Indian Realty Party is Over - HSBC

HSBC in a report on the Indian Realty sector has turned bearish due to prevailing macro factors in the Indian economy. This report is an addendum with deeper survey and analysis than to the one released in March-08. Current report forecasts property prices to fall between 25-30% in most markets across India.

In the graph below [released by HSBC], you can see the property boom in Mumbai between 1990-94 followed by a slump for 4 years before stabilizing between 1999 and 2002. Current forecast is fall of 25-30%.

With interest rates expected to rise, deterioration in affordability is likely to accelerate. If interest rates rise by 200bp, property prices need to fall roughly 13% to maintain the current level of affordability, which already looks stretched.

With housing loan interest rates at 13.5%, EMIs have shot up by 16.9% considering base case home loan rate of 11%. HSBC Research suggests that sales are down by as much as 50-60% y-o-y in the past six months.

Rising inflation and higher interest rates will, in our view, lead to a further deterioration in demand, leading to a 25-30% correction over two years. At that point, affordability levels should start to improve and, in turn, boost demand.