The Gloomy Outlook for the Real Estate Sector in Most Countries

The Current Situation in the Real Estate Sector

The real estate sector in most countries around the world is bleeding and suffering from a case of acute crisis because of a number of reasons. These range from building up of inventory in anticipation of sales; heavy investments made into the sector by businesspersons and realtors in the expectation that house prices would not fall further than they had over the last four years; and a general drop in demand or the “death of the demand” from home buyers that resulted from the shrinking disposable income as a result of the ongoing economic crisis. Though the slump and the bust in the real estate sector was the reason for the subprime crisis in the United States and Europe, most Asian countries witnessed robust pickup in demand in 2008 and 2009 mainly because a large percentage of the population wanted to own houses. Further, the Asian economies like China and India had benefited from the flood of easy money in the aftermath of the crisis and this liquidity found its way into the real estate sector. However, the situation over the last three to four years has somewhat been different as explained below.

The Primary Reason for the Slump

The primary reason for the crisis in the real estate sector in the Asian countries is that excess inventory has been built up over the years. Whereas an inventory buildup of 12-15 months is considered normal and something that would sustain the sector, the current situation in many Asian countries is of inventories being held in excess for a longer period. Indeed, in China, the incidence of “ghost towns” with complete or nearly complete houses, malls, and offices lying vacant with no occupancy is the situation prevailing in many provinces. In India, excess inventory has been built up to the tune of almost 24-48 months, which indicates a sector in deep depression. Further, with home prices still high which is contradictory given the lack of demand, the builders are finding that there are no takers for their projects. The reason for the high prices in times of lack of demand is mainly the huge investments that have been made in the sector in anticipation of sales and the fact that builders did not expect the prices to fall further than they did in 2008-09. Apart from this, there are many projects where the builders are unwilling to lower prices because that would result in huge losses to them and instead, are willing to wait that much longer for the buyers. However, this has the knock on effect of the loans made by the realtors coming due and the situation is only helped because the bankers and the financial institutions are willing to give the builders a lifeline by not insisting on immediate repayment and instead content with interest payments alone.

The Secondary Reason for the Bust

The secondary reason why the real estate sector is in crisis worldwide is that along with excess inventories and the flow of liquidity that made these inventories possible, the rising interest rates are discouraging home buyers from making fresh purchases of residential units. The corporate sector is also not expanding as much as desired to absorb the office space and the drop in consumer demand has meant that malls and other shopping and leisure units are not witnessing an uptick in demand. All these conditions have brought about a “Perfect Storm” for the real estate sector, it is only a matter of time before the realtors start defaulting on the loans that they have taken, and as the banks are also under pressure to be capitalized adequately, the time is running out for all the stakeholders.


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Managerial Economics