Low Intensity Diwali amid Economic and Liquidity Crunch

Lunar month of Kartika with a bright new moon marks Diwali – the festival of lights to worship Maha Lakshmi for balanced wealth. As recent financial turmoil taught many of us with wide spread panic, fear of job losses and economic downturn, our Lakshmi may now be a little tightfisted about circulating money back to the riches, snatching from the capitalists is not far away (to avoid clotting), as we hear even in US election rhetoric, to say the least. In fact, I would be happy to see few more European Secret Banks like UBS, Icelandic Banks, etc. to bust, as many of them also hold and play with money of the so-called representatives of poor nations.

Our long tradition (especially in North India) decrees that it is auspicious to make purchases during Diwali season. But with religion meshing so effortlessly with commerce (after Politics), the season sees sellers, advertisers and marketers urging the devout to spend money with a religious fervor with hawking everything from dry fruits and durables to gold and new homes. The period of Diwali is usually a bonanza for the real estate industry with some 70% business conducted during this time.

Not this year anymore! As the mood is decidedly downbeat. Ugly demon of impending economic crisis is refusing to die, and with liquidity crunch the real estate sector is facing the worst attack. One potential buyer on this portal has this to say “I was looking for flat and was able to zero down on one but the plan of the house as per the brochure was slightly different from the approved plan from the municipal authority and internal dimensions were the same but the names given were different. For example, they had mentioned Pooja Room in approved plan whereas Kitchen is there as per the brochure. Studied balcony as per approved plan was combined and given as a bedroom. Can this be done or does the builder need to get a revised approved plan with the correct naming conventions for the rooms as per their brochure.” - a very skeptical one to avoid a outright buy with trust in market forces.

Considering that real estate in India has grown 25-30% during the last 5 years and reflecting on the rapidly increasing demand for office, commercial and industrial properties. The economic meltdown is already slowing due to high inflation and a acute liquidity crunch. Earlier GDP growth estimates of 9% at the beginning of 2008 have been revised to below 7%, and the effect is directly visible in the real estate sector – expect more jobs cuts and spending freezing. Central banks are cutting interest rates to cure some issues, not all of them.

Property sales in Mumbai and Chennai are down by around 35%. Builders are advertising for cash discounts on down payments, but as investments have lost value at stock markets, most middle-class Indians do not have the money to buy a property or maybe they do not want to gamble anymore. We are heading for a cyclical slowdown even before the current economic slump with even prices of construction material rising. Housing loan rates also went from about 7% to 12% plus.

We are not fully pessimistic but as some experts and industry insiders say that once the financial storm blows over, demand can rise. Though the silver lining is, once this depressed phase ends, land and housing prices will be corrected to rational levels and speculators will be squeezed-out. The market forces of free capitalist society has failed to deliver, of course the super-class and lobbyists will disagree, maybe Mr. Obama can do something for securing international markets. Back home in India, the politics and politicians or the super-class have many other priorities (like violence, religion, regions, vote-bank, attention, promising speeches, media presence, etc..) - finance, real economy and job creation are down on their agenda list. Let's pray for the best. - Happy Diwali – may many good ideas storm inside of all of us with a bang.