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A global meltdown?

Awaiting buyers: Market forces dictate the fate of the housing industry

There is a general notion that the global economy looks for ‘direction’ from the U.S. and the housing sector cannot be an exception. If this notion does not hold good for major European countries, can it be good for India?

In the light of growing trade between different nations across the world, there is a tendency to spread the ‘virus’ affecting major economic powers to other nations as well. This has become more contagious with strong economies like that of the U.S. In this context, let us look into the real estate scenario.

The housing sector in the U.S. grew by leaps and bounds with the influx of immigrants. Most Indians holding a green card purchased houses/apartments as an investment. Instead of paying high rentals, they utilised the money for reduction of mortgage. Further, the interest rates for deposits in Indian banks were low and uncertain and income from investments was not freely repatriable.

Most of all, in a booming real estate market, houses fetched handsome surpluses when sold after a few years. Again, profit from sale of property was free from tax.

The increasing demand for houses propelled large-scale investments by real estate developers, especially in States such as California where the immigrant population was high. The supply position, thus, overshot the demand, bringing about a slump in the housing market.

The boom gradually turned into a downward spiral and, by the year 2006, it reached rock bottom. Sale of houses slumped to almost 1.3 per cent in the first three months of the current year, the weakest performance in four years.

The continuing housing slump became a drag on the overall U.S economy in the last couple of years. A survey by the National Association of Home Builders indicated that there are more troubles to come as there has been a steep fall in builder sentiment.

D.R.Horton, the largest home builder, has warned of a third quarter loss to the company due to a 40 per cent fall in orders for new houses. The investors fear this could mark a watershed in the history of the U.S housing market.

While the U.S home loan woes sent stock exchanges worldwide reeling, leading to increase in sub-prime segment risk, the phenomenon is not likely to happen in Europe.

In this context, many economists feel that the most vulnerable European countries are Spain and England. Still, the hot Spanish and British housing markets are stated to be cooling off, though with slow price increases. These countries are not in any substantial crisis, and demand is good as their high employment economy supports the buying capacity.

It is understood that the only negative effect could be a sort of credit squeeze by banks. No turmoil is predicted in Germany either, as the fundamentals of the German market are good. Italy too is not at risk of sub-prime loan default because the guarantees supporting the loans are stricter there.

In India, there has been large housing shortage for a long time. Indian housing and habitat policies are of very recent origin as compared to the U.S. where there used to be no housing shortage as such, at any time. The comparable factors are perhaps inflation and the dominant role of the central bank in both the countries.

In a recent discussion on a private TV channel organised by the CII, the speakers representing the developers and builders were accusing the RBI of following short-term policies and overreacting to the rather high credit expansion in the real estate sector, by terming it as ‘over-heating’. The panellists were hinting that while the builders and developers are reluctant to reduce the prices, many are offering incentives to buyers to encourage sales, as constructed houses and apartments in some cities are awaiting buyers.

With the recent cut of 0.50 per cent in the discount rate by the Federal Reserve, the bourses across many countries bounced back, which may promote further mortgages too, at least for a while, which may mean that even in the U.S., the health of the housing sector may be on the road to recovery after months of recession.

With the affordability of buyers rising, especially in metros where salaries are rising, the prices of homes may rise again, standing on the strong fundamentals. The Indian realty scenario might continue to look up by a reasonable reduction in the interest rate, a beginning for which was made by the RBI’s last quarterly review of Credit Policy wherein the key rates were left untouched.

If the present trend continues, the Indian realty market may not catch cold merely because the U.S. real estate market sneezes! And ... the global market too.

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