The Reserve Bank of India (RBI) published House Price Index (HPI) data last week. According to the index, house prices during the June quarter rose by 3.45% as compared to a year ago. HPI tracks housing prices across 10 cities in India and like all averages, it hides more than it tells. Nonetheless, it is an important metric to understand things at the macro level.
Home prices in India have been low during Covid. According to HPI, from December-end 2019, before the Covid pandemic, the absolute return till June 2022 was 6.5% or around 2.55% per annum.
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This is in stark contrast to what is happening in many parts of the world, where home prices have been skyrocketing since the beginning of 2020. Let’s consider America. According to the All-Transaction House Price Index for America, home prices have increased by about 39% from the end of December 2019 to June 2022, with the increase in prices being higher in cities.
The median sale price of homes in the US from April to June was $440,300. This was about 35% higher than the October-December 2019 average price.
Following the spread of COVID, the world’s central banks began a general monetary policy of printing money and lowering long-term interest rates. This has prompted many investors to buy real estate in search of higher returns. The work from home dynamic also met the need for larger 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 haven’t invested money in real estate. The answer lies in what happened a decade and a half ago.
From 2000 to 2007, most parts of the world saw a rapid increase in home prices. According to the All-Transaction House Price Index, prices in the US peaked during the March quarter of 2007. After that, as the financial crisis started, prices fell. By the June quarter of 2012, home prices were down about 19% from their peak. From June 2012 to June 2019, home prices grew at a very slow rate of 5% per year on average.
In India, the recovery after the financial crisis was very brief and house prices continued to rise. This happened because interest rates fell sharply. The repo rate in July 2008 was 9%. By April 2009, this had decreased to 4.75%. Repo rate is the interest rate at which RBI lends to banks.
This analysis is limited by the fact that the RBI’s house price index only starts from April to June 2010. Home prices increased by more than 50% between June 2010 and June 2012. Between June 2010 and June 2015 home prices increased by 129 percent, or about 18% per year. From June 2015 to June 2022, home prices increased at a rate of 4.7% per year.
The point is that, unlike many other countries, India never saw a real estate crash, although prices stabilized after 2015. However, without accident, home prices remain high for most people. As a result, many investors who bought homes at the end of the rally are still looking for higher returns.
In this situation, there were no people willing to bet on residential real estate as a viable investment, even when the RBI pushed interest rates through money printing to several-decade lows. Thus in its own strange way, India has not seen a real estate bubble during Covid. Whether we like it or not, economics can be random at times.
To conclude, it is very easy to inflate the real estate bubble but deflation takes a lot of time. It is one less problem for India to deal with.
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