Rising inflation has caused central banks across the world to raise interest rates and that in turn is showing an effect as there is a cool down in commodity prices and a big correction in stock prices.
There’s one asset class though which is usually late to the party , but when it arrives, Oh boy - it creates absolute havoc. Yeah, the one that was instrumental in the 2008 GFC - Housing
US housing
From the above graph its clear :
how sudden spikes have always been followed by a violent downmove be it in the late 70s or early 90s or the infamous pre 2008 spike.
The scariest part this time though : Average home value is spiking even as the median income has already started going down.
Inflations is at 4 decade high and adding to that mortgage rates are at a 15 year highs jumping the most in 35 years :
Its not only a double whammy…it may as well be a multiple whammy….
Now let us look at what the situation is in some of the european countries :
Iceland
Britain
China
The Chinese housing market too is extremely fragile after the Evergrande fiasco with a lot of real estate companies put on junk/default list by rating agencies.
Yesterday, China’s largest developer Country garden holding ltd. being downgraded to junk territory in a sign of how far sentiment in the sector has fallen.
What about India ?
Will we see a similar trend in India ? Is it time to go underweight in real estate ?? I would bet on it…but the thing with real estate is " Years happen in a week "
Would love to hear your take on the overall global and indian scenario
You’re confusing the real estate sector and real estate. While the real estate sector might underperform in a recession, real estate as an asset class doesn’t necessarily. I’d underweight the real estate sector in a recession, not real estate.
The Indian real estate market also differs significantly from other real estate markets.
Already has started bursting in chennai though. Plenty of large high rise , houses , flats , big gated communities are sparsely occupied. Some gated communities recently built are nearly ghost areas where you can play counter strike. These are just around outskirts. Inside city NRI’s are still holding out but a recession in US is enough to kill the housing market here. I did a road trip to AP , same thing there, plenty of large new flats sparsely occupied to completely being empty.
If you want to know what’s real estate bubble pop looks like it’s those empty buildings.
This is only gonna get worse as IT sector companies can easily cut down infrastructure. With WFH the crowd from other districts won’t create the demand that was earlier there.
I think this phenomenon is restricted to few big cities for now.
In my locality in Kanpur (a tier 2 city in UP) people are signing up redevelopment agreements with builders to develop apartments on their 3000 to 5000 square feet bunglows. This trend is going on since the pandemic restrictions started easing in 2020. And those apartments are selling like hot cakes.
They are gonna remain empty or NPA by bank because of high interest rate. Back in the day there used to be concept of fixed interest rate even that’s gone means EMI would be high too. There is a point till which people will pushing through.
important factors are here :-
Rent is always lesser than EMI in the market. There is a certain ratio of income people would willing to give for paying EMI but with rising interest rates people would rather default and choose to rent.
Rent to mortgage ratio. Owning house is expensive as hell not to mention insurance, taxes and maintenance. Every house owner knows this for every 1 rupee rent it cost 1.5 to 2 rupee cost to live in own house. The 1.5 includes expenses towards house.
Building has no value but flats are overpriced af, high rise gives terrible Undivided share of land . Cost of construction is high too
Yeilds are terrible too
Initial real estate boom was mostly due to IT sector flourishing. But with WFM and IT companies cutting cost this going to be a major change.
For now from what I observed in tier 2 and tier 3 NRI’s are the ones creating that demand still now , but a recession in US or layoff is enough to stand still real estate here.
I’m just talking what I’m seeing in my locality around me.
None of the buyers are NRI. NRIs prefer to buy in big townships located on outskirts of city.
These redeveloped properties are just having 3 to 4 floors with 8 to 10 units of 2/3 bhk and these units are cheaper by 10-20% compared to flats at high rises.
Almost all these flats are being purchased by owners who were earlier living in rented properties and they’re are Government/PSU employees. There aren’t enough private jobs in my city. So no risk of bank defaults.
Well the thing here is that when you are redeveloping flats, undivided share of land reduces mostly. Remember building has no value. So they are not cheaper as they seem. And new flats are over priced as hell.
High rises differs some of them are completely planned projects and societies but the same applies there as well.
It is not prudent (& statistically incorrect) to compare average value of one variable with median of other variable especially when data sets are skewed or not symmetric…
Doing this one can (in this case CNBC) portray the data however they want…
While you may be right for few places. Apartments and villas are getting sold out even before they getting built herein Bangalore and Hyderabad.There seem no stopping on home buying.
So no risk of bank defaults.