Economy Apr 20, 2013
The decline in gold prices, resulting from market expectations that Cyprus would sell its gold reserve to save itself from financial crisis and that US quantitative easing would come to an end soon, is an opportunity for buyers to shift from real estate investments to bullion.
When markets are volatile, investors tend to increase their portfolio holdings of gold and real estate. However, off late, investor concerns over gold as a safe investment have raised similar apprehensions about property as prices have become astronomically high and the two are more often than not substitute for making money when the economy is in doldrums.
Second, the plunge in the gold prices is also linked to speculative futures trading in the yellow metal. The same holds true for property too, since nothing but investor play can explain the price properties in Mumbai and Delhi command today. Hence the reasons that lead to an unwinding of gold prices could impact housing prices too.
A recent report by Karvy Stock Broking, using real estate rates and international gold price data for Hong Kong, has shown that there was a 0.81 (81%) correlation between the prices of both asset classes.The same hypothesis holds true for India in 2012-2013, the research has shown.
"If gold prices correct as an asset class, money flows into buying yellow metal and this will impact the realty sales," said real estate analyst Parikshit Kandpal.
In other words, since Indians for years have bought gold as a long-term investment, a price correction only implies that they will sell their real estate investments and buy even more gold. This in turn will lead to a slide in property prices, making certain sections more affordable.
Over the last two years, average gold imports into India have been $51 billion, which equals to an annual residential real estate purchase of $48 billion, the note said.
"Now an 18 percent correction in gold offers an opportunity for investors to switch from real estate to gold. The most impacted markets could be ones which have high investor concentration viz. NCR (including Gurgaon), Mumbai," said Kandpal.
Already real estate prices have dipped by around 10 percent in New Delhi while unsold housing units have gone up to 1.4 lakh units. Even in Mumbai, buyer sentiment is at an all-time low as almost 90 percent of the real estate projects are upwards of Rs 1 crore.
A recent report by global property consultancy Knight Frank says that more than one-fourth of the total 5.2 lakh housing stocks being constructed in the National Capital Region (NCR) remain unsold due to weak consumer demand.
Karvy's interaction with mortgage providers suggested that current realty prices in Mumbai are unaffordable and buyers are reluctant to commit for projects above Rs1 crore. "Mortgage provider's highlighted slowdown in demand and expect 15% price correction by 1HFY14 for the return of affordability," said Kandpal.
Most of the projects that were showcased in the recent property exhibition in Mumbai were in the range of Rs 1.3-Rs 1.5 crore, and that too in Mumbai's suburbs. However, unlike gold where the price fall is uniform and usually follows the same pattern as international markets, the dynamics in real estate is different as it is location-specific. While prices may see a correction in certain pockets, they may continue to remain high in those areas where supply is constrained.
"Price movements in the real estate sector are the result of supply and demand. This is true for gold as well, but the demand drivers for real estate are not the same as for precious metals. Though, in investment terms, they technically fall under the category of asset classes, the demand for residential property stems from the desire for home ownership that is hard-wired into the Indian psyche. It is demand from end-users that dictates investors' appetite for residential property," said Anuj Puri, Chairman & Country Head, Jones Lang LaSalle India.
In short: If you are looking to buy a house, hope for a correction now. Stock market investors on the other hand could tank up real estate stocks, hoping that the correction will lead to higher volumes and a rally in these stocks.
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