How the American real estate bubble impacts you and your investments

What if I were to say that the home prices in the United States impact the value of your investments in India. You will probably turn around and ask me to go take a walk.

But the fact of the matter is that there is actually a link between the two and we have reached a stage where the link perhaps matters more than it ever did. Nonetheless, before we get into understanding this, it’s important to know how we got here in the first place.

In late 2019 and early 2020, rich world central banks led by the Federal Reserve of the United States, the American central bank, started to print a lot of money, first to take care of the economic slowdown and then the economic contraction because of the spread of the covid pandemic.

The idea was to drive down interest rates. At lower interest rates people were expected to borrow and spend money. Interest rates on thirty year home loans in the United States fell to as low as 2.65% in early January 2021, the lowest they had been since 1971, the year from which this data is available.

Naturally, with interest rates at such low levels, more people started borrowing and buying homes than was the case in the past. While the demand for homes went up quickly, their supply couldn’t go up as quickly to meet this extra demand. Hence, home prices went up, at a very past pace.

In April 2022, home prices in the US, as per the S&P Case-Shiller 20-City Composite Home Price Index, went up by 21.2% in comparison to April 2021. Home prices have been rising at more than 17% year on year from May 2021 onwards. This kind of price rise wasn’t even seen during the real estate bubble of the 2000s.

One straight impact of this has been rising home rents. As per, the median rent in the United States in May 2022 was 23.2% higher than in May 2020 and 15.5% higher than in May 2021. This rise in home rents feeds into retail inflation. As The Economist puts it, in May 2022, the “rising housing costs already accounted for 40% of the monthly increase in the consumer-price index [which measures retail inflation].”

In May 2022, the retail inflation in the United States stood at 8.6%, the highest since December 1981, when it was at 8.9%. People are now building in this high inflation into their monetary calculations; in the home-rents they demand and in the salaries and wages they ask for.

In May 2022, the median one-year ahead expected inflation rate in the United States was 6.6%, the highest that it has been in a while. As any economist would put it, once inflation expectations set in the minds of people it becomes very difficult for central banks to control inflation.

So, in this scenario, it has become very important for the Federal Reserve to control the fast pace at which housing prices have been going up, given that it can’t do much about the high energy prices, due to the war in Ukraine.

The Federal Reserve has decided to gradually withdraw some of the money that it had printed and pumped into the financial system. Between June 2021 and May 2022, it expects to suck out close to a trillion dollars, bringing an era of easy money to an end.

This is already pushing up home loan and other long-term interest rates in the United States. As of June 30, the median interest rate on a 30-year fixed interest rate home loan had risen to 5.7%, from a low of 2.65% in early January 2021.

As the Fed keeps sucking out money, the interest rate on home loans will keep going up and this will hopefully drive down the demand for fresh homes and the rate of price rise of homes. As home price inflation cools down, rental inflation will also cool down and in turn bring down retail inflation. That’s the theory.

Other than taking out the money it had printed, the Federal Reserve also plans to raise its key short interest rate, the federal funds rate. This is expected to drive up short term interest rates in the United States.

The end of the era of easy money and rising interest rates in the United States will have an impact on investments in India. In fact, this is already happening. The foreign institutional investors (FIIs) have already sold Indian stocks worth Rs 2.56 trillion between October 2021 and July 1, 2022. This has led to the value of investments in stocks, equity mutual funds and unit linked insurance plans, falling.

Further, as FIIs sell out of India, they convert their rupees into dollars, leading to a surge in the demand for the dollar and drop in the value of the rupee. One dollar is currently worth around Rs 79. It was worth around Rs 74.5 at the beginning of 2022. This makes life expensive for those looking to study abroad or to go for a foreign holiday.

As the Federal Reserve raises interest rates, the Reserve Bank of India will have to do the same. This will push up interest rates on loans as well as deposits in India. Hence, people with loans are likely to end up paying higher EMIs, whereas people with deposits are likely to earn a higher interest than was the case in the past. Again, this is already happening.

Of course, a big impact of the rise in interest rates in the United States has been on crypto prices, which have crashed by close to 80% from their all-time high-levels, leaving many zoomers poorer.

All in all, as the old cliché goes, when America sneezes, the whole world catches cold.

This piece originally appeared in the Deccan Herald on July 3, 2022, with a different headline.

Eight Economic Indicators which Tell Us that the Indian Economy is Not Doing Well

There is a very interesting story about current Chinese premier of the State Council Le Keqiang. In 2007, when Keqiang was the head of the Communist Party of the Liaoning province, he was once unusually candid with the American Ambassador to China, about the local economic data.

The American Ambassador sent a confidential memo after the meeting. This was later leaked and published by WikiLeaks. As the newsagency Reuters reported in 2010: “The U.S. cable reported that Li…focused on just three data points to evaluate Liaoning’s economy: electricity consumption, rail cargo volume and bank lending.”

“By looking at these three figures, Li said he can measure with relative accuracy the speed of economic growth. All other figures, especially GDP statistics, are ‘for reference only,’ he said smiling,” the cable added. The data points that Keqiang looked at was promptly dubbed the Li Keqiang Index, writes Satyajit Das in The Age of Stagnation.

Over the years, doubts have always been raised regarding the veracity of the Chinese gross domestic product(GDP) numbers. GDP is a method of measuring the size of an economy. But the lack of credibility of Chinese data is not the issue I am trying to raise here. The bigger point is that the GDP is ultimately a theoretical construct and given that there are other ‘real’ data points that we need to take a look at to figure out the ‘realistic’ state of any economy.

In the Indian context the tendency in the recent past has been to look at economic growth (GDP growth), which has been higher than 7%, and say that we are the fastest growing large economy in the world. Another version of this tendency is to say that we are now growing faster than China.

The trouble is if we were to look at ‘real’ data points (or the Indian version of the Li Keqiang index), the economy looks clearly to be in a weak territory. Let’s look at some of the data points.

a) New Car Sales: New car sales are a very good indicator of consumer demand in urban India. In December 2015, new car sales grew by 11% to 2,32,000 units. The leading pink paper splashed this news on the front page, where it said: “Besides being a large direct employer, the automobile sector has crucial interlinkages with a raft of sectors and its performance is a crucial barometer of economic confidence.”

New car sales are a reliable economic indicator which tells us whether the economy is starting to pick up. People buy a car only when they feel certain about their job prospects and hence, feel financially secure. Further, once car sales pick up, sale of steel, tyres, auto-components, glass etc., also starts to pick up as well. New car sales have a multiplier effect and hence, are a good indicator of economic growth. At least that’s how one would look at things theoretically.

While new car sales are an important economic parameter to look at, they are clearly not the only parameter, especially in a country like India where owning a car continues to remain a luxury. There are other data points which the pink paper should have also splashed on its front page, but it did not. But no worries, you can read up about them, in what follows.

b) Two wheeler sales: Two-wheeler sales are a good indicator of consumer demand both in rural as well as urban India, given that they are more affordable than cars are. Two wheeler sales of five leading two wheeler companies (Hero MotoCorp, Honda Motorcycle and Scooters, Bajaj Auto, TVS Motor Company and Royal Enfield) fell by 3.41% in December 2015 to 12,46,356 units.

This tells us very clearly that the consumer demand for a larger section of the population continues to remain subdued. This is a clear reflection of weak rural demand. And it is worth remembering here that half of India’s population stays in rural areas.

c) Liquor demand: Consumption of alcohol is another good data point to look at. This is primarily because people are addicted to it and don’t give up on its consumption so easily. The trouble is that this data is not so easy to get.

A recent newsreport in the Mint newspaper points out that: “For the first time since the start of the millennium, the volume of liquor sales in India declined in 2015…Liquor sales volumes, which grew in the low single digits in the two previous financial years, are down 1-2% for the eight months to December, according to data gathered from executives at liquor companies.”

As Vijay L Bhambwani, CEO of, told me regarding these numbers: “Going through the numbers, two things emerge – resistance to spending by consumers and down-trading by consumers (sales of higher price brands falling & lower priced brands rising). Remember the economic survey by the government in mid-2008? The sales of toothpaste had fallen & tooth powder had risen. Consumers down-traded high priced brands. A big fall in consumption followed soon. Demand for alcohol tends to be inelastic due to addictive nature of intoxicants. These aren’t great signs.”

d) Bank loan growth: This is one of the point that the Chinese premier Le Keqiang liked to look at. The loan growth of scheduled commercial banks has been in single digit territory for a while now. Between November 2014 and November 2015, bank loans grew by 8.6%.

They had grown by 10.5% between November 2013 and November 2014. In fact, given the fact that bad loans of public sector banks have been piling up, lending to industry has grown by just 5% over the last one year. It had grown by 7.3% between November 2013 and November 2014. This slowdown is a clear indication of weak industrial activity in the country.

e) Steel output: This is another data point which tells us how things are looking in the manufacturing sector given that a lot of steel is required to manufacture things. Data released by the Joint Plant Committee shows that steel production in November 2015 fell by 8.5% to 7.1 million tonnes.

f) Declining investment announcements: Data from Centre for Monitoring Indian Economy (CMIE) points out that “investment proposals to set up new capacities declined substantially in the quarter ended December 2015. 381 new projects with investments worth R.1,05,000 lakh crore were announced.” This was 74% lower than in three-month period ended December 2014. Such a huge fall is also because of a large number of projects had been announced in December 2014. “The largest being Indigo’s 250 aircraft purchase from Airbus worth Rs.1.5 billion. Investment in this single project was more than one third of the total aggregated cost of all new projects announced in the quarter,” CMIE points out.

g) Decline in project commissioning: This is a very important lead economic indicator and tells us whether economic revival is on the anvil. The latest data doesn’t indicate anything like that. As CMIE points out: “Project commissioning in December 2015 quarter dropped 44 per cent on Y-o-Y basis. 269 projects with investments worth Rs.496 billion were commissioned. According to CMIE’s CapEx database, quite a few large projects were scheduled to get completed in December 2015 quarter, but latest information on their status is yet to come in. Companies are expected to disclose information on commissioning of their fresh capacities along with their December quarter results. With information on project commissioning coming in with a lag, the aggregates are expected to go up. However, chances are less that the aggregates will reach the year ago levels.”

h) Electricity consumption: This is another economic indicator that the Chinese premier liked to look at. As CMIE points out: “According to tentative data released by the Central Electricity Authority (CEA), India’s power generation grew by 2.7 per cent from 86.9 billion units in December 2014 to 89.3 billion units in December 2015.” Things have improved a little on this front, but it is very difficult to say whether that has been because of the revival in industrial demand.

i) Corporate earnings: The financial results of companies for the period October to December 2015, will soon start to be published, from next week onwards. Crisil Research expects revenue of companies (excluding banks and oil and gas companies) to grow by a measly 2%. This will be driven by “low-base effect (growth in the corresponding quarter of last fiscal was just 5%) amid crushed commodity prices, weak investment demand, flagging rural consumption.”

As Prasad Koparkar, Senior Director, CRISIL Research, put it: “Sectors more focused on urban consumers such as automobiles, media, retail, and telecom are projected to post healthy double-digit topline growth…But in general India Inc is grappling with poor demand sentiment. With lower input costs and intense competition, pricing has also been impacted. This is evident across a range of sectors airlines, FMCG, textiles, cement (except south India), and IT services. In addition, the heavy rains that disrupted normal life in Chennai will impact the December 2015 quarter numbers of consumer discretionary sectors as well as IT services, auto components, and engineering.

What these numbers clearly tell us is that the Indian economy is in a bad shape and there is no way we could possibly be growing at greater than 7%. We might be the only bright spark globally when it comes to economic growth, but we are clearly not growing as fast as is being made out to be.

The column originally appeared in Vivek Kaul’s Diary on January 8, 2016