Anne Richardson, Director of Member Services at TRACE, is in New Delhi this week and reports that a hot topic at meetings with business leaders there is the relative stability of the Indian real estate market vis-à-vis the chaotic American housing market. Ironically, the pervasiveness of “black money” in real estate in India appears to have insulated the country from the housing boom-and-bust that has crippled the U.S. financial sector. (“Black money” refers here to unaccounted-for or untaxed cash, including income generated in the black market, through organized crime or by other illegal activities, including corruption.) While India has experienced a real estate boom of sorts, it has suffered no corresponding mortgage or financial crisis.
The mortgage crisis in the U.S. was precipitated by subprime lending and loan securitization, which produced borrowers with little, or no, equity stake in their homes. In India, however, most borrowers do not walk away from their homes if the prices drop because, in many cases, about half of the home’s purchase price was paid with black money. Official, registered home values are typically 50% of a home’s purchase price; the other 50% having been paid under the table in cash. So, even if an Indian bank has financed the entire house value (the official value, that is), the owner still contributed a large amount in black cash. As a result, if house prices decline, the owner is less likely to stop paying the mortgage installments because otherwise the black investment is lost. This deterrence against default tends to be more prevalent in the residential market than the commercial one.
So, it seems, black money serves an insurance-like function for India’s banking system. Of course, this doesn’t change the other, more insidious, consequences of ubiquitous black money and markets – income inequality, price instability, tax evasion, organized crime and, of course, corruption.
