Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

A hard time for hard assets in India

A sharp fall in gold and home prices will be good news for India's economy

Analysts from investment bank Ambit Capital wrote in a recent report about their visit to five deserted property registration offices in Mumbai. New property registrations are down to a trickle. The only people coming in were seeking to register rental agreements.

Such anecdotal evidence is backed by a wealth of data that shows how the Indian real estate sector is battling weak demand, as buyers baulk at high prices. Most official data shows that the pace of house price inflation has been slowing down in recent quarters. Ambit Capital has trawled through data from property websites to conclude that prices are actually dropping in most cities. The analysts believe that India is on the cusp of a major property market correction.

Such a correction is overdue. Most Indians do not believe real estate prices are subject to the laws of gravity, but the stark fact is that median home prices have increased far faster than median incomes in recent years.

We had written in these columns in September 2013 that the Indian real estate bubble was about to pop. The most recent data on property prices, property transactions volumes, inventory levels in various cities and cement sales suggests that the correction has almost definitely begun. It is now a waiting game: builders are trying to hold the price line while prospective buyers are waiting for the other side to blink. A sharp fall in prices could squeeze speculators who have invested in homes to flip them in a couple of years at a profit. And it seems that the government campaign against black money could cut off another source of investment buying.

Now it is time to shift attention to the other major physical asset that Indians have been traditionally in love with: gold. Yellow metal prices have fallen sharply in the global markets. China—another big sink of gold —has also seen a price correction. Domestic prices have followed. It is not yet clear whether lower prices will lead to a rush of Indian buying in anticipation of the festive season. But the strengthening dollar as well as lower domestic inflation could keep gold prices down.

All this is good news for the Indian economy in the long run, if it means that a larger slice of the savings cake goes into financial assets.

Indians have traditionally been attracted to physical assets. The habit has not changed despite economic development. There are rational reasons for such behaviour. One of the most important of them is that gold and real estate have been effective hedges against high inflation. Gold has also been the only way Indians could buy protection against a depreciating rupee. Bank deposits have offered negative real interest rates because of financial repression, the most recent example being during the inflation crisis from 2010 to 2014.

The financial sector is also to blame for its practices. Many products from the formal financial sector have been mis-sold to unsuspecting families that do not have access to competent financial advice. The bull runs in equity markets have been punctuated by scams, with small investors entering at market peaks when prices are overblown and questionable initial public offers are pushed aggressively by investment banks.

But what has made rational sense for individuals has been a bad thing for the economy as a whole. Financial savings are far lower than they should be. The flow of new financial savings will be inadequate to fund the economic recovery in case it strengthens. Monetary policy transmission gets affected by such behaviour as well. It is no wonder that policymakers have struggled to wean Indian savers away from an overdependence on physical assets for several decades now.

The correction in gold and real estate prices is welcome if it alters savings behaviour in India. Positive real interest rates will also help. But the shift to a higher proportion of financial savings in household portfolios will not be permanent unless the financial sector regulation is built around customer protection.

What can be done to attract Indians to invest in financial assets? Tell us at