Tuesday, November 25, 2008

India: The Sound Of Crashing Real Estate (Goldman...

Goldman Sachs
India: The Sound Of Crashing Real Estate
India's property market is poised for a deep correction. This will bring on sizeable knock down effects, with India GDP expect to slide down to a growth of 5.8 per cent in FY10.
 
We estimate prices may need to fall by up to 30% from current levels, with significant knock on effects on the economy.
 
In particular, it will slow construction activity, which directly
accounts for 7.3% of GDP, but
has sector linkages which we estimate to be 14% of GDP.
 
After India's last housing bust in 1996, real property prices fell some 40% over three years, negatively affecting consumption and investment demand.
 
Mitigating factors—favorable demographics, low mortgage penetration, ongoing infrastructure demand.
 
India's property market is poised for a deep correction. Property prices
have risen dramatically over the past three years, supply exceeds demand in most geographies, and affordability lags prices. Our India Real Estate Team believes that residential property prices in some geographies may need to fall by up to 30% from current levels for affordability to catch up. As elsewhere globally, we think this will have negative effects on the economy.
 
The imminent slowdown in construction activity can potentially have a big impact on the economy. By using an input-output matrix, we estimate that although the sector directly accounts for 7.3% of GDP, its backward linkages in terms of the sector's usage of iron, steel, cement etc., and forward linkages to other sectors, impacts an estimated 14% of GDP. Therefore, a slowdown in
the construction sector can potentially have large knock-on effects on the economy.
 
From the demand side, a property downturn, we think, will have negative effects on consumption and investment. As housing forms the largest component of household wealth, consumer demand will be impacted. The fall in collateral will also hurt firms' balance sheets, increase their funding costs, hurt confidence, and reduce investment demand. However, the impact on demand will be lower than in developed countries.
 
 
Lessons from previous housing busts suggest that they tend to be prolonged episodes with considerable macro consequences. After India's last housing bust in 1996, real property prices fell some 40% over three years, and did not recover to their previous peaks for a decade.
 
Consumption and investment demand were both negatively affected, and growth slowed from an average of 6.8% in the four years prior to the bust to 5.4% in the four years after it.
 
Typically, housing busts in OECD countries have lasted six years with a 30% decline in prices and substantial negative implications for the economy.
 
Mitigating factors, such as India's favorable demographics, low mortgage penetration, falling interest rates, and ongoing infrastructure demand, in our view, will keep the property downturn from being protracted.
 
However, we believe a sharp slowdown is imminent. We therefore remain negative on the real estate sector, and its supplier industries such as cement, iron, and steel, and reiterate our below consensus estimate of 5.8% GDP growth in FY10.


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