario has limited empirical research on the issue and made it difficult to analyse the intensity of the situation. A strong watchdog is required to monitor the housing sector and prevent such pseudo prices and transactions. Hopefully, the market will enter corrective measures and not face a sudden downfall.
Anuj Godhani is head of the student research cell, at Symbiosis School of Economics, Symbiosis International University.
Featured Image Source: Visual Hunt
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