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The US housing market is declining, after years of steady growth. A tighter monetary policy, rising interest rates, high construction costs, and looming in slowdown (if not recession) are discouraging home buyers from investing in property.
American trade association body-The National Association of Realtors, estimates that the existing home sales in the US has fallen by about 15% to 20% from last year. In comparison to the 2008 housing market crash, which was caused by a subprime mortgage crisis, the current one has more to do with home buyer affordability, which is getting squeezed due to record inflation. Alas, the days of cheap and easy credit are getting over.
Inflation in the US has reached record levels. The US Consumer Price Index (CPI), increased 9.1% year-on-year, exhibiting the fastest annual growth, since November 1981. The popular rhetoric is that it is the result of the Federal Reserve’s quantitative easing measures. According to Statista Research, Federal Reserve’s balance sheet expanded to around USD 8.89 trillion, as of July 26 2022. While this was meant to stimulate economic growth after the pandemic, it also led to a sharp rise in inflation.
This combined with an increase in home loan interest rates, has made home buyers jittery. According to the Federal Home Loan Mortgage Corporation (Freddie Mac), the 30-year, fixed-rate mortgage averaged 5.13% for the week ending August 18 2022, compared to 2.86% a year ago, while the average 15-year, fixed-rate mortgage was 4.55%, versus 2.16% a year ago
In China, home sales are down by 60-70% over the last one year. Bloomberg estimates that China’s real estate sector has seen almost USD 90 billion being wiped off its stocks and bonds, since the beginning of 2022. China’s crisis has been caused by a massive debt pile up with real estate companies, who are struggling to repay debt. Many large real estate companies are showing signs of collapse, because of potential loan defaults. Cash flow concerns have forced several real estate developers to halt construction of homes. It is a full-blown housing crisis, with some home buyers even threatening to stop their mortgage payments, until construction on the homes that they had bought resumes.
Where does India’s property market stand in all of this? India has also seen a tightening in its monetary policy. The low interest rate era is well over, at least in the near foreseeable future. While this will affect home buyer affordability, India’s housing market is nowhere near a crisis. There is a huge pent-up demand for housing and unsold inventories are getting consumed fast. Besides, the reforms in the real estate sector, huge investment in infrastructure and rapid urbanisation are all fuelling demand for homes. There has been a lot of interest in high-end and luxury properties from high net-worth individuals, especially from the Non-Resident Indian (NRI) community, who have seen an increase in their purchasing power after the rupee weakened.
In the last decade, Indian real estate sector has also seen lot of turbulence with many big names (companies) going belly down, and millions of homebuyers staring at unfinished projects with no resolution in sight but their Equated Monthly Installments (EMIs) with banks continuing to haunt them and thereby causing immense stress on household budgets.
Thus, there are lessons to be learnt. It would be prudent for real estate developers to avoid debt pile-up, improve their governance and disclosure standards, and adopt global best practices to attract investments. Also, the government and regulators should keep an eye on the developments and make necessary timely edits in policy to avoid any major fallouts.
Thanks to the government – both Central and State government reforms such as Real Estate Regulation Act (RERA), linkage of stamp duty with circle rates, digitisation of records (though still a work in progress) and the Insolvency and Bankruptcy Code, have brought in some method in the madness, in this sector.
Steps taken by the government through Goods and Services Tax, introduction of Tax Deducted at Source (TDS) provisions above certain thresholds has also improved transparency levels in this sector. Gradually, the Real Estate Investment Trusts (REITs) regime is also gaining some maturity and traction after years of back and forth on tax and regulatory reforms.
Global developments may have some impact, in line with the overall investment flow and macro-economic scenario. Nevertheless, India’s real estate sector appears to be on a strong footing, and it is unlikely that the sector is headed for a crisis, at least as of now. Of course, a lot depends upon the Indian economy continuing to grow!
