Goldman Sachs says prices will drop by 30%

Published: November 25, 2008

NEW DELHI: Real estate prices in India requires to drop by 30% to spur demand, said Goldman Sachs in a report. However, the report further maintained that the sharp decline in the prices will have a negative impact on the economy.

Goldman Sachs said: “Our India Real Estate Team believes that prices need to fall by up to 30% in some geographies for affordability to catch up.”

The report pointed out that prices in areas like suburbs of Mumbai and Bangalore need to decline by up to 30% to boost demand. “Although prices over the past three years have gone up in line with other economies globally, they have not corrected substantially, unlike its global peers,” the report said.

It further said due to ongoing economic crisis, demand for property would also fall. “Demand for real estate is largely driven by income growth, demographics, interest rates, and inflation, but also people’s expectations of future prices. As the economy continues to slow down due to the knock-on effect of the global financial crisis, income growth will suffer, thereby reducing demand for housing,” it said.

The demand for commercial real estate would also be adversely affected due to the slowdown in the IT and Business Process Outsourcing (BPO) sectors. “From the demand side, a property downturn, we think, will have negative effects on consumption and investment,” it said.

However, it maintained that the realty downturn in India would not be protracted due to favourable mitigating factors. “Mitigating factors, such as India’s favourable demographies, low mortgage penetration, falling interest rates and ongoing infrastructure demand will keep the property downturn from being protracted,” it said, adding that a sharp downturn, however, was imminent.

The downturn in the realty sector will also affect the economic growth. “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, have an impact of 14% on GDP. Therefore, a slowdown in construction sector can potentially have large knock-on effects on the economy,” it said.

The study cautioned that a slowdown in the construction sector, which has been at the forefront of job creation, would also have a significant impact on employment.

Comparing the current scenario with that of 1996’s, when realty prices fell after appreciating cumulatively about 70 per cent during the three preceding years, Goldman Sachs said the impact of a property slowdown could potentially be stronger this time.

“In the three years prior to 2008, residential prices had increased some 80 per cent on average. There has also been a large increase in mortgages, albeit from a low base and more household wealth in absolute terms is in housing,” it said.

Source: TOI

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