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Some analysts believe that property prices are likely to undergo a correction in 2008. This is partly because home buyers, deterred by increasing property prices and high interest rates over the past three years, may wait for prices to moderate. While that may be true, keep in mind that corrections may not follow a uniform pattern geographically. There may be a price correction in some markets, but not a bubble burst by any stretch of imagination.
The whole debate of a housing bubble reminds me of what former US Fed chairman Alan Greenspan told the US Congress Joint Economic Committee in June 1999. “Bubbles generally are perceptible only after the fact. To spot a bubble in advance requires a judgment that hundreds of thousands of informed investors have it all wrong.” If housing prices are high today only because they will be higher tomorrow while “fundamental” factors do not justify them, then a bubble exists. The measure of a real estate bubble is simple: property prices rise much faster than incomes.
The genesis of the debate is the global experience of a stock market crash leading to a collapse in real estate prices. Japan's real estate crashed in 1985 along with the stock market collapse. In 1991, during the stock market slump in India, real estate market crashed and prices remained stagnant for the next 6-7 years. In 2001, the Nasdaq went down and the US real estate market fell by 20-30%. Are we treading the same path? Will property prices repeat the history of the 90s?
Charles Kindleberger answered this question in his book Manias, Panics and Crashes. “When the stock market collapses, shareholders, especially those on margin, know they are in trouble. Speculators in real estate initially feel no such compunction...They have real assets, not just paper claims.” Stock market crashes are characterised by a sharp drop in stock prices but the volume of transactions remains very high. Conversely, a collapse in the housing market is characterised by illiquidity and a sharp drop in deals. Buyers as well as sellers seem to disappear.
It is too early to talk of a housing price correction and its correlation with the stock market crash in a pan-India context. However, it might be evident in the Mumbai market, where there is a closer correlation between the stock market and real estate prices. In Delhi-NCR, the fundamentals are different. When passed, Delhi’s Master Plan is likely to pave the way for more supply. Banks are cutting home loan rates and speculators are gradually getting out— reasons why a price correction, and not a bubble burst, seems on the cards.
Growth in the country over the past three years has been supported by sound economic fundamentals. Real estate companies have shown strong topline growth in 2007 and this will continue in 2008, as they would continue to launch new projects.
Moreover, real estate companies have expanded to cities outside their principal area of operation. This geographical diversification would continue through 2008. We live in a consumption economy that is financed by debt, which in turn largely rests upon our home foundations.
