Impact of US recession on India's Real Estate Market.

By Mr. Rajat Maheshwari .

The Indian real estate industry is one of the largest sectors after agriculture and primary sector in our country. These sectors contribute about 6.5 % to 7 % and it is one of major source of job for unorganized sector of Indian labour market. This sector was one of the main beneficiaries of the post-liberalization periods, where India become one of the hot properties of the foreign direct investment, lot of new ventures open day by day and salaries of Indian middle class increase exponential. Since 1990s it shows a major growth, and Indian metro cities, like Chennai, Mumbai, Hyderabad, Delhi & Kolkata feels the boom in real estate sector. It is also expected that this sector will grab more non-resident Indian (NRI) investments in both the short term and the long term. Bengaluru is expected to be the most favoured property investment destination for NRIs, followed by Ahmedabad, Pune, Hyderabad Chennai, Goa & Delhi.

History of Recession on Real Estate:

The most recent recession, in 2008, was devastating to the real estate industry. Sales fallen, homes went into foreclosure, and the market in general spun into chaos. But buying a home during a recession can lead to a great deal if you know the 2008 recession and housing market crash showed how closely the economy is tense to home prices. Recession of 2008, which lasted from 2007 to 2009.

And the real estate industry was at the heart of that recession, due to subprime mortgage rates. And COVID itself had had an influence on real estate transactions. With stay-at-home mandates in place, you probably were not able to go look at homes. And even if you were able, you might not have willingness to and sellers might not have wanted you in their home. So, less homes are currently on the market.

What happens to house prices in a recession?

As the nation continues its stable march toward progress, fuelled by government spending, private investments in manufacturing, and the geopolitical advantage for India, 2023 will be a crucial year for the Indian real estate market. One of the major challenges being faced for the real estate market in the upcoming year of 2023 is going to be the cooldown effect of the US recession the cost of construction materials has risen dramatically, including key input materials such as cement and steel. As construction costs rise, they will be forced to raise prices and pass the cost on to end users. The increased property prices are expected to lead to an increase in rental prices as well.

Recessions often bring about a fall in property prices. During Australia’s last big recession in 1990/91, property prices fell across the country. In the worst-affected capital city, Melbourne, they were down more than -6%. This time around, some analysts foreshadowed that property prices could fall by as much as -30% if we experienced a severe recession.

However, as Australia looks likely to avoid the worst impacts of the virus a figure of -10% or below is now more widely forecast. If you’re a first home buyer, lower prices are usually welcome news. After all, if property prices were to fall by -10% across the board, that property that once was $600,000 would now be $540,000.

This would mean you need to save $12,000 less to have a 20% deposit for the property (which means $108,000 instead of $120,000). And, if you were borrowing the remaining 80% of the property’s value using a 25-year principal and interest home loan at 3.5% interest, your repayments would be around $240 a month cheaper.

High Demand for Rental Homes

During a recession, most people become anxious, and rightfully so. Due to uncertainty in the air, individuals who had intentions to purchase a home will have reservations due to the income flux. Consequently, rental homes will become the go-to housing medium during this period. Regardless of the increased rental rates that would define this period, people will prefer these real estate assets due to their cost- effectiveness at the time. a recession will see rental payments become higher than income Irrespective of this troubling fact, residents in big cities should be spared from this increment as they’ll be policies in place to mitigate this act.

Impact on Residential Properties

An imminent US recession in 2023, if it unfolds as it seems possible now, will also impact housing demand in India at least marginally. Reduced flows of IT work outsourced to India and further layoffs will also leave their mark on residential absorption here

Despite recording an upbeat performance in residential properties in terms of sales, the year 2023 will continue to witness controlled supply of new launches in most of the top cities. Ready to move in properties will continue to draw the most demand among homebuyers in 2023. The overall demand for homes will sustain at least in the first quarter of next year and is expected to remain sceptical afterwardslargely depending on a few important factors like repo rate hike and consequently, hiked home loan interest rates. The demand is expected to contract if the home loan interest rate rises above 9.5%.

Conclusion Impact on Commercial Properties:

The commercial real estate sector in India depends heavily on expansion by domestic and international corporate companies, and global recession could have direct and substantial unpleasant effect on the Indian commercial office market. After witnessing a dull year in 2020, the demand for commercial possessions picked pace in 2021 with supply and demand recording a 21% and 34% growth respectively, over the previous year.

The first half of 2022 also remained upbeat with companies started opening their offices, and asking for employees to work from the offices. But the forthcoming threat of recession in the US considerably changes things. Currently, 70% of offices in this country are occupied by foreign companies who focus on cost advantages like subdollar rentals for good quality Grade A offices, and almost 80% lower operating cost per full-time employee in India compared to the tier II cities in the US A recession in US in 2023 will only compound this caution, further slowing down MNC leasing. However, the deals concluded in 2022 offer a sliver of hope.

The Impact of the recession on the Indian real estate market can vary depending on the severity of the recession and the specific market conditions in India at the time. Generally, a recession can lead to a decrease in demand for real estate, resulting in lower property prices and a slower pace of sale. This can lead to decline in construction activity and a slowdown in the overall economy.

Apart from this threat there is a threat of Job losses which may result in fall in real income of people this may lead to fall in the demand for houses. At the same time people whose real income will increase will demand more property, but the group of people whose demand fall will be larger than that of group with who will rise the demand for houses because of the overall slowdown in the economy. However, it’s important to note that the real estate market is a cyclical and may recover once the recession ends.