Another financial crisis in the making?

Fri, 9 May Pre-Open

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In 2008, it all started with one of the biggest real estate crashes in history. Well, we are talking about one of the worst financial crisis that the US ever faced. Barely few years have passed and the history is set to repeat itself.

As per a feature in moneylife, the S&P Case Shiller Home Price Index indicates a sharp rally in home prices since 2013, and is expected to reach the highs of 2005 and 2006. On the contrary, if the actual mortgage originations (how many people are actually buying homes) are anything to go buy; we can very much decipher that the recent run up in prices could be nothing more than a bubble. E.g. JP Morgan Chase reported a 68% decline in mortgage originations in 1QCY14; which indicates that only US$ 17 bn worth of mortgages were issued as compared to US$ 52.7 bn in 1QCY13. Citigroup too suffered the same fate where mortgage originations declined 71% for the same period.

Another menace that may fuel the financial crisis is burgeoning debt. Total consumer credit in USA increased by US$ 17.5 bn in March as compared to US$ 13 bn in February. This increase in consumer credit increased the total borrowing to US$ 3.14 trillion in March 2014. Although this can be considered a positive sign for the economy, the factors that drive the increase in debt raise a doubt. For example, increase in household wealth as a result of high stock and property values is increasing credit-card debt of US citizens despite the job market remaining bearish. In addition, there has been a significant drop in personal saving rate and real disposable income.

The rest of the world, too, may not be spared by this looming debt crisis. The world debt has increased more than 40% to US$ 100 trillion from 2007 to 2013. The burgeoning debt is a result of governments borrowing to wade their economies through recession. Businesses too borrowed huge amount of debt to capitalize on low interest rates.

All said and done, one economy that may be able to stick its neck out is India. As far as real estate bubble is concerned, Indian realtors have often been accused of inflating prices; while the actual demand has slowed down. However, growing disposable income, rapid urbanization and improvement in investment climate can avert a sudden crash in property prices. India's external debt at 17% of GDP is far better and safer. The country has a conservative banking system that is likely to prevent emergence of a debt crisis. India is pinning its hope on a new stable government; which is likely to take care of few of the nation's economic inadequacies while maintaining its relatively better financial stability.