Is the Indian Real Estate Sector insulated from the Pandemic effect?

Multiple factors drive the dynamics of Real Estate price variance. Especially in a Cash dominated country as large as India, the attributes vary from state to state and even at a city level too. However, there is one common and indispensable factor in any price prediction model viz Country’s Gross Domestic Product Growth (GDP).

Relationship between GDP & Real Estate Prices

Gross Domestic Product and Real Estate prices are very closely related.  Afterall, GDP is a summation of Monetary Values of all goods manufactured and services rendered in a given period.  The below graphs pertaining to different countries will indicate how closely Real Estate Property prices are related to Per Capita GDP growth.

Source: Asia Green

The following interesting points emerge from the above graphs:

1. Linear relationships or similar trends observed across countries.
2. There exists a time lag (4-8 qtrs) for the Real Estate prices to adjust itself to the GDP.
3. A disproportionate growth in Real Estate prices vis-à-vis GDP is not sustainable. For example, the US property prices increased nearly 2.50 times between 1998 to 2008 as against a modest 1.5 times Per Capita GDP growth during the same period.  This scenario also known as Real Estate Bubble, resulted in an unprecedented Real Estate crash between 2008-12 until the prices got realigned with GDP growth rate. 

Indian Scenario

India’s Real Estate Prices, like many other countries, has trended southward along with GDP over the last 5 years. However, the data is far more interesting than the rest.

Inferences

1. Both GDP growth rates and Inflation-Adjusted Real Estate prices have fallen during the period between 2015-2020.
2. Real Estate prices have fallen far more steeply than the GDP growth rate indicating 2 possible scenarios – 1. Other sectors of the Indian Economy have performed well and 2. Real Estate had challenges which were very specific to that sector like the prolonged impact of demonetization, RERA, etc.
3. Any direct evidence cannot be substantiated to justify the sudden spike of 10% in the property prices during 2016-17. However, the below graph indicates that the Stamp duty collections in 2016-17 saw a sudden spike without a proportionate increase in Construction Sector Value addition.

Inference

The spike in Stamp duty collections can correlate to the Demonetization drive in Q3 of 2016 post which strict controls imposed on cash transactions. These restrictions have probably yielded a 10% increase in registration value of properties without a proportionate increase in the number of transactions. Though this is not substantiated.

We can reasonably establish that like any other country, the Indian Real Estate Price follows the GDP trend line although the magnitude varies significantly. 

Lockdown Impact on Indian GDP

Across 180+ countries, the Corona pandemic has blocked not just the human movement but has also disrupted the entire chain of Goods and Services.

A sector-wise analysis of Gross Value Addition (Supply Side) of 2018-19 will give a highly macro-level insight.

Source: National Statistics Office

1. Our Economy has a mix of 16% Agriculture: 84% Non-Agri Value Addition.
2. Industrial Contribution (29.6%) and Services Sectors (54.3%) constitute the other major sectors of our economy.
3. Trade, Hotel, and Transport contribute a whopping 18% of our Economic activity.

Over the last few weeks of lockdown (approx 40 days ending Apr 30th), Indians are spending only on “Essentials” like Grains, Pulses, Vegetables and Fruits along with medicines most of which fall under the Agricultural Sector.  The remaining 84% of Indian Economy consisting of Non-Agri Sectors like Industries / Hotels / Finance / Real Estate / Services etc. are all in cessation.

I am applying the 2018-19 GDP figure of Rs. 190 Lakh Cr, the 40-day lockdown has disrupted the Economy to an extent ranging between Rs. 15 to Rs. 20 Lakh Crore.

This disruption could result in a short term contraction of about 12 % to 14 % on the GDP which can be reasonably correlated with the 14.5 % fall in Nifty between Mar 5th and Apr 10th, 2020.

However to understand the impact of Pandemics on the battered Indian Real Estate Sector, a peep into the previous pandemics like Spanish Flu (1918 -1920) and Asian Flu (1956-59). 

Impact of Spanish Flu & Asian Flu in American Real Estate Prices

America is probably one of the very few countries to have a structured Real Estate Price Index with 1890 as the base year.  The index, commonly known as S&P Case – Shiller Home Price Index has recorded the Median Real Estate Price movement year on year ever since its inception.

Given below is the graph depicting American Real Estate Price from 1890 till 2013.

Inferences

1. Over the last 1 century, America has witnessed 2 Economic Booms, 2 Pandemics, 2 World Wars, 1 Industrial Revolution and 1 Real Estate Bubble 
2. Real estate prices have significantly fallen under 4 scenarios viz 1. Industrial revolution resulting in mass unemployment 2. Spanish and Asian Flu 3. Cyclical fall after the economic boom and 4. Bubble burst.
3. American Real Estate Prices remained at par with the 1890 base prices for nearly 60 years till 1947-48.
4. Both WorldWar I and II have not impacted the Real Estate Prices significantly.  In Fact, the property prices recorded 40% growth during the WorldWar II.
5. The Influenza / Pneumonia which spread immediately after WW I saw the property prices moving downwards.  The Spanish Flu Pandemic which existed between 1918- 1919 resulted in a further drop in real estate prices. 
6. Between 1915 – 1921, the real estate prices fell by nearly 35% — however nearly 15% of losses were recovered in 3 – 4 years since.
7. The Asian Flu Pandemic between 1956-59, saw real estate prices falling by 15% – 18% but the recovery, not as quick as Spanish Flu but stretched over 5-6 years.

Other Insights into Spanish and Asian Pandemics (extracted from several research papers online)

1. As Spain was then one of the worst affected countries, the flu was named Spanish Flu.
2. The American soldiers were affected in large numbers to pneumonia between 2015-17
3. Influenza was categorised as Pandemic in 1918 when people in the range of 18-40 fell victims to the virus.
4. Asian Flu, though initially started affecting the kids and mid-aged people, eventually saw older people aged more than 60 years becoming its biggest victims.
5. Both these viruses have resurfaced after the initial round of attacks.
6. The Economic revival was very swift.
7. During the initial stages of Recovery, the Cost of Labor saw a steep increase as people’s movement was restricted to smaller localities owing to the fear of contraction of virus.
8. Most laborers avoided Inter-State travel and localised jobs were preferred.
9. Automation of processes helped speeding up the recovery process immediately after the Spanish Flu.

Probable Impact of Corona Virus on Indian Real Estate Prices

The previous pandemics have resulted in Real Estate Prices falling to the extent of 15% – 35%.  The Spanish Flu witnessed a very severe fall owing to 2 critical aspects 

1. The longer duration of the pandemic  – almost 6 years incl 2 years of Pneumonia and
2. The age group of the victims viz 18-40 years of age.  This age group represented the earning members of most of the families and hence the Income levels of Average American fell very sharply.  

However in Asian Flu, the duration was a much shorter duration of 2 years, and the age group of the victims were largely > 60. 

Though there exist very little numerical data points to conduct a detailed Statistical analysis, the present Corona Pandemic is quite similar to Asian Flu in terms of both the genome and the age of the victims.

With this understanding of the previous Pandemics coupled the fact that the Indian GDP has already got disrupted to the extent of 12% – 14%, the Indian Real Estate Prices, is likely to drop in the range of 14% to 18%. While this range applies to Indian Real Estate Index, the range will significantly vary between States and also cities/towns within a State depending on their own strengths and weaknesses.

However, the hypothesis that “Indian Real Estate Prices will fall more than 14 % to 18% owing to the prolonged weakness over the last 4 years” cannot be tested due to the non-availability of structured historical data.

Economic Recovery

The Spanish Flu witnessed a very sharp recovery as the country was already weak over the last 5 years while The Asian Flu witnessed a sluggish recovery which spread over 5-6 years.  

In my opinion, the recovery phase revolves around the following:

1. Death Rates will have significantly relevant psychological impact on the recovery.  Lower the rates the recovery could be relatively faster than compared to higher mortality rates.
2. Governmental policies around taxation and bailing out packages MSME / cottage Industries.
3. NPA levels of Banks.  We lack the infrastructure to handle high levels of delinquencies (15% and above).
4. Financial Institutions resuming Credit sanctioning.
5. The principle of Social Distancing is now getting deeply embedded in the human system. It could potentially lead to a different style of working and working atmosphere.  From Offices to other public places need to realign the accommodate the “New Normal”.
6. Time to alleviate the fear of open and free movement of people (both intra and inter-city or state).
7. Adopt & Accept Technological Automation as the best alternative to high-cost labor.

Krish Sudhakar 

Valuation Research Foundation

Disclaimer:

Statements on this blog reflect the author’s personal opinion. They do not represent the views or policies of evalo or any other organisations with whom the author may be associated. The author has expressed his opinion emanating from his research on the subject topic. The author advices and suggests the readers conduct adequate study and convince themselves on any decisions or actions basis this blog. The author does not accept any liability or responsibility for the actions taken by the readers of this blog based on the information contained therein.