Minsky moment in real estate market ?

 

Pandemic has changed the world in an unprecedented way. It has affected, disrupted, and changed our lives once for all. If the world as a whole gets shattered is the real estate spared??

Old Model of Real Estate: In earlier days real estate followed this five-staged value creation model from 

1 Change in original usage of land from agriculture to residential or commercial

2 Physical structure put up from residential or commercial drives other new venture driving up the price of the land 

3 Improvement in commercial value as the locality populates more due to facilities made available results in increasing the demand.

4 Periodic booms and busts 

5 Impact of the economic development and Inflation

When the utility of the land changes it results in a price rise so is when the commercial value increases or demand due to an increase in population.  The price rise of real estate is also catalyzed by the easy availability of credit due to repo rate cuts or economic development leading to a boom ending with a bust.

Post-2000: People on rent decided to move to their own house as the EMI of housing loan was the same as the rent paid. The additional benefit of the central government scheme where the interest paid on housing loans was declared as tax deductibles not only enticed the ones without their own house but also with one who treated this as an investment. With rent not only did they service debt but also claimed tax benefits. This resulted in a boom in real estate where the developer not only captured the value accretion of three or four stages but all five stages of the Real estate 

This artificially pumped-up price was sustainable due to

 1 The easy availability of credit for buying land, construction of apartments over it, and also end-users with credit buy it since credit is used at every stage, price of it escalates. 

2 Due to legal restrictions Land is underused as the number of flats that can be built over it is confined without using the latest construction technology.

This bubble had to burst but COVID-19 may exacerbate it due to the impact of the pandemic on various sectors dependent on Real estate.

IT and ITes: Pandemic forced work from home has been efficient as the earlier model which may continue hereafter due to lessening of cost and improving its profitability reducing the demand for office space. Leading Indian multinational IT services and consulting company has planned to allow 75% of its workforce to work from home is a testimony to this.

Retail: Retailers are upgrading their IT infrastructure by developing commerce websites to take advantage of gained traction in online shopping. Established e-commerce companies have continued to gobble up the small retailers in various retail sectors like groceries, clothes, electronics, and books thereby reducing the demand for commercial complexes and malls.

Homebuyers: potential high-income retail home buyers have reduced in the recent past tapering the demand for it. The nature of real estate which is illiquid, no transparent price discovery along with an oversupply of flats and apartments will continue to contain price rise.

Theatre and restaurants: Food aggregators and cloud kitchens will rise due to their efficient customer satisfaction and OTT platforms will continue to flourish as the customer behavior is been tuned to it due to the pandemic reducing the theatres and restaurants. 

Good roads and excellent communication infrastructure across the country facilitate easy transportation and decentralization of the cities allowing reverse migration.

These factors may not make the real estate investment profitable like it did in the past, so the real question to ask is  "has the Minsky moment arrived for the real estate.

Minskey Moment: Investopedia describes it as the onset of a Market collapse brought by reckless speculative activity.

Reference:

https://www.valueresearchonline.com/stories/48637/the-pandemic-changes-real-estate-attitudes/

https://www.youtube.com/watch?v=LuEhwkYczqI&t=74s

https://www.youtube.com/watch?v=TeB6Xwzfw7M&t=119s