Myth #7 : Fall in home price will definitely be beneficial to the nation

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(Category: General Business Reading)
( also published in CNBCTV18.com ) 


 If you thought falling home prices are good for the nation, this blog may clear some of your myths.

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The general belief is that with homes getting more affordable, a larger share of the population will be able to buy homes, resulting in a better quality of life for the citizens. While this argument is correct but not without a fallacy. The fallacy lies in the fact that this logic only looks at interest of future home buyers. It neglects the interest of citizens who already own real estate. 

Besides impacting existing owners of real estate, falling home prices will also hurt interests of banks and Housing Finance Companies (HFCs) as the value of underlying assets they hold shall come down, affecting their asset coverage ratios. Falling asset prices also create a disincentive for home buyers to repay their loans. Defaulting then becomes an easier option for many borrowers. A large number of defaults reduce the chances of recovery for banks/HFCs. Along with Bank/HFCs, Government is another important loser - as falling home prices reduce government revenues (GST, stamp duty etc.)

Another impacted segment would be the redevelopment of old properties. Lower property rates would mean lower profits for developers undertaking redevelopment of old buildings. Developers would accordingly offer lower areas to tenants in rehabilitation projects. This will result in resistance from tenants resulting in fewer redevelopment projects taking off, thus forcing tenants to continue staying in old dilapidated buildings.

So, while lower home prices is a good emotional wish and an excellent political argument but the same comes with its own baggage of problems. Declining property prices is, therefore, an extremely complex situation, the impact of which is difficult to fathom.

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