Life in the Housing Bubble

Alarm bells should ring when the IMF says that housing prices in India have fallen by 9 per cent

What is the biggest gamble that a middle-class Indian almost inevitably takes in his life? Not marriage, because we are talking of a real financial gamble—the kind of thing that people do at the races or the casinos. And what is interesting about this particular gamble is that the gambler is not even aware that he or she is gambling. The answer: buying a home.

This is how it has usually worked— after about five to ten years of his working life, a man manages to earn enough to just about squeeze in an EMI for a flat and then diligently keeps paying it for twenty years. During that time he sees the value of his flat going up manifold and the EMI becoming negligible as a percentage of his salary, until finally, he is the proud owner of a piece of valuable real estate that he could never have imagined owning outright.

Essentially he took money that he didn’t own to buy the property, and underpinning this decision is the gamble that its price will keep increasing. No one considers this gambling because of the perception that property prices can never go down in a country like India where demand is so huge.Unfortunately, we are now told that it is going down.

The International Monetary Fund (IMF) recently came out with data on global housing prices. It has a graph on its website about the year-on-year growth of house prices. The graph’s title says ‘Through The Roof?’ and a line below it reads ‘House prices have gone up for most countries’. Countries like the United States, where the real estate sector has been battered, are seeing a resurgence. But India happens to be the country in which prices have declined the most, by as much as 9 per cent.

That India has a housing bubble has been evident for many years now. True, that the demand is huge with millions aspiring for their own house. But the plain fact is that except for a narrow band at the top, the overwhelming majority of salaried people just can’t buy a house in cities like Delhi or Mumbai. Prices of flats have far overshot the rate of salary increases. In a city like Mumbai, far-flung suburbs quote in crores for tiny flats whose walls leak.

Sales are just not happening, with builders and aspiring flat buyers ranged against each other waiting to see who will blink first. But builders also have loans to pay off to banks and they cannot keep their inventory perpetually unsold. The bubble has to burst, but the big question is when? It has taken a long time coming and might be even longer, so long as the builders can hang on. Real estate is the favourite sector of politicians to park their funds and that is a long line of credit.

A crash, whenever it happens, will be drawn across years and it will be painful. Most people will at some point get used to the idea that they might never own a house. That is not such a bad thing. At present, for an EMI that a person pays on a flat, he can rent one of double or triple the size. It might mean a better quality of life.

declinehousingIMFreal estate