Home Prices and Credit Markets


The home market in India is really an aggregate of multiple micro-markets, sometimes within the same city. Most builders are in financial straits, and there have been desperate sales by some of the smaller ones without much capital cushion. Prospective buyers have tended to stay away, hoping for even steeper price declines.

There are three kinds of home buyers: those who are genuinely interested, those who buy as an investment, and the speculators who buy and flip, often before taking possession. The speculators have exited the market. These days, we are seeing some degree of real buyer interest, though it is small at this time.

Prices have dropped between 10 and 35 percent depending on location, but buyers are still waiting and watching. DLF sold 1,400 flats in Delhi within 24 hours of announcing the Capital Greens housing scheme on the erstwhile DCM land. Demand is very much there, provided you price it right. Housing demand is precipitative, whereas commercial real estate demand is consequential.

There is already a slow turnaround, especially in up-market properties in Delhi. The previous year has seen some real deal flows. Prices of apartments in Gurgaon, however, are still dropping. They are 30 – 35 percent down from their peak; desperate builders are trying to liquidate excess inventory.

Local inventories are a strong predictor; they bode well for prices. If inventories stay high, there may be more price cuts in the pipeline. The problem: there is little publicly available data on inventory, housing starts, or any other indicator of the housing market. While inventories are an indicator for the supply side, housing loans are a good indicator for the demand side. But many developers point out that the slowdown in retail lending for home buying may stem from other causes, such as rising default rates that impact bank balance sheets. Some say that banks are being less aggressive, and demanding more equity from the prospective buyer. But here again, publicly available and reliable data is absent. One other indicator is to keep track of job outlook.

Credit Markets: Will borrowing conditions get easier?

Despite some aggressive rate cutting from the RBI, interest rates for borrowers have been much slower to respond. Given that banks account for close to 80 percent of debt finance for India Inc., cuts in policy rates have to translate into cheaper and more lending. Lending rates for even the largest companies have remained high. And small and medium enterprises (SMEs), may have even gone up. Many SME CEOs are of the view that while lower activity means lower financing needs, banks may be slower to respond to expanded needs once the turnaround begins.

With only one really large pool of lenders – the banks – finding secular indicators of credit market conditions poses problems. One thing to at is credit spreads, mainly between the 91-day and 364-day treasury bills, and commercial paper and one-year bank loans, respectively. The spread between the yield on five-year government bonds and AAA-rated corporate bonds is another indicator: the higher the spreads, the greater the reluctance on the part of banks to lend.

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