Why India was spared a covid real-estate bubble

Home prices between June 2010 and June 2015 rose by 129% or around 18% a year. From June 2015 to June 2022, home prices have risen at 4.7% a year. Photo: MInt 
Home prices between June 2010 and June 2015 rose by 129% or around 18% a year. From June 2015 to June 2022, home prices have risen at 4.7% a year. Photo: MInt 


  • India did not see a real estate crash though prices in the sector have stagnated after 2015

The Reserve Bank of India (RBI) published the House Price Index (HPI) data last week. Home prices during the June quarter rose by 3.45% from a year earlier, according to the index. HPI tracks housing prices across 10 cities in India and, like all averages, it hides more than it reveals. Nonetheless, it is an important metric to make sense of things at a macro level.

Home prices in India have remained subdued during covid. The absolute returns from December-end 2019, before the covid pandemic, to June 2022 were 6.5% or around 2.55% per year, according to HPI.

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This is unlike what has been happening in many parts of the world, where home prices since the beginning of 2020 have gone through the roof. Let’s consider the US. According to the All-Transactions House Price Index for the US, home prices from the end of December 2019 to June 2022 have gone up by around 39%, with the price rise in cities being higher.

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The median sales price of houses in the US from April to June was $440,300. This was around 35% higher than the median price from October to December 2019.

In the aftermath of covid spreading, central banks of the world unleashed a common monetary policy of printing money and driving down long-term interest rates. This pushed many investors into buying real estate in search of a higher return. The work-from-home dynamic also drove the need for bigger homes.

As Edward Chancellor writes in The Price of Time: “Real estate markets around the world reacted positively to the stimulus of ultra-low interest rates."

The question is why Indian investors did not move money into real estate. The answer lies in something that happened one-and-a-half decades ago.

From 2000 to 2007, most parts of the world saw a swift rise in home prices. According to the All-Transactions House Price Index, prices in the US peaked during the March quarter of 2007. After that, as the financial crisis set in, prices fell. By the June quarter of 2012, home prices had dropped by around 19% from their peak. From June 2012 to June 2019, home prices rose at a very gradual pace of an average of 5% per year.

In India, the post-financial crisis correction was extremely brief and home prices continued to rise. This happened as interest rates fell quickly. The repo rate was at 9% in July 2008. By April 2009, it was down to 4.75%. The repo rate is the interest rate at which the RBI lends to banks.

This analysis is limited by the fact that the RBI’s House Price Index starts only from April to June 2010. Home prices between June 2010 and June 2012 went up by more than 50%. Home prices between June 2010 and June 2015 rose by 129% or around 18% per year. From June 2015 to June 2022, home prices have risen at 4.7% per year.

The point is that, unlike many other countries, India never saw a real estate crash, though prices stagnated after 2015. However, without a crash, home prices continue to remain elevated for most people. As a result, many investors who had bought homes towards the end of the rally in prices are still holding on in search of higher returns.

In this situation, there weren’t people willing to bet on residential real estate as a viable investment, even when RBI, through money printing, drove down interest rates to a multi-decade low. This is how in its own weird way, India hasn’t seen a real estate bubble during covid. Whether we like it or not, economics can be pretty random at times as well.

To conclude, real estate bubbles are very easy to inflate but take a lot of time to deflate. That is one less problem for India to deal with.

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