Activity unlikely to resume without price adjustments to dispose off unsold stocks
Can the housing market recover without price corrections? That’s a question for policymakers to ask. As realty stocks soar and debt-laden firms ask for interest rate cuts to revive the market, the amazing counterpart is of mounting inventories, declining incomes but rising house prices! One would expect prices to adjust in a downturn when demand falls and excess capacity arises; demand-supply equilibrium is restored in the process, paving the way for transactions to resume. No such mechanism seems to be at work in the Indian property market though, where price corrections have essentially meant some deceleration, but not enough to sell off existing stock. The disconnect between weak growth and house prices suggests there is need for further correction.
The trajectory of housing prices in six major cities from 2007-2013 is shown in the first of the accompanying charts. House prices have not only grown extraordinarily relative to 2007 levels, but also doubled in a very short span. Prices moderated just a wee bit at end-2013 in some cities, falling in just one, rising in another. House prices were reported to rise up to 7% in 12 major cities, according to the National Housing Bank last week.
Against these housing price trends, per capita income growth is observed to fall very sharply —from 6.8% in the two years to 2010-11 to 2.1% in 2012-13 and 2.7% last year. The fraction of incomes that consumers can spare for housing, or loan-to-income ratios, are significantly higher. On the affordability metric therefore, if real income growth is stagnating at about 2% for the past two years and isn’t going to jump any higher this year too, can consumers commit to long-term loans of large magnitudes, e.g., a Rs 70 lakh loan for a house priced at R1crore, plus owned funds to meet the standard 30% margin?
The number of transactions—the key link between housing and consumer demand in an economy—is one indicator of the stark disconnect between growth and housing prices. While aggregate data isn’t available, reports show sales have plummeted in the NCR in the past four quarters or so; several firms judge it will take at least another year and a half for things to get any better. A December 2013 survey by Reuters showed that house price increases in major Indian cities are expected to slow to just