The hissing sound you may hear this Diwali may be metaphorical — not from yet another cracker shattering the neighbourhood peace but of air being let out of the inflated property market.

There are already reports of property prices declining in some parts of the country, though the lack of a robust housing price index that goes back several decades forces us to depend on the estimates put out by some property broking firms. But the anecdotal evidence is clear. The cost of buying or leasing property is falling. For example, the Business Standard reported last week that rentals on commercial property in Mumbai are already slipping. Cee Jay House, a building in central Mumbai that houses several top investment banks, could see a halving of rentals over the next six months.

Falling real estate prices have wreaked havoc on the rich countries. All sorts of loans and derivatives backed by this property have lost value and brought large parts of the Western financial system to its knees. Indian banks, too, will face problems as the value of the collateral supporting their home loans drops, but this is hardly likely to create a systemic crisis that will require bailouts funded by taxpayers.

But falling property prices and the growing woes of developers will inflict some pain on the Indian economy. Construction now accounts for one-tenth of India’s non-agricultural gross domestic product, or GDP. It has been one of the fastest growing segments of the economy. That was evident from the way cranes to build houses and malls had become a common feature of our urban skyline, and the pace at which new ribbons of tar and cement were being laid out to join various points of the country. In fact, for the first quarter of the current fiscal year starting April, construction grew faster than segments such as agriculture, manufacturing and financing: at 11.4%, it easily outpaced the overall 7.9% rate of economic growth.

Slowing construction could then pull down the overall rate of economic growth further, directly as well as indirectly, because of slowing demand for cement, steel, equipment and the like. But there will be effects on job creation and the stock market as well.

Consider employment first. Six out of every 100 working Indians are employed in construction activities. And this number will grow. The Planning Commission estimates in its 11th Plan document that more than one in every five of the 115 million new jobs likely to be created between 2006 and 2016 will be in construction. That is more than the new jobs that will emerge from manufacturing growth. Only the “trade, hotels and restaurants" segment of the economy will create more jobs than construction is expected to. Most of these jobs require few skills and are ideal for the millions who want to escape from rural misery.

Then there is the impact on the stock market, where prices have already been battered out of shape (or into shape, considering the unrealistic levels they reached by the beginning of this year). The real estate stock price index is down to a quarter of its peak. I had written in this column a little before the DLF initial public offering in June 2006 that the Indian stock market could start resembling the one in Hong Kong, which, too, has a heavy exposure to real estate and construction: “...this also brings a new type of risk in the Indian economy — the risk of asset deflation."

Ironically, a sharp drop in land costs could be good news for many businesses. Reliance Power, for example, is ready to pay Rs450 crore to get land for a power plant outside Mumbai, at the rate of Rs10 lakh per fertile acre and Rs5 lakh per infertile acre, besides other sops such as jobs for locals. And even this may be too low, given market rates in the area. Deep in the urban jungle, sky-high rents and capital value makes it difficult for malls to generate profits.

A report in the Mumbai Mirror says that a few pizza chains have decided to charge customers according to the area a particular outlet operates in and the cost of land there. This does not make a pizza delivery service in a city centre less competitive than one in a distant suburb, since there are transport and time costs that will prevent a customer in one area from ordering a pizza in another. Dense human populations also ensure that land costs are amortized over more people: The real estate is very expensive but more customers are likely to walk through your doors on any given day.

Yet, low-value businesses could find themselves squeezed out of many cities if real estate continues to be at Manhattan levels. As with the sharp change in any relative price, the coming drop in land prices will benefit some and harm others.

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