Could a decline in the Indian stock market also deliver a blow to India’s housing sector, and thus to the broader economy?

Let’s understand why this might be a real possibility.

One of the components of GDP is something called the Gross Fixed Capital Formation (GFCF), which measures the net increase in new or existing fixed assets held by the business sector, governments, and households. Although it’s not a measure of total investment (since it takes no account of financial assets, for instance), it is still sometimes referred to as “investment”.

In FY25, India’s GFCF will be close to Rs. 98-100 trillion. Of this, nearly 40% will come from households, with the construction of dwellings (or homes) accounting for more than 70% of that, as indicated in the image below.

This means that when times are good, home construction by households can account for nearly a third of all investments in India. Currently, this is equivalent to more than 10% of our GDP — a sizable number, given that the ancillary effects of home construction can be enormous.

In 2011, at the peak of the previous cycle as well, one-third of Indian investments were a result of home construction and improvement.

So there appears to be some kind of correlation between the housing sector and the Indian economy: the former could be a significant source of strength for the latter.

Post-pandemic, the trend in this sector, as measured by home sales and declining inventory, have been encouraging. However, it’s not entirely clear what’s driving this trend.

But here’s a not-so-wild idea: might the stock market be a key driver of housing sales in this cycle?

Let’s see why this idea is plausible. Since the start of the post-pandemic era, India has seen a steady improvement in housing sales. However, at the same time, the housing loans component has failed to rise, as can be seen below.

Indeed, anecdotally, a large proportion of housing transactions are being done without the use of credit. But there is no commensurate rise in incomes to account for this increase in housing sales!

This odd state of affairs opens up the possibility that people might be funneling profits from the stock market into real estate, particularly housing.

Even the Governor of the RBI hinted at something to this effect a few months ago:

“There is no hard data establishing that funds from unsecured loans are significantly entering the stock market, but anecdotal indications suggest this could be happening... We are very watchful of that segment. Estimating the exact amount is very difficult.” — RBI Governor, Nov 2024.

Thus, a large decline in the stock market could put a lot of stress on the housing sector, which is probably a significant driver of India’s growth. This is a rather delicate nexus of cause and effect that merits close monitoring.

For more actionable insights backed by data and analyses, we invite you to read the latest edition of Netra in its entirety.