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Realty's reality

It’s a great time to be a home buyer in the US. Housing prices in key states are down 15-20 per cent, and if more banks continue to report losses, then prices could fall some more.

Print Edition: May 18, 2008

It’s a great time to be a home buyer in the US. Housing prices in key states are down 15-20 per cent, and if more banks continue to report losses, then prices could fall some more. For those with good credit history and a little bit of cash to spare, it’s the perfect time to upgrade, be it in terms of the size of the house or its location. Like in India and most other parts of the world, housing prices in the US had been soaring, and when the economy started slowing in 2006 and thousands of home owners began defaulting on their mortgages, prices of homes started falling—so far, prices have fallen 11 per cent, but Goldman Sachs estimates that they may fall another 19-24 percentage points over the next 18 months. We all know what that has meant for the US economy—a subprime crisis that, the International Monetary Fund estimates, could cost banks $1 trillion in losses. However, the Organisation for Economic Cooperation and Development (OECD) has come up with a different set of figures that puts the losses between $350 billion and $420 billion.

Realty check: If economic growth sustains, prices will hold
If economic growth sustains, prices will hold
Will the Indian housing market, which makes up three-fourths of the real estate market, come crashing down as it has in the US? No, but there’s no doubt that prices are correcting in some markets—for example, in some parts of Gurgaon prices are down 22-34 per cent, while in other markets such as Bangalore, there is no uniform trend; while south, south-east and east Bangalore are reporting a drop in prices, north-east is witnessing a 7 to 10 per cent increase. Similarly, in Mumbai and Chennai, housing prices are stable. In the US, in contrast, the fall in housing prices is more secular.

Then, there are other—economic and social—differences between India and the US. The biggest is that the Indian economy is still growing, while in the US, the GDP growth had been slowing down over the last three years and may be moving into recession now. India, by contrast, should clock more than 8 per cent growth this year.

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That means a large number of Indians are getting richer with every passing year, and they will keep up the demand for housing. Socially, owning a house is seen as a proxy for social security. Besides, most of the homeowning Indians own only one home, therefore, selling it is not really an option for them. Three, unlike in the US, a lot of black money tends to circulate in the real estate market in India; this is unaccounted for wealth, and not some bank loan. Therefore, any erosion of this wealth is unlikely to hurt the banking system. But, ultimately, India’s best hope of keeping the correction from turning into a crash lies in its economic growth. As long as growth keeps humming, prices will hold.

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