Explained: Global real estate prices surging, but why are bankers iffy?

As the world slowly gets over the impact of multiple waves of the COVID-19 pandemic, businesses are starting to open up. Construction activities too have resumed. Property prices have begun to soar at a rate seen only before the 2007-08 global financial crisis (the biggest since the Great Depression), according to experts.

In America, the increase in housing prices in April 2021 was the highest in the last three decades, reported Bloomberg. Real estate consultancy firm Knight noted that prices are rising at their fastest pace since 2006, posting double-digit annual growth.

And the buyers this time around are actual property owners, not investors.

Several properties in the US, the UK and even China and Russia are being obtained after aggressive bidding.

The key factors include people’s desire for more space in their homes in the aftermath of COVID-19. The trend also reflects the work from home (WFH) factor, where realignments are taking place.

However, banking regulators are worried as larger home loans mean more borrowers posing a risk to lenders. And if the economies fail to grow adequately, rising interest rates and inflation could lead to more defaults, with lesser income available for consumption. Bankers are not keen on another real estate crash.

Regulators do not wish a repeat of the American real estate bubble deflating in 2007 after the valuations of mortgage-backed securities linked to real estate nosedived in 2007 (remember ‘sub-prime’) leading to the collapse of Lehman Brothers in 2008.

Banks are focussing on robust due diligence and prudent lending while luring customers, hoping that lower interest rates will prevail for a longer time.

New York's property market witnessed fluctuations as prices in Manhattan kept falling due to more sellers offering higher discounts. Greenwich, which is close to New York City, saw prices tripling from what they were 12 months back.

Buyers from California are willing to offer more for remote areas such as the scenic city of Boise in Idaho, near the Rocky Mountains. One seller obtained the right to stay in his already sold property for five months on a nominal rent.

In the UK, nearly 25 percent of houses sell within a week of the declaration of the intent, as per estate agents Hamptons International.

The boom has led to ‘gazumping’ where buyers and sellers delay formalising the agreements for months even after finalising the amount or deal.

While people in the rest of the world moved away from the cities, Chinese property buyers headed to the cities. Prices in urban hubs grew over 10 percent vis-à-vis May 2020. Sellers tried to bypass norms of how many properties one family can own.

In Shenzhen, an apartment now costs 43,500 percent more than a citizen’s mean salary, according to the real estate research firm E-House (China) Enterprise Holdings Ltd. The same is being witnessed in Hong Kong, which is the world’s least affordable city.

In one instance, one million yuan ($157,000) was transferred in advance to a seller by an interested buyer even before the process was initiated. Builders have started checking if buyers have been evading taxes.

It’s even stranger Down Under. An Australian agent said a house (4.4 miles outside Sydney) without a kitchen or a toilet sold for four times higher the expected rate after frenzied bidding. Analysts said the top end is seeing interest from buyers across the globe and such high prices have not been seen since 2004.

A real estate agent in Canada said multiple buyers (and even agents) flocked without prior intimation to her one-bedroom property in a satellite town, which is a 90-minute drive from Toronto. She lost her sleep but sold for double her expected price.

Unsold realty inventory levels fell during the last 12 months to around seven lakh (two-year low) as of Q4FY21 against 8.5 lakh as of Q1FY21, as per the Reserve Bank of India recent Financial Stability Report. However, new launches went up to over six lakh in Q4FY21, seeing strength and stability in premium and sub-premium segments.

Experts predict that realty prices in India will rise soon. But the situation on the ground is not exciting at present. Residential sales in eight key markets such as the National Capital Region (NCR), Mumbai Metropolitan Region (MMR), Bengaluru, Ahmedabad, Chennai, Hyderabad, Kolkata and Pune fell by 76 percent against those seen in Q4FY22, as per brokerage house PropTiger.

Commercial segment sales are down with warehousing related transactions in the top eight Indian cities declining 23 percent as of March 2021, said Care Ratings. It predicted muted demand in FY22.

Other experts said builders will try to finish existing inventory in 2021 before slowly raising prices in 2022 as the economy bounces back. However, younger buyers may find it difficult to own houses due to job losses and lower salaries.

Stock market analysts predicted an upswing in realty stocks after many years, with quality players such as Godrej Properties, Oberoi Realty, DLF, Prestige Estates and Macrotech (Lodha) seeing some gains.