Effects of International Financial Crisis on Indian Realty Sector

When the world encountered a financial crisis in 2008, India was insulated to a great extent by a vast consuming population which ensures intrinsic growth of the economy in spite of the fall in demand from the rest of the world. Most business based in India dependent on exports including software exports suffered but were swift enough to recognize the potential of the domestic market to consume their products and thus survived the crisis.

This lead to the theory of ‘decoupling’ (delinking) whereby it seemed that the happenings in the rest of the world did not have much of an effect on the Indian Economy since its own consumption patterns were enough to sustain its scorching pace of growth.

2011 seems to be different. The world is in the grip of a double dip recession and this time we have been dragged to be part of the Global happenings and it seems we may not be able to avoid the effects of the Financial Crisis precipitated by the members of the European Union. The simple reason for the same this time is that the Indian Population has it seems decided to cut back on consumption for the time being as India is in the grip of a Double Digit inflation which is a combination of both demand side and supply side pressures. When we say demand side pressure, we mean inflation on account of huge demand and low supplies such as in the case of Food Grains, Vegetables, Pulses etc. When we say supply side pressures we mean increase in prices on account of cut back in production capacities, supply related shortages etc. The examples of this are Crude Oil, Coal etc.

In order to tackle inflation and cool down the economy the Reserve Bank of India has increased the interest rates almost every month in the last 10 months in an effort to curb demand which will eventually lead to a decrease in prices and hence get inflation under control. Alas, the side effect of this practice is stifling of growth of the economy. As the interest rates move up, businesses borrow less thus postponing their expansion plans and increase in capacity. Prospective House owners postpone their decisions as the interest rate moves up thus slowing down the Real Estate Industry as well.

The effects of the Global Financial Crisis on the Indian Real Estate Sector can be summarized as follows:

  • Increase in input costs of critical building material like steel, cement etc. due to an increase in International commodity prices and shortage of critical inputs like coal which is imported.
  • Increase in input costs due to shortage of plastering materials like sand in many states in India has been a cause for concern. Likewise, since many erstwhile backward states have seen economic development and creation of employment, migration of labour from these states has stopped leading to a human resource crisis for the Real Estate industry pushing up labour rates dramatically.
  • Increase in interest rates on housing loans has reduced the leveraging capacity of most Indians and has forced them to postpone their buying decision.
  • The crisis effecting Europe and USA has lead to a drop in Foreign Direct Investment into the Real Estate Industry which may lead to postponement and delay in implementation of projects.
  • In many cities in India like Mumbai, Bangalore and Delhi the pricing of the Real Estate products have been such that most of the population especially the middle class cannot afford a house anymore.
  • Uncertainty in many industries especially those dependent on exports and imports due to demand and supply problems compounded by the depreciating Rupee has lead its employees to play safe and conserve cash.
  • The growing popularity of GOLD as an alternate investment option has also effected investments in the otherwise popular Real Estate Market.

The Solution to this situation in the Real Estate Industry can possibly be as follows:

  • Release of vast tracts of Government Land to private developers a reasonable prices with the sole objective creating affordable urban housing with a restriction on profits so that these houses remain affordable.
  • Voluntary reduction in selling prices by Developers to stimulate demand. This will help ease the cash flow problems faced by many developers and increase inventory turnover.
  • Increase in efficiencies of Government processes which will reduce the shortage of input commodities to the industry like sand, metal etc. which can reduce the input costs and possibly selling price.
  • Subsidies from the Government to use alternate and better construction technologies which provide better quality at low costs and moves away from tradition building materials like sand, bricks etc. This will again reduce costs and possibly sales prices.
  • Change in municipal regulations and clear cut, transparent rules of development which will increase the efficiency of land use and materials which can again reduce costs and possibly sales values.
  • Leaving out Housing Loan rates from rate hikes to control inflation. This will ensure that demand for Real Estate on which accounts for more than 6% of our GDP and around 20% of our population depends on for its livelihood is not affected.

There are problems, however there are solutions too! The industry needs to come together to hob nob with the Government and trash out a win-win solution which will benefit the industry as a whole.