Newsletter

Are You Really Wealthy?

BY whirlwind
4 Mins Read
February 23, 2025

The last few weeks have been rough for the stock market— and this could perhaps be an understatement.

Let me give you a quick context:

In the 2025 Budget, Finance Minister Nirmala Sitharaman announced a personal tax cut aimed at boosting consumption by increasing disposable income for the middle class.

This was a positive development for the markets, especially since there were no adverse measures like a hike in Long-Term Capital Gains (LTCG) tax rates.

However, this was one of the few bright spots amid a series of negative factors weighing on the markets.

Concerns such as Trump’s proposed tariffs, a depreciating rupee, weak corporate earnings, high valuations, and pessimistic commentary from prominent fund managers have contributed to a bearish sentiment.

Additionally, Foreign Institutional Investors (FIIs) have maintained their selling pressure, offloading approximately ₹2.5 lakh crore in the secondary market in the last five months.

Source: StockEdge

As a result, the Nifty 50 has corrected by ~13% from its 52-week high, while the Nifty Midcap 100 and Nifty Smallcap 150 have declined by ~17% and ~21%, respectively (as on 21st Feb’25).

If this downtrend continues, the Wealth Effect that is currently prevalent, could take a sharp U-turn.

But what exactly is the Wealth Effect? Let me break it down.

When Prosperity Feels Like a Given

Imagine a middle-class couple in Mumbai, both in their mid-40s with stable corporate jobs. Before 2020, their investments grew modestly, their apartment appreciated gradually, and life was financially stable but unremarkable.

Post-pandemic, their stock portfolio doubles, their 2BHK apartment appreciates by 20-25%, and gold prices skyrocket. Suddenly, they feel richer, more confident, and ready to upgrade their lifestyle.

They buy a luxury SUV, book an international vacation, and even purchase a bigger home (on EMI!).

This is the Wealth Effect in action—a psychological and economic phenomenon where rising asset values create an illusion of lasting prosperity. It drives higher spending, in turn, fueling economic growth.

The post-COVID asset boom was a textbook example of the Wealth Effect. Many individuals saw their net worth rise—not due to higher earnings but through asset appreciation. This surge in wealth fueled increased consumption, record-high home sales, and soaring startup valuations.

Real Estate: A Big Beneficiary

Real Estate usually is the biggest beneficiary of this phenomenon. Reports show that luxury home sales in cities like Mumbai, Delhi, and Bengaluru surged post-2021. Developers launched new projects, and homebuyers stretched their budgets, confident that their increasing wealth would support bigger loans.

As a result, property prices appreciated by 30% between FY2019 and FY2023, far outpacing the 13% rise in the previous four years.

The Party Eventually Ends

The Wealth Effect is not unique to India or even the post-covid phase. We’ve seen similar trends play out before — and they haven’t always end well.

The U.S. Housing Boom & 2008 Crash

In the early 2000s, soaring home prices made Americans feel wealthier. They borrowed aggressively, spent freely, and drove economic growth. But when the housing market crashed in 2008, it all came crumbling down. Asset values collapsed, people cut spending, and a recession followed.

China’s Property Crisis

For two decades, China’s real estate market was on fire. Homes were seen as the safest investment, and buyers rushed in. But as developers defaulted and property prices plunged, the negative Wealth Effect kicked in. Households cut spending, leading to broader economic instability.

Japan’s Asset Bubble of the 1990s

During the late 1980s, Japan experienced a massive stock and real estate boom. The Nikkei 225 soared, and Tokyo property prices became the highest in the world. But when the bubble burst in the early 1990s, it led to Japan’s infamous “Lost Decades,” with stagnant growth for years.

Is India Headed for a Similar Fate?

With stock markets softening and global uncertainties rising, a crucial question arises: Is India’s Wealth Effect reversing?

If asset prices decline, will households cut back on spending? Will real estate demand slow? Could this impact the broader economic momentum?

India, however, has a structural advantage—its demographics. With a young population and a long path ahead before reaching middle-income status, the long-term growth story remains intact.

Additionally India’s ambition to become a manufacturing powerhouse, aided by companies diversifying their production from China, is a strong tailwind for India’s economic growth.

While the near-term outlook may be challenging, the aspirational middle class are likely to continue spending, investing, and gradually improving their standard of living.

This will help keep the economy moving forward, even if at a slower pace, until the next phase of the Wealth Effect kicks in.