‘Property slowdown to have ripple effect’

This can impact economy, says Goldman Sachs.

BL Research Bureau

The ripple effect of a slowing property market is likely to result in a substantial impact on the Indian economy, states a report by the Asia Economics Research Team at Goldman Sachs.

Strong linkages

According to the report, a slowdown in the realty industry results in an inevitable slowdown in construction activity. While construction activity accounts for 7.3 per cent of the GDP, the sector’s multiplier effect would be felt in other industries that account for an estimated 14 per cent of the GDP.

Construction has strong backward linkages to sectors such as iron, steel, cement and forward linkages to segments such as hotels, trade and transport, thus bringing about a ripple effect.

The report estimates that the realty sector along with its linkages will reduce about 0.7 percentage point from India’s GDP in FY09 (compared to previous year) and an additional 0.4 percentage point in FY10.

Drawing parallels

The report also draws parallels to the previous cooling off of the property market in 1996 and the accompanying periods of relatively low economic growth.

It is to be noted that during 1994-95, India’s GDP growth had shot up to 6.4 per cent, a sharp acceleration from the less than 2 per cent growth in 1991-92. The country was also challenged by double digit inflation. Interest rates, then too, were raised to contain the inflation leading to turmoil in the property market and an overall liquidity crunch. With constrained money supply as well as demand, the country’s GDP declined to 4.3 per cent in 1997-98.

According to the Goldman Sachs report, residential real estate prices on an average rose 70 per cent cumulatively over the three years preceding the property bust in 1996 and declined by a cumulative 40 per cent in three years after 1996. The report notes that it took a good five years for the prices to recover from the slump.

Placed in a similar context, residential property prices over the last three years to 2008 have surged by a total of 80 per cent on an average. Inflation-adjusted real estate prices in the four major cities of Delhi, Mumbai, Kolkata and Chennai have also gone past the previous peak in 1996.

The report, released on Monday, suggests that residential property prices in some regions may have to decline by 30 per cent from current levels to improve affordability.