Housing Market in India: Size remains still so small

Income and wealth are correlated but one should not compare wealth with income; we do that often when we compare stock market wealth (market capitalization of corporations) or Housing Wealth with the GDP. Indian stock market for example is $2 Trillion and Housing $1 Trillion while the GDP is $2.5 Trillion.

Stock markets capture our attention by the sheer size of wealth it facilitates to create, the market capitalization of all stocks reach a sizeable portion of the GDP in most countries, in U.S. the former is even bigger than the latter. Comparing sum total of all dividends with the GDP should have been the right comparison and then the stock market would have looked small. 

As in this, wealth and one year’s income, which is GDP, are completely different things; Market capitalization of all stock is the sum total of the net present value of all expected future income of all the companies. So we should potentially compare the net present value of the future income of all the people in the economy and the two would have compared evenly but the former (Stocks) would have been a smaller proportion of the latter (income).

In fact housing assets are far bigger in most economies than stocks and this gets far little mention. Mortgage lending, which is easily possible in Housing and not possible for Stocks is one of the precise reasons for Housing market growth. Housing assets therefore become the back bone of the economy in many and any stress in the housing sector creates enormous stress in the whole economy. We will see why this is so.

Take the U.S. economy for example and try to see the size of the S&P 500, which is close to $26 Trillion and the Housing assets have reached even on a dampened price scenario close to $27 Trillion. Housing assets have not recovered from the precipitous fall in the last crisis. At the peak of last upturn, housing assets were far ahead of the S&P 500. 

Per capita analysis of stocks would reveal, which actually in this case is an odd comparison and it shows that stocks would be $78000 per capita in U.S. if we extrapolate it to today’s numbers, which as a size of wealth would not be that big to take the person all through his life if she had to depend on that wealth. No wonder there are other forms in which savings gets diverted and surely housing assets feature in that.  

A per capita comparison of Indian Stock market wealth would show that it would be about Rs.110000 per person, a rather small amount for the average population as a stock of wealth.

This is where a per capita comparison makes you wonder how relatively small is the total size of the stock market relative to the wealth and income of the entire population. Housing, although the per capita number could be not very different, it is far more distributed in the population and it makes a difference. However a far lower proportion of the population actually hold the stocks. Far bigger share of the population hold housing as an asset and this is where the connection to the larger economy becomes that much bigger.

This is where housing deviates from stocks and provides the backbone of wealth creation for an economy like India. But the housing sector is so small in India in comparable terms and leaves a lot to be desired.

Focusing on housing sector is of paramount importance as it draws a large number of inter-connected sectors, Steel, Cement to the Public sectors like Revenue, Urban Development, to the logistics sectors, like Road, Rail; the entire economy gets connected through housing. We should not miss finance, as housing finance holds the engine of credit creation.

Think of the smallest unit of wealth, it could be the smallest piece of gold, to any savings asset in a bank to a stock unit in the stock market. All of this form pieces of collateral for the larger wealth creation that an average individual aims for. That is housing, it is the ultimate objective that an individual wealth creator aims to achieve in life.  

By focusing on Housing, the developed economies created an array of actions that on one hand incentivized people to put their long term savings into creating housing assets through mortgage and on the other provide enough insurance that the sector did not move out of bounds impacting the financial health of the economy.

It has been a tight walk always and there has been severe housing market booms and bursts, impacting large hordes of people; in the last crisis 30% of wealth got destroyed in U.S. alone.

In India, we have seen stresses, but the housing market did correct itself. There is so much to happen actually in housing if urban planning moves to the next gear drawing large tracts of land meet the infrastructural requirements; we have either land where no connectivity exists, or connectivity where land is scarce.

Financing has many hurdles as well, what would a retail bank do after it has given a housing loan to an individual home owner in a suburb? With a permanent liability on its books, it can never give the next loan, unless a fresh deposit is added. This could be solved by bundling of housing loan assets that could be sold to investors. This would have created the constant channel through which further loans could be disbursed.  

The creation of secondary markets through which new finance from investors would have drawn in more capital is an area of development. Securitization products need to be developed in India, like Collateralized Loan Obligations, where loans are pooled together and are passed on to different classes of investors in various tranches. Pooling in the bunch risky and non-risky loans actually makes allowance for risk mitigation and this is how the secondary market for loans is created.  

The secondary markets allow institutional lenders to release limits, increase volumes financed and manage exposure to underlying entities. It also acts as a critical source of funding by providing liquidity through sell downs.

Without deepening of the financial markets around housing, the market still remains small compared to the overall size of the economy. While we focus to capitalize the sector which is partially drained of liquidity, we must not ignore the fact that without development of secondary markets we would continue to struggle.