Job losses, increased housing demand and uniqueness of K-shaped recovery

Most readers were convinced with my previous blog Why Indian real estate will bottom out in 2021 ? but were not clear how could the housing demand increase despite so many job losses and salary cuts.

The answer lies in the uniqueness of K-shaped recovery which is likely to dominate the post-pandemic economy. In such a recovery, certain sectors will do much better than the others and certain players within a sector will perform much better than the others. This will result in a skewed and an unequal distribution of income.

Such a non-uniform growth is not something that any national economist would aspire for. However, such a recovery could offer a favourable pitch for rising demand for new homes.

Unlike gross domestic product (GDP) which is driven by rising average incomes, the demand for housing is determined by the number of individuals who see their incomes cross a certain threshold level.  This happens since the demand for homes is low on priority on the use of discretionary spending and gets triggered only when an individual’s income crosses a threshold level. So even if the average incomes experience low growth, the non-uniform income distribution – driven by K-shaped recovery could result in a disproportionately large number of individuals experience incomes above the threshold levels.

(In a super ideal case when the income of every citizen of India is exactly equal to the average income of the nation, there will be practically zero housing sales in Urban India (at today’s prices). It is the inequality of income distribution that ensures that some people have enough surplus to buy capital assets like cars, jewellery, homes, etc.)

Besides the initial trigger provided by the K-shaped recovery, the bottoming out of real estate in India has multiple consumer behavioural factors to champion the same despite the job losses.

Social Pressures: Over the years, with rising incomes, many people have moved up their socio-economic group but have still deferred the home purchase decision owing to being stuck in the Rent v/s EMI syndrome. But now with growing children, these people have started feeling the opportunity loss of enjoying fewer years of good quality housing with their children. With their friends and families having moved into better homes, social pressure only increases. Further, with every basis point reduction in interest rates, the Rent v/s EMI tug of war inches towards EMI. If that was not enough, the stock market indices have made SIP portfolios rise in titanic proportions which is ensuring more family debates ruling decision in favour of EMI.

Changing definition of home: Over the years, many people have started looking at homes, not just as dwelling units but also as a work-place (pandemic has only triggered this trend), fitness zone ( yoga room, work out area, etc) and as a socialising hub (for inviting friends and families).  This has increased the square footage demanded from home buyers.

Very little distress sale to push prices down:  Job losses could mean distress sale of homes and distress sales can negatively impact the asset prices. However, the number of such sales are expected to be minimal since for Indians home is amongst the last assets to be sold in case of emergencies.

Recovery does not require significantly higher demand: Despite job losses, many sectors have also seen steadily rising incomes (FMCG, banking, pharma, IT, government sectors, etc.) during the last five years. And during these five years, property prices were on a regular decline. These two along with lower interest rates have made homes much more affordable for this category of people. And since the quantum of housing sales required to warrant a bottomed-out real estate market is not too much, we are not very far from bottom level.  (With an additional annual sale of 10,000 units, Mumbai will see its all-time high annual sale of housing units.)

In case you are wondering about the slow sale of luxury products in a K-shaped recovery, then it may be worth noting that the demand for luxury brands is a function of events and gatherings happening in the city.

So, while it will be the not-so-benign K-shape recovery that may drive the economic revival but since housing is the most democratic job creator – creates jobs across India and across skillsets (from unskilled worker and small broker to qualified engineers and consultants all get work) - it will not be too stretched out to hope that it will be the much-maligned real estate industry that will lay the foundation for a more distributed income through wider job creation.