US and India: Property woes

Wed, 16 Jun Pre-Open

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The mortgage crisis in the US has been the worst ever. Not only did it balloon into a financial crisis in the US, but its ripples were felt across the globe. Not only the developed world, but even the emerging markets suffered as a result of the crisis, though not on the same scale as the rich world. The property market in the US is still struggling to take off. Unemployment is raging high in the US. Many people have put on hold their plans of purchasing new homes.

So, a housing shortage in the US in the future would right now seem pretty unbelievable. But as reported on CNN, this could actually turn out to be the case. Because of the abysmal demand for homes, not many are being built. And so there is a concern that when the economy recovers and job prospects improve, a new wave of demand for homes will be unleashed. And the supply of homes then will not be able to satisfy this growth in demand.

The other problem that builders in the US are facing is availability of loans. Ideally a rise in demand would mean a scramble on part of the builders to meet the same. But difficulty in obtaining loans would mean that builders will not be as nimble as they would like to be when it comes to building more homes. When this scenario will unfold though is anybody’s guess. For the time being, it appears that the recovery in the US property market will be slow and steady at best.

Infact, an eminent IMF economist has been recently reported to have said that the US housing market is not getting any better. And is in fact getting worse. That is because in past housing slumps, downturns lasted 18 quarters, with prices falling 22% from peak to trough. However, the current housing slump has lasted only 14 quarters, while prices have dropped only 15% yet. Thus, going by this metric, there may very well still be some pain left in the US housing market.

The property market in India though is a different ballgame altogether. Ajit Dayal, founder of Equitymaster, has quoted that the direction of real estate prices will in large part depend upon the close connection between politicians and real estate companies . Unless and until that gets broken, the chances of prices heading significantly lower appear remote. In India, the demand for real estate is palpable as many people do not still have their first home. But the problem is also on the supply side. While there has been no shortage of land per se, only limited land is being sold because of zoning rules.