realestate research paper china

8/2/2019 Realestate Research Paper China

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Dr V Chandrasekar, Professor, Executive Advisor, ICREI, ISB

Gaurang Sanghvi, Research Associate, ISBIndicators of real estate cycle: Implications for India

Indicators of a Real Estate

Cycle - Implication for India


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Indicators of real estate cycle: Implications for India

Indu real estate research chair

Disclaimer

This paper attempts to serve as the background note on the global real estate market and cycles. The

paper provides an overview of the real estate cycle and market dynamics therein, and explores the

imperative indicators which affect the real estate cycle.

The paper also makes an effort to provide general information on dynamics of a real estate cycle. The

paper tries to provide information on matters of interest to readers. The implications of indicators can vary

widely from case to case, based upon the specific or unique characteristics of a particular macro-economy.

Readers are encouraged to consult with professional advisors for advice concerning specific matters

before implementing any investment or tax strategies.

While due care has been taken during the compilation of this paper to ensure that the information is

accurate to the best of the Authors and ISBs knowledge and belief, Author is not responsible for the

accuracy or appropriateness of the information in this paper and disclaims responsibility for strategies

implemented as a result of any information provided herein.

The Author and ISB neither recommend nor endorse any specific products or services that may have been

mentioned in this publication and nor do they assume any liability or responsibility for the outcome ofdecisions taken as a result of any reliance placed on this paper.

Neither the Author nor ISB shall be liable for any direct or indirect damages that may arise due to any act

or omission on the part of the user due to any reliance placed or guidance taken from any portion of this

paper.


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Terms of reference

R Square and tStatistic:

Given the scope of the paper, we can establish that there is a relationship between house price and

income by the exercise of regression, and the respective values of R square and t statistic whichcomes in the output of the regression.

R Square: The estimated value of R square (also known as coefficient of determination), signifies the extent to

which the variation in the movement of price could be explained by the income.

The value of R square ranges from 0 to 1.

We generally express R square as percentage.

If the value of R square is closer to 1 or 100%; we conclude that the variation in the price is explainedby the movement in income.

e.g.: if the value of R square is 0. 95 i.e. 95%, this means that 95% of the variations in the dependentvariable can be explained by the independent variable in the regression model.

tStatistic:

t Statisticindicates that whether or not the given two variables can be related to each other.

If the tstatistic is higher than 2, than our hypotheses that the variables are related is taken as true.


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Approach

The term bubble implies a transient state where a rapidly growing boom is not supported by economic

fundamentals but is based on false assumptions and expectations and would eventually prove to become

short lived.

Dehesh, Pugh (1996)

Countries differ in their institutional, structural and economic fundamentals, and any economic phenomena

associated with a particular economy would typically have different characteristic features, which can be

attributed to geographical diversities and structural differences such as supply responsiveness, housing

markets liquidity and mortgage market completeness. Similarly, features of real estate cycle across

different economies are supposed to be exhibiting at best a spurious correlation only.

However certain macroeconomic indicators such as household disposable income and market specific

determinants such as interest rate, debt service ratio, rentals trends, tend to exhibit similar pattern in terms

of their impact on the price movements in the real estate sector. Given this backdrop, the report is an

attempt at outlining the impact of these indicators on the price trends in different real estate markets.

Indian real estate market has been analyzed with the backdrop of the global trends, and a possible

trajectory for the Indian market has been examined.

Section 1 gives a brief overview of the theory of real estate cyles and the various indicators that affect the

real estate cycle.

Section 2 studies the real estate cycles in USA, Japan, and UK. The main criterian that have been

considered while choosing these case studies have been a) The real estate cycles should have lasted

atleast for five years b) The real estate market should have global significance c) Statistical data

availability across markets. In this section we would separately analyse the pattern of real estate cycles in

the respective economies, and would try to see similarities, if any, in the indicators responsible for the

cycle and also in their respective magnitude.

Section 3analyses the Indian real estate cycle under the above select indicators. The opportunities and

risks in Indian real estate market have also been analysed. The case of the Mumbai real estate market has

been considered for the analysis, since it is believed to be the most burgeoning real estate market in India.

Mumbai is also a mature, demand led market, where end users are higher as compared to other

speculative markets in the country.

We try to establish the presence or possibility of any similarity between the trends in the price movements

in the real estate sector in India and the respective trends in the US, UK or Japan. The role of Government

vis--vis policies, both fiscal and monetary, in the price movements of real estate sector has also been

analysed in this section. An attempt has also been made to forecast the possible trajectory of the Indian

real estate, in light of the present demand supply scenario.

Section 4 analyses the key findings of the report and also attempts at highlighting the strengths and

possible challenges faced by the Indian real estate sector.


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List of figures

List of tables

List of graph

List of abbreviations

1. A brief background of Real Estate Global Cycle

1.1 Introduction

1.2 Real estate cycle

2. Real Estate Cycle : Case Studies

2.1 Indicators of the real estate cycle

2.2 United States of America - Real estate cycle

2.2.1 United States real estate cycle

2.2.2 Indicators of the real estate cycle

2.2.3 United States : Inference

2.3 Japan real estate cycle

2.3.1 Japanese real estate cycle


2.3.3 Japan : Inference

2.4 UK

2.4.1 UK real estate cycle


2.4.3 UK : Inference

3. Indian real estate cycle

3.1 Indian real estate cycle

3.2 Indicators of the real estate cyle

3.3 Demand supply scenario and policy perspective

3.4 Real estate cycles India v/s global market

4. India Road ahead

Reference

Table of contents


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List of figures

Figure 1 Phases of a real estate cycle

Figure 2 Indicators affecting a real estate cycle

Figure 3 Selected indicators and the pattern of their movement during a real estate cycle

Figure 4 Timeline of global real estate cycles and macroeconomic events

Figure 5 House price changes for United States (1975 2006)

List of tables

Table 1 Timeline of real estate cycle United States

Table 2 House price appreciation in United States

Table 3 Indicators affecting global real estate cycles

Table 4 India v/s global market

List of Graphs

Graph 1 United States real estate cycle (1980 2005)

Graph 2 House price (1985 1989)

Graph 3 Net rental yield (1985 1989)

Graph 4 House price to income ratio (1985 1989)

Graph 5 Interest rates (1985 1989)

Graph 6 GDP vs disposable income (1985 1989)

Graph 7 Demand supply scenario (1985 1989)


Graph 9 - Net rental yield (1995 1999)





Graph 14 - House price (2000 2005)

Graph 15 - Net rental yield (2000 2005)






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Graph 20 Japanese real estate cycle (1985 - 1999)


Graph 22 House price to rent index (1985 1999)

Graph 23 Household debt service ratio (1985 1999)



Graph 26 UK real estate cycle (1986 1991)

Graph 27 House Price (1986 1991)

Graph 28 Interest Rates (1986 1991)

Graph 29 Disposable income vs GDP (1986 1991)

Graph 30 Indian real estate cycle (1990 1999)



Graph 33 House price to income (1999 1990)

Graph 34 Interest Rates (1999 1990)

Graph 35 Housing shortfall in India

Graph 36 Demand for new housing (2005 2030)

List of Abbreviations

CAGR Compound Annual Growth Rate

FDI Foreign Direct Investment

FII Foreign Institutional Investors

GDP Gross Domestic Product

INR Indian National Rupee

IPO Initial Public Offerings

NBO National Building Organization

REIT Real Estate Investment Trust

UK United Kingdom

USA United States of America

USD United States Dollar

VC Venture Capital


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The real estate cycles involves periodic shifts of rapid growth of output (recovery and prosperity),

alternating with relative stagnation or decline (contraction or recession) over time.

Historically, in early 1980s and 1990s the price of new houses appreciated by 300 percent whereas pricesof raw land appreciated by 1000 percent. Both subsequently depreciated, ushering in a recession that

bottomed out in 1992. The trend post 1993 witnessed an even keel in the house price. (source to justify300 and 1000 percent

1.1 Introduction:

1. A Brief Background of the Real Estate Global Cycles:

1.2 Real estate cycles:

Real estate cycles are described as cyclic movements of price in the real estate market which, over a

period of time, causes fluctuations in the residential and commercial property market. This is a result ofthe economic, demographic and/or policy changes in the overall market environment.

The four phases of a real estate cycle viz. Recession, Recovery, Expansion, Contraction. While phases

1 and 4 (recession and contraction) are characterized by rising vacancy rates, phases 2 and 3 (recoveryand expansion) demonstrate falling vacancy rates as shown in figure 1.

Figure:1 Phases of a real estate cycle

1

Expansion is accompanied by job and population growth along with high demand on the infrastructure.

Equilibrium occurs when prices stabilize. Prices, having reached their maximum limits, less businessesmove into, or expand in the area. Recession occurs due to declining job growth, relocation of businesses

and depreciating housing demand. During this time, prices become stagnant or even decline as rents andoccupancy depreciates. Absorption occurs as prices and occupancy depreciates and the area becomes

attractive again to the market.

In growing economy, the rising phase dominate the declining phase of the real estate cycle and on

an average, there are more years of good times than bad times for investors.

Source Journal of real estate research, Volume 18, No 1, 1999


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In attempting to identify real estate cycles across global markets, certain key indicators have beenchosen. Analysis of these indicators across select markets signify whether a given real estate market is

experiencing a boom or a bust phase. The various indicators which affect a real estate cycle are as

follows:

2. Real estate cycle : Case Studies:

2.1 Indicators of Real estate cycle:

Figure: 2 Indicators affecting real estate cycle

2

1) Population growth

2) Employment rate

3) Gross Domestic Product (GDP)

4) Household disposable income

5) Stock Market values

6) Average House price movement

7) Price to Income ratio

8) Net rental yield

9) Household debt service ratio

10) Interest rate/mortgage rate

11) Demand- supply scenario

The above figure illustrates the various indicators affecting a real estate cycle, their corresponding impacts

on the real estate cycle and their inter dependency on each other.


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2. Real estate cycle : Case Studies

5) Interest rates / mortgage rates

6) Stock price values

7) Demand supply gap

3

The markets selected for analysing real estate cycle are United States of America, Japan and the UK. The

various macro-economic events that have affected the above mentioned real estate cycle are as follows:

1985: Plaza agreement and Japanese asset boom - The Plaza Agreement was signed by five countries

ie France, West Germany, Japan, United States and United Kingdom and it was agreed to depreciate the

US dollar in relation to the Japanese Yen by intervening in the currency markets.

1986-1993: Increase in Japanese foreign investment This period was considered as the year of

massive Japanese dominance over the world financial market, whereby Japans net long term capital

outflow among the G 7 countries appreciated by 90% from 1982 to 1987.

Figure: 3 Selected indicators and the pattern of their movement during real

estate cycles

The indicators chosen for the purpose of analysis are as follows

1) Average House price movement

2) Price to income index/ ratio

3) Price to rent ratio / net rental yield

4) Debt service ratio

The figure 3 illustrates the indicators selected for the analysis of real estate cycle and the pattern of their

movement during the boom and the bust phase of a real estate cycle.


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Figure: 4: Timeline of global real estate cycles and macroeconomic events

1987: Deregulation in real estate market and stock market crash in UK The stock market crash

resulted in wealth losses on consumption. Thus the financial institutions eased credit which fuelled the on

going real estate boom

19881992: Large inflow of capital in United States of America led to increase in gross nationalproduct Accelerated capital inflows started in 1989 which was affected by Japanese manufacturing

investments leading to domestic structural reforms. The year 1993 was the peak in which the inflows were

the highest.

1988-1993: Increase in cross-country real estate investment Cross country real estate investments

were carried out by banks, pension funds and insurance companies for a better portfolio diversification and

higher returns.

1991: Financial deregulation and capital market liberalization in United States of America and UK

Major structural changes such as removal of restrictions on the establishment of foreign institutions,abolition of interest rate controls and removal of regulations segmenting the financial markets among

others were introduced.

The timeline of the global real estate cycle across global markets and the various macro economic

incidents prevalent during the time is shown in figure 4.

4

2. Real estate cycle : Case Studies


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2.2 United States of America : Real estate cycle

United States has witnessed three real estate cycles from the 1980s. The trend in house prices (i.e house

prices adjusted for inflation) during real estate cycle has witnessed periods of appreciation and depreciation

since 1975, although instances of nominal price declines have been rare. The three real estate cycles

witnessed by United States are 1) 1986-1989, 2) 1995-1998, 3) 2001-2005.

The trend of house price reveals that the prices have appreciated at a CAGR of 6.3 percent from 1975 to

2005. Graph 1 below indicates the increase in demand for housing and rapid appreciation in house prices

as witnessed by the real estate cycle in the United States from the mid 1980s to 2007.

.

Real estate cycle III2000- 2005

Real estate boom phase of cycle - II1995 - 1997

Real estate cycle II1995 - 1999

Real estate cycle - I1985 - 1989

Real estate bust phase of cycle III2005

Real estate boom phase of cycle III2001 - 2005

Early 2000s recession2000 - 2003

Real estate bust phase of cycle - II1997 - 1999

Real estate bust phase of cycle - I1988 - 1989

Real estate boom phase of cycle - I1986 - 1988

TimelineYear

Table:1: Timeline of real estate cycle United States

2.2.1 United States of America : Real estate cycle (1980-2005)

5

There has been considerable variation in houseprices among different regions in the country as

shown in figure 5. The West and the Northeastregions have had greater price appreciation thanthe national average. Within these two regions, the

Pacific and Mountain states have had greaterpercentage increases in real house prices in recent

years than they did in the previous episode of risingprices in the 1980s.

States such as California, New York, and NewJersey have been identified as having higher price

appreciation and more volatility as a result oflimitations on new construction.

Figure 5: House- Price change for United States

(1975 2006)

house prices are plotted on a logarithmic (log) scale.Schiller (2006)

OFHEO House- price index deflated by CPISchiller (2006)

Table:2: House Price Appreciation in the United States*

8.8 62.6Pennsylvania

65 143.1New Jersey

58.5United States

% IncreaseMetropolitan Area or Division

First Quarter 1995 Second Quarter 2006

Graph 1 United States real estate cycles (1980 2005)


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AveragePrice(USD

)

(persq.feet)

-5.00

0.00

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15.00

20.00

GrowthRate

Growth Rate (%)

House Price (USD) (per sq. feet)

2.2.2 Indicators for real estate cycles:

Source: www.census.gov

Graph 2: House price (1985-1989)

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Graph 3: Net rental yield (1985-1989):

Graph 4: House price to income ratio (1985-1989):

3.253.3

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Rate(%

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Interest Rate

Mort gage Rate


Graph 5: Interest rate (1985-1989):


Graph 6: GDP vs disposable income (1985-1989):

0

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New housing units completed (00 0)

New houses sold (00 0)


Graph 7: Demand and supply scenario (1985-1989):

Observed trends in different indicators between 1985 1989:

The rise in house prices, as depicted in graph 2, for the same period reflect the negative relationshipbetween the two indicators. {Ref sec 2.2.3}

The house price shows a sudden growth of around 16 percent in 1986 from a low of around 2.5percent in the previous year, only to sink to a negative growth in the year 1989, as indicated in graph

2.

The house price to income ratio as shown in graph 4, for the same timeline though shows a

depreciating trend, still the movement is not too sharp. The interest rates and mortgage rates as shown in graph 5, both exhibit a down turn starting with

1985, but they pick up by the end of 1989. For the period when price to income ratio shows a upward trend reaching 3.3 percent in the year

1988, major contribution to this trend comes from the rising prices, in light of decelerating growth rate

of disposable income as depicted in graph 4 and graph 6 respectively.

The decelerating pattern in the growth rate of disposable income, as indicated in graph 6, could be

one of the reasons for the widening gap between demand for and supply of the housing units.

The gap in the demand for and supply of new housing units for the period between 1985 and 1989, is

more than 100%, with supply being greater than the demand. As the speculative pressure seem tosettle down, the gap decreases, but the supply still being reasonably higher than the demand. 6

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Gro ss Do mest ic P ro duct (GDP ) D ispo sable inco me (%)

Real estate cycle I (1985 1989):

United States of America : Real estate cycle


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Real Estate Cycle: II (1995-1999)

6.6

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7.1

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7.3


3.1 3.1

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3.35

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Interest Rate

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Units(000)

New housing units completed (000)

New houses sold (000)





Graph 8: House price (1995-1999): Graph 9: Net rental yield (1995-1999):

Graph 10: House price to income ratio (1995-1999): Graph 11: Interest rate (1995-1999)

Graph 12: GDP vs disposable income (1995-1999): Graph 13: Demand and supply scenario (1995-1999)

7

Observed trends in different indicators between 1995-1999:

The rise in the house price as shown in graph 8 has been a bit moderate relative to the rise experienced

in the previous cycle as shown in graph 2.

But the net rental yield as depicted in graph 9, has shown a steady decline through the period, from a

stable 7.2 percent for a consecutive three to four years before the bubble set in.

The price to income ratio as indicated in graph 10 has remained stable at 3.1 percent all through the

period.

The interest rates and mortgage rates as depicted in graph 11, both show a downward trend during the

period, but unlike the observed trend in previous cycle, the interest rate actually picks up just before the

cycle sets in, and then dips.

The demand supply gap, as illustrated in graph 13, has narrowed down in this phase of the cycle, unlike

the pattern in the previous cycle. The possible reason could be the moderate rising pattern of

disposable income growth rate (graph 12) in this phase which was not the case in the previous cycle.

2.2 United States of America : Real estate cycle


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Real Estate Cycle: III ( 2000 2005)


Source: www.census.gov Source: www.census.gov




0

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Interest Rate

M ortgage Rate

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200400

600800

1,0001,200

1,400

1,6001,8002,000

2,200

Units(000)

New housing units completed (000)

New houses sold (000)

Graph 14: House price (2000-2005): Graph 15: Net rental yield (2000-2005):

Graph 16: House price to income ratio (2000-2005): Graph 17: Interest rate (2000-2005)

Graph 18: GDP vs disposable income (2000-2005): Graph 19: Demand and supply scenario (2000-2005)

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Gross Do mest ic Pro duct (GDP) Disposable income (%)

0

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100150

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2005

HousePrice(USD)

(persq

.ft)

-5.00

0.00

5.00

10.00

15.00

GrowthRate

Growt h Rate (%)

House Price (USD) (per sq. feet)

Observed trends in different indicators between 2000 2005:

During this period of real estate cycle, almost all the indicators show steady trend.

The bubble in this period has been identified primarily due to subprime mortgage crisis and the

associated market correction.

The remarkable feature of this cycle is the gap between the demand and supply for housing units asdepicted in graph 19, which is the lowest among all the three cycles analysed so far. The main

reason for this phenomena is the subprime lending in this sector.

The subprime lending activity was in part demand driven and in part pushed by the State policies.



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The analysis reveals that during the boom and bust phase of real estate cycles, the house prices have

subsequently exhibited sharp appreciation up to 14 percent, followed by sharp depreciation.

A shift can be witnessed from renting a house to owning a house from late 1990s. The factors that

contributed to the shift were depreciation in interest rates, mortgage rates and appreciation in the

disposable incomes.

The price to income ratio reveals that housing looked relatively cheap when the ratio was 3.0, and

expensive at 3.3 times which is a narrow range. It persisted for at least two decades from 1980- 2000.

Interest rates now stands at 6.25 percent, compared with 10 percent in the late 1980s and a high of

11.5 percent in the early 1980s. The primary reason for the real estate bust was high interest rates.

House purchase constitute a major chunk of the disposable income. This can be explained by the

strong relation in the movement of the average house price and the disposable income, with R square

at 93 percent and t statistic at around 10.

The price movement in USA is more of a demand pull phenomena. This is explained by a relatively

higher value of t statistic between demand for houses and the average house price than the t statistic

for the supply of new house units and the house prices.

One of the main features of the real estate cycles have been declining net rental yield. This could be

explains the existence of a trend in the prices.

The impact of interest rate is significant but the moderate level of R square suggests that on a one to

one basis, not all the variation in the average price movements are explained by interest rate

movements only.

Period ( 1980 2005 ) tstatistic Rsquare

Regression of Prices on demand for house 10.79351 0.835125

Regression of Prices on supply of house 03.095415 0.29408

Regression of Price on interest rate 05.18395 0.538831

2.2.3 United States : Inferences

9



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2.3 Japan - Real Estate Cycle

The Japanese real estate boom was a period of skyrocketing land prices and it lasted from 1985 to 1990. It

is considered as the most famous of the economic booms. The land prices grew by around 28 percent

over the 5 years preceding the peak and it witnessed an equally dramatic drop of approximately 22 percent

over 5 years after the peak. Macro economic policies factors viz. an overvalued Yen and aggressive

lending policies introduced by the financial institutions resulted in large amounts of capital introduced into

the property sector. This led to speculation of land investments resulting in increasing prices. Residential

land prices in 1990s in Japans six big city areas were 2.6 times those in 1985 and commercial land was

3.9 times as expensive.

The time of the collpase hit the property market particularly hard. Investments were made from largely out

of the country. When the prices crashed, commercial land value reduced to half, by 1995. Corporate Japan

also lost money due to declining real estate holdings. Businesses cut back their plans to spend on plant

and equipment, cut back on working hours and salaries of workers thus snapping economic growth. The

average price of a 750 sft condominium in Tokyo rose to more than 70 million Yen (USD 625,000) in 1991

from about 25 million Yen (USD 223,000) in the early 1980s. After crashing in the early 1990s, the average

house price hovered around 40 million Yen (USD 350,000).

2.3.1 The Japanese real estate cycle (1985 - 1999)

The Japanese real estate cycle lasted from 1985 until 1999, whereby the boom period lasted for around six

years from 1985 to 1991 and the bust followed from 1991 until 1999 for a period of nine years as shown in

graph 20. The land prices began to increase in around the year 1983 in the commercial districts of Tokyo

which subsequently spread to the residential sector and regionally to the suburbs of Tokyo. This steady

rise in land prices reached its peak in 1989. The land prices began to level off in 1988 and 1990 in Tokyo

and Osaka respectively. The prices began to fall in 1991. In January 1992 the average land prices

nationwide fell by 4.6 percent compared to the previous year.

Graph 20 Japanese real estate cycle (1985 - 1999)

10


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The real estate market followed uninterrupted growth until 1991 except for 1986-1987 due to an

overvalued Yen. This was the period of increased investments in real estate due to speculation. For

promoting the growth of real estate, large tax reductions were permitted such as real estate acquisition

tax, registration tax and transfer tax. Housing loan deductions were extended from six years to fifteen

years.

The first period from 1992 to 1994 was affected by the economic slowdown with a real GDP growth of

only 1.1 percent (from approximately 5 percent in 1990 to 1991). During the period from 1995 to 1997,

the Japanese government introduced fiscal stimuli which improved the GDP growth rates to 2.7 percent.

The unemployment rates began to increase over this period, (close to 3.5 percent from approximately 2.5

percent during 1992 to 1994). The office workers were the first to be hit due to the economic decline with

cuts in the working hours and salaries. Over 1998 to 2000 Japan was at the peak of its crisis with the

lowest ever GDP growth of -0.1 percent. This was the period of nation wide decline in disposable

incomes and with unemployment rates at an all time high of almost 5 percent.


Source UN and Japan stat

House prices

House prices reached its peak during 1990 andstarted steadily declining before bottoming out in2000 as depicted in graph 21. The prices

appreciated by about 28 percent over five yearsbefore its peak in 1990 and depreciated by about 22

percent over five years after the peak. The mainreason for this was the easing of the monetary

policies and the lowering of the interest rates.

100

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2000

Y e a rIndex 1985 Q1 = 100

House price to rent index (reciprocal of net rental yield )

The price to rent curve, as shown in graph 22,matches the trend of the real estate cycle. Owner

occupied residences have been stable at anaverage of 60 percent throughout the cycle. The

rentals have witnessed a sharp decrease of 22percent from 1993 to 1998. This must have been

due to lack of policies that favored rental buildings.Focus was laid on measures to bring back the assetprices from the slump. Source BOJ and Standard and Poors research

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Index 1985 = 100

House prices to income ratio

The house price to disposable income followed the

same curve as that of the real estate cycle,illustrated in graph 23. The peak of this cycle was

between 1991 to 1992. Though income and houseprices grew rapidly during identical time periods until1990, house prices were eventually surpassed by

the income. Interest rates were also lowered duringthe same time as that of rising incomes. This led to

increasing land prices and this meant that theborrower could bid a higher price for a property.

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99

9

2

00

0

Index 1985=100

Source Housing prices and monetary policy in Japan

Graph 21: House price (1985 - 1999)

Graph 22: House price to rent index (1985 - 1999)

Graph 23: House price to income ratio (1985 - 1999)

11

Japan Real Estate Cycle


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Interest rates

The financial institutions increased their lending

activity into the property sector from the late 1980suntil the end of 1990. The bust in the economy

resulted in large number of non performing loans. In

order to remedy this situation the financialinstitutions were forced to lower the interest rates.The adjoining figure indicates the drop in interest

rates on home loans from a high of 5.5 percent in1990 to the lowest ever drop of 2 percent in 1998.

Source Japan stat

0

1

2

3

4

5

6

7

8

9

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

Year

Rate

(in%)

City Banks Housing Corporations

GDP v/s disposable income

Economic growth was triggered due to introduction

of monetary policies by the government and due toan overvalued Yen. Real GDP witnessed a growthof 8.6 percent from the mid 1990s to the end of

2000. GDP growth has been negative since 1998(graph 25).

Steep rise in the value of the Yen during the late1980s contributed to deteriorating employment

situation. The unemployment rate rose from 2.1percent in 1991 to 4.7 percent at the end of 2000

causing a negative growth in the householddisposable incomes from 1990 to 1998.

Source Housing prices and monetary policy in Japan

Graph 24: Interest rate (1985-1999)

Graph 25: GDP v/s disposable income (1985 - 1999)

12

-2

0

2

4

6

8

-2

0

2

4

6

8

GDP growth rate Household disposable income (%)

The rise in house price, as shown in graph 21, in Japan has been more steep than that experiencedin the respective period of booms in USA.

Though owner occupied residences remained stable at 60 percent, the rental trends are observed to

have decreased by 22 percent. This was possibly due to lack of Government incentives for rental

accommodation.

The price to income ratio , in graph 23, reveals that eventually the house prices were surpassed by

the income.

This was coincidental with the lowering of interest rates by the Government as a deliberate move, to

help the servicing of non performing loans.

One of the remarkable feature of the price trends in the Japanese real estate was the rising interest

rates during bubble phase. The possible reason could be the easy and massive loans made

available for heavy investments.

Declining employment rates and disposable income (graph 25) did not affect the household

mortgage payment rates. This was primarily due to loosening of monetary policies by the

Government and lowering of interest rates.

Interest rates, as illustrated in graph 24, were slashed to 2 percent in 1998 from 5.5 percent in 1990

due to the high accumulation of non performing loans.

2.3.3 Japan : Inferences

Japan Real Estate Cycle


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United Kingdom Real estate cycle

UK has witnessed one real estate cycle from 1989 -1991.The late 1980s boom took place due to the

appreciation of interest rates again in double-digits. House prices in the UK have appreciated by 169

percent since 1997, whereby appreciation and depriciation of house price booms was due to large

quantities of mortgage debt in the system.

Since 1970, the average house price for a first-time buyer has risen by approximately 3,100 percent but

the average income of this group of borrowers has increased by only approximately 1,900 percent. For

first-time buyers, house prices have appreciated the most in London where the increase was 3,432

percent followed by the South West with an increase of 3,427 percent. At the other end of the scale,

Scotland has recorded house price growth of just 1,900 percent. In 1970, the average house price for a

first time buyer in Scotland was 4,200, or 70 percent of the average price in London of 6,100. By 2005,

the average price in Scotland had risen to 85,500, but this represents only 40 percent of the average

2005 London price of 216,000. (Source Research by Halifax Agents)

0

500

1,000

1,500

2,000

2,500

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

HousePrice(persqmeter)

High interest rate

Increasing no of nonperforming loan

The trend from 1980-2005 reveals that the UK witnessed an extraordinary appreciation in the demand for

housing followed by a subsequent increase in the house prices. Smaller cities, have an average population

of less than 250,000 recorded the largest appreciation in average price per square meter. House prices

have appreciated by triple fold in 15 cities and at least doubled in all 62 cities since 1996. The majority of

the cities recording the biggest increases are in Southern England, but Salford and Newcastle also feature

in the top 10. Brighton (260 percent), Salford (255 percent), London (252 percent) and Bath (236 percent)

follow Truro in the top five. (Source Research by Halifax Agents)

Scottish cities dominate the list of cities experiencing the smallest increases in house prices on a persquare meter basis during the past decade. Three of the bottom five cities are north of the border:

Aberdeen (104 percent), Stirling (122 percent) and Glasgow (126 percent). Southampton (132 percent) and

Preston (133 percent) are the other cities in the bottom five. (Source Research by Halifax Agents)

Graph 26 UK real estate cycle (1986 to 1991)

Source www.statistics.gov.uk

2.4.1 UK real estate cycle (1986-1991):

13


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-5.0

0.0

5.0

10.0

15.0

20.0

Disposable income GDP

House Price:

2.4.2 Indicators for Real Estate boom and bust cycle UK

The average or effective mortgage rate that

UK households pay has steadily declined over

the past 20 years. It now stands at 4.65

percent, compared to the 10 percent during the

late 1980s and a high of 16.6 percent in the

early 1980s. As the graph 28 shows, the

effective interest rates have steadily

depreciated over a period of time from 1980 to

2005. at a CAGR of 4.69 percent.

The trend reveals that interest rates during thecycle-I (1986- 1991) as shown in graph 28have appreciated and depreciated for the UK

i.e. in 1987 the rate was lowest 9.62 percentand then appreciating during the bust phase to

14 percent in 1990.

0

2

4

6

8

10

12

14

16

18

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Rate(%)

Disposable Income vs Gross DomesticProduct (GDP) :

The disposable personal income from 1980 to

2005 has appreciated at a CAGR of 6.7percent. If we observe cycle - I (1986- 1991),

the disposable personal income hasdecreased for the UK i.e. in 1986 the

disposable income appreciated to 7.5 percentand subsequently depreciated to 5.1 percent

during the bust phase in 1991. On the contrarythe GDP during cycle-I (1986-1991) was 4percent during boom phase, depreciating to -

.1.4 during bust phase in 1991 as depicted ingraph 29.

Interest Rates :

UK average house prices have witnessed a

phenomenal appreciation of 768 percent from1980 to 2006. House price of homes haveappreciated at a CAGR of 8.34 percent from

1980 to 2006.

The trend in cycle I (1989-1996) as shown ingraph 27, reveals that during boom phase

(1989-1991) the prices have appreciated 42percent from 349 /sq.mt to 602 /sq.mt. and

depreciating to almost 3 percent during thebust phase.

Graph 27: House Price (1986-1991)

Graph 28: Interest Rate (1986-1991)

Graph 29: Disposable Income to GDP (1986-1991):




14

0

500

1,000

1,500

2,000

2,500

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

HousePrice(persqmeter)

-5

0

5

10

15

20

GrowthRate(%)

Growth Rate (%) House Pr ice

United Kingdom Real estate cycle


22/27



The analysis reveals that during the boom and bust phase of real estate cycle the house prices have

subsequently appreciated by 42 percent and depreciated to 3 percent during the bust phase.

Interest rates now stands at 4.65 percent, compared to the 10 percent during the late 1980s and a

high of 16.6 percent in the early 1980s.

Disposable personal income has decreased for the UK i.e. in 1986 the disposable income appreciated

to 7.5 percent and subsequently depreciated to 5.1 percent during the bust phase in 1991.

2.4.2 United Kingdom : Inferences

15


23/27



3. Indian real estate cycle

The Indian real estate market, during the early 1990s, was highly unorganized and fragmented with

issues which ranged from lack of institutional funding support to developers, absence of world classdevelopers to limited consumer demand due to unavailability of easy financing options and lack of

transparency in the market.

In this section we shall discuss the Indian real estate cycle, and the trend in the different indicators, then

we shall compare the trend in the price movements in Indian real estate market and that of USA, Japan,and UK and would try to look for similarity if any.

We shall then attempt to analyse the demand and supply scenario of Indian real estate market, andanalyse the future trend. The role of the government would also be analysed in this respect.

The Indian real estate cycle lasted from 1990 until 1999 whereby the boom period lasted for a period ofsix years from 1990 to 1996 followed by the bust from 1996 until 1999. The prices began to level off

from 1999 onwards. The residential property prices in some markets have recorded a growth ofapproximately 15 to 20 per cent in the last two years and have witnessed substantial activity in the year

2004 -05.

The last decade witnessed a frenzied boom in the residential property prices. This boom was artificiallycreated where it was backed primarily by the boom in the stock market that was kicked off in 1991. Theprices appreciated sharply during 1994 to 1995 whereby it witnessed a phenomenal growth of almost 420percent from 1990 to 1996. The stock market and real estate markets crashed in quick succession just alittle after 1995. This was followed by a prolonged period of about 8 years of little or no appreciation inreal estate.

A reversal in trend has been witnessed over the past 2 to 3 years with real estate prices inching upbacked by strong demand. This demand in turn is primarily being driven by strong demographic trends

and the emergence of a favorable environment for real estate investment.

Graph 30: Indian real estate cycle (1990-1999)

3.1 Indian real estate cycle

16


24/27



GDP v/s disposable income

Economic growth in India was triggered by theeconomic liberalization of 1991. One of theconsequences of this was the approval of FDI intomany sectors. The economy had grown at aconstant excepting a few major setbacks.

As shown in graph 32, the rise in disposableincomes was steady until 1998. Employmentopportunities brought in by the IT/ITeS sectorsresulted in a sharp rise in disposable incomesduring the period from 1998 to 2001. Thedisposable incomes have been growing at a steadypace since then.

House prices

Average house prices in Mumbai hit its peak during

1994 to 1995 as indicated in graph 31. The prices

increased at a CAGR of 3 percent from 1990 to1996. This boom lasted only for 4 years from 1992

till 1996 before bottoming out in 1999. The bustperiod lasted for 3 years from 1996 until 1999 where

the prices dropped by 60 percent. This boom andbust was created due to the stock market rise and

crash respectively.

Source UN stat and Mckinsey research

10

20

30

40

50

60

70

80

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Price to income

0.01.02.03.04.0

5.06.07.0

8.09.0

1

9

9

0

1

9

9

1

1

9

9

2

1

9

9

3

1

9

9

4

1

9

9

5

1

9

9

6

1

9

9

7

1

9

9

8

1

9

9

9

2

0

0

0

2

0

0

1

2

0

0

2

2

0

0

3

2

0

0

4

2

0

0

5

2

0

0

6

2

0

0

7

Growthra

te(in%)

012345

6789

10

Growthra

te(in%)

Disposable income growth rate (left axis) GDP growth rate (right axis)

House price to disposable income

The house price to income follows the same curve

as that of the real estate cycle (graph 33). A largeamount of investment in real estate was witnesses

during the peak period. This trend was mainlybacked by speculation. After a sluggish period from

1998 to 2004, this trend has picked up primarily dueto sharp rise in property prices backed by risingincome levels and an investment friendly. This

allows the borrower to bid a higher price for aproperty.

3.2 Indicators of the real estate cycle

5

7

9

1113

15

17

19

1

990

1

991

1

992

1

993

1

994

1

995

1

996

1

997

1

998

1

999

2

000

2

001

2

002

2

003

2

004

2

005

2

006

2

007

In%

Interest rates

Interest rates

Financing option for real estate, during the 1980sand early 1990s, was fairly unorganized and

bureaucratic in nature. Financial institutions

increased their lending rates and it reached an alltime high at 17 percent (graph 34) during 1995 to

1996 which hampered the inflow of capital into theproperty sector. As a remedy to this situation

significant transformations have taken place on thefinancing side whereby interest rates have been

reduced drastically along with lenient lendingpolicies. Lending rates recorded an all time high of17 percent in 1995 to 1996 and reached an all time

low of 7.5 percent during 2005.

Graph 33: House price to disposable income(1990-1999)

Graph 31: House price (1990-1999)

Graph 32: GDP vs disposable income (1990-1999)

Graph 34: Interest rate(1990-1999)

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

Average house price growth rate (left axis)

Average house price (INR/sft) (right axis)

17

Source UN stat, industry sources

Source Industry sources

Source UN stat, industry sources


25/27



18

India: Demand - Supply scenario & Policy Perspective

The Indian real estate market is growing at an annualgrowth rate of 30% (Source NorthBridge Capital Research,June 2007). Factors such as the high GDP growth, strong

demographics, positive urbanization trend andincreasing disposable income are causing a demand

pull in the real estate market. On the other end, factorssuch as favorable policy/ regulatory changes, positive

investment climate and unlocking of land parcels arethe supply factors changing the dynamics of real estatemarket in India.

According to the National Building Organisation (NBO), the total demand for housing is estimated at 2million units per year and the total housing shortfall is estimated to be 19.4 million units, of which 12.76million units is from rural areas and 6.64 million units from urban areas. According to 2001 national

statistics as depicted in graph 35, there was a total of about 187,162,172 residential dwelling unitsnationwide and the gap between supply and demand in residential market is 41 billion sq.ft.

The persistent gap between demand for and supply of housing units as pointed out by the NBO study can

be explained by the fact that major contribution to the shortfall of housing units comes from rural area. Withmore emphasis on the supply creation in urban centers, the gap is only going to widen, and thus putting

further pressure on the prices.

0

5

10

15

20

25

1961

1971

1981

1991

2001

Shortfall(mn)

To tal Rural Urban

Growth Drivers

Deutsche Bank Research

Future demand

As per Detusch Bank research approximately 4.7

million housing units would have to be completed up to2030. This estimated figure is based on additional

demand of roughly 2.7 million housing units and annualreplacement demand of roughly 2 million dwellings as

indicated in graph 36. The housing markets haveappreciated considerably from 2003 - 2004.

Strong demand stimuli have caused shortages in housing in cities, pushing up residential property prices.The Government on its part is also giving policy incentives (discussed in the next section), towards themovement of capital in the real estate sector.

Enabling Policy and Regulatory Environment

Government incentives such as favorable reforms ensuring easy project financing, increased fiscalincentives and simplification of government procedures assisted the real estate developers to expand theirhorizons and improved their risk appetite for large scale projects.

Incentives on project financing

Policy to permit FDI up to 100% in housing, townships, built-up infrastructure and construction

development projects. This paved the way for a significant capital infusion to the capital intensive sectorthrough Foreign Institutional Investors (FIIs), Venture Capital (VCs) funds etc.

The Government has also lowered the floor on minimum land area for FDI investment to 25 acres froman earlier 100 acres. This move has triggered a spurt in construction activity especially in urban areas as

developers are now able to source foreign funds for developments on smaller parcels of land in congestedmetros.

The Government allowed FIIs to take part in Initial Public Offerings (IPO) and pre-IPO placement of realestate companies.

The Government is also evaluating proposal to introduce Real Estate Investments Trusts (REITs). REITs

will give international investors a familiar means of investing in real estate, which would provide an impetusto the existing real estate market.

Graph 35: Housing shortfall in India

Graph 36: Demand for new housing (2005 2030)


26/27



19

Fiscal Incentives for supply creation

Tax holiday of 100% for profits derived by an undertaking engaged in developing and building housingprojects in the country.

The new SEZ Act, 2006 has also provided for 100 per cent tax holiday for profits derived by anundertaking engaged in development of a SEZ, exemption from levy of MAT etc.

Focus on Urban Infrastructure Development

The increased focus of Indian government on urban infrastructure development has led to emergence

of newer locations and has significantly induced the real estate activity.

Public authorities like housing boards and development authorities are now taking special initiatives for

provision of housing, which creates strong competition to the private developers and also provide awide range of options to the urban consumers.

3.4 Real Estate Cycles: India v/s the global market

Table 4 - India v/s global market

Notavailable

Boomphase

UK

Notavailable

Bustphase

Notavailable

Bustphase

Notavailable

Boomphase

India

Boomphase

Japan

Bustphase

Bustphase

Boom

phase

United States

Supply and DemandScenario

Disposable Income and

Gross Domestic Product

Interest Rate / MortgageRate

Price to Income ratio

Net Rental Yield

House Price

Indicators

The R square estimate and t statistic between interest rate and price trend, in the case of both the

country, is almost the same for the period between 1994 and 2006.

In case of the impact of disposable income on the trend in the price of housing units, though there seemsto be a valid one to one relationship between the two in the case of both India and USA, but disposableincome seems to be having more strong effect on the prices in the case of USA, than in India. Which also

holds true, as the trend in the case of India happened more because of the stock market bubble.

It is evident that the Indian real estate cycle was an unnatural occurrence whereby property prices were

artificially corrected due to a boom in the stock market. After a brief period of stabilization in these prices,a significant boom can be seen over the past few years. There is no significant rise in the prices of

residential property over the past six months and these prices are expected to stabilize in the next fewyears.

The above table signifies that the indicators have similar impacts on the property prices during the realestate cycles across global property markets. One remarkable result which comes out of the econometric

exercise is the similarity in the magnitude of impact of interest rate movements on the real estate pricetrends, observed between India and USA.


27/27

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Housing Economics.

Tokyo Real Estate Market Report , Tokyo Tatemono

Higashino, Japanese real estate market reaches a turning point, Japanese Economy Division.

Hines (2001), Japanese Real Estate Investment, Quorum Books. Dehesh, Pugh (1996), Real estate cycles, internationalized transmission, mechanism and the Japanese

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Nitta, Invigorating Japans Service Sector, Japanese Economy Division

Ozeki (2007), Overview of Japans residential mortgage market, PIMCO

Porter, Vehse, Real estate investment thrusts in Japan, PricewaterhouseCoopers, Tokyo

Horioka (2006), Past, present and future trends in Japans household savings rates, Institute of Social

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Kozu, Sato, Inada (2003), Demographic changes in Japan and their macroeconomic effects, Bank of

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Wong (2005), The anatomy of a housing boom, The Wharton School, University of Pennsylvania

Nemoto (2005), Battle of Japans mortgage market raises default risks, Standard & Poors

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Kawai (2003), Japans banking system: From boom and crisis to reconstruction, Institute of Social

Science, University of Tokyo

By Stefan Karlsson America's Unsustainable Boom ,

Haibin Zhu The case of the missing commercial real estate Cycle,

Dot-com boom, From Wikipedia

Economic & Real Estate Trends, Summer 2007 PMI mortgage insurance co.

Timothy Schiller, Residential Investment over the Real Estate Cycle, Number 2006-15, June 30, 2006.

FRBSF Economic Letter

HSBC Global Research , A Froth-finding mission detecting US housing booms

Tom Angotti, The Real Estate Market in the United States: Progressive Strategies

Stephen Malpezzi and Susan M. Wachter, The Centre for Urban Land Economics Reasearch,The Role

of Speculation in Real Estate Cycles

E. Gerald Corrigan, The Boom-Bust capital spending cycle in the United States: Lessons Learned

The State of Real Estate January 2006, Review and Outlook , A reprint form Tierra Grande

Dean Baker, CEPR, Trouble at home: The housing boom

Maricel Ferrer-Custodio, Understanding the Real Estate boom as part of the Real Estate Cycle,

February 11th, 2007

Karen Dynan, Kathleen Johnson, and Karen Pence, the Boards Division of Research and Statistics,

Recent Changes to a Measure of U.S. Household Debt Service, of 2007

Dean Baker Housing boom update: 10 Economic Indicators to watch

References

realestate research paper china

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