The property cycle has been weak since 2012, and has coincided with a slowdown in industrial growth and corporate earnings. At the same time, markets are worried about the negative impact of the cycle being inter-linked with the NBFC crisis. But, in our view, reviving the property cycle may represent a lowhanging fruit. Any policy steps to revive property demand should help boost not only the macro growth cycle and earnings growth but also the property and financials sectors. This can revive growth even in the near-term, given fiscal constraints.
Further, the impact of the property cycle on the macro economy and specifically on the wealth effect may be routinely underestimated. We estimate the value of the residential stock in urban India at around $2.8 trillion (equivalent to around one times GDP) — significantly higher than either equity market capitalisation or outstanding bank credit. The notional price changes would have a significant impact on household sentiment and also their ability to lever up to increase investment. Property mortgages are long-tenure loans and create new credit as well as demand for associated materials/labour. They can be a catalyst to unlock stressed balance sheets (for both developers and non-banks) and/or clear unsold inventory ($47 billion estimated in Mumbai and Delhi areas alone).
The precedent of housing price trends in US/China post the GFC (Global Financial Crisis) reflects policymakers’ approach to the property cycle in other markets. In the immediate aftermath of the GFC, home prices collapsed in the US but policy support ensured a subsequent recovery. Similarly, in China, despite a volatile growth environment and high urban vacancy rates (>20%), the growth of property prices has remained steady.
In India, the policy mix has worked as a drag on the property cycle in recent years.
Recent anti-corruption programmes and regulatory reforms, like the establishment of the Real Estate Regulatory Authority (RERA), have had an adverse near-term impact although they bode well for the sector’s longterm health. High mortgage real interest rates, even more so in the context of low rental yields and stagnant property prices, are a significant deterrent to household demand.
All is compounded by a negative feedback loop, wherein households are deferring purchase decisions because of the outlook for property prices. The herd instinct currently is anti-property. Bigger markets (in terms of wealth effect and property value) like Delhi/ Mumbai are worst hit with NBFC stress’ origin also arguably concentrated in these markets. Residential property affordability is the best in the last 15 years, as per our estimates, but sales have remained weak. Property sales in top 15 cities of India peaked in 2011-12 and have since declined. In 2018, property sales grew by 12% YoY across most markets, signalling a bottoming-out of the cycle. However, year-to-date, due to the NBFC crisis, the incipient recovery has started to dissipate.
While the property sector remains a drag on overall growth, it is not necessarily a millstone for systemic stability. The ongoing NBFC crisis is leading to sector funding concerns, as 40% of builder financing is from NBFCs, although the narrative may be exaggerated by the concentration in Mumbai/Delhi. We estimate stressed loans to developers at $12 billion, which is 75/45bps of system credit and GDP, respectively. In our view, this is unlikely to cause systemic risks to financial stability but it does suggest that a policy boost may have more of an impact than usual.
Will the government provide a policy boost, specifically to revive demand? Our meetings with industry and policymakers suggest that the debate has begun. What can the government do? Hypothetically, policymakers in India can replicate the global playbook by boosting demand with tax cuts, either through income tax breaks to make property more affordable or by exempting rental income to attract investment demand and help develop rental market. Some countries have reduced stamp duty for limited periods to prompt dithering household buyers. Over the mediumterm, developing a deep, liquid securitisation market can help lower mortgage rates, as seen in US. Near-term, expanding affordable housing interest subvention to a broader level maybe an option.
In the context of capex, boosting the property cycle assumes even higher importance; given the lack of visibility in private sector capex as well as given public sector capex, growth has possibly peaked out. Indian households are under-levered versus peer countries, which is not the case for corporates/public.
While we can’t be sure of any policy boost to property demand, we remain overweight property. Our overweight stance is irrespective of the cycle, as we expect larger companies to gain market share, anyway. It is also possible that the cycle may gradually bottom out given the trajectory of the inventory-to-sales ratio. In short, property is a single arrow to hit three targets: reviving macro growth, property itself and financial sector stress.