This one number suggests that the real estate bubble may be fizzling out

Every time I write a piece on real estate I am asked: “when will the real estate bubble burst?” This proverbial question remains very difficult to answer because of several reasons.
First and foremost we have almost no data on real estate. For something as simple as what is the going price in an area, one has to trust the brokers operating in that area. One may make that leap of faith and trust the broker, but how does one figure whether there are any transactions happening at that price? The broker has no incentive to be honest.
Further, there is no clear way of figuring out whether prices are rising or falling even at the aggregate city level. The
National Housing Bank(NHB) through the Residex index tracks prices in 26 Indian cities. But the index works quarterly. Further, the NHB takes way too much time to put out the data. Currently, the data is available upto the period between July and September 2014. We are in May 2015. Basically whenever the next data set of October and December 2014 will come out, it will be many months late, making even his broad indicator practically useless.
Also, the index possibly doesn’t take the black money component into account. Black money forms a substantial part of the real estate transactions in India. Further, any evidence of prices falling that come in is at best anecdotal. Typically, the way this works is that the journalist covering real estate calls up a few brokers he is close to, and they tell him that prices in such and such area are falling.
Given this, lack of numbers on the real estate sector in India, it remains very difficult to say when the prices will start to fall or have prices started to fall, for sure. Nevertheless, there remains one data point that one can take a look at and make some broad inferences out of it.
The Reserve Bank of India(RBI) puts out the sectoral deployment of credit data at the end of every month. The latest data for the one year period ending March 20, 2015, shows that lending to the commercial real estate sector by banks grew by 8.9% to Rs 1,68,000 crore. The overall lending by banks on the other hand grew by a very similar 8.6%.
What this tells us is that lending to the real estate sector during the last one year grew almost as fast as the overall lending by banks. This hasn’t been the case for a while. For the period of one year ending March 21, 2014, lending to commercial real estate by banks had grown by 22.4% to Rs 1,54,400 crore. During the same period overall lending by banks had grown by a much smaller 14%.
So what does this tell us? Bank lending to real estate companies had been growing at a faster pace than overall lending. This despite the fact that real estate companies were sitting on a huge amount of unsold inventory (As I have written on a
number of previous occasions). Also, the number of new launches that the real estate companies were coming up with had also come down significantly over the years.
Then why was lending by banks to real estate companies going up? What explains this possible disconnect? There is no straight forward answer to this question. To make a definitive statement on this, one would need the break up of the amount of lending to real estate comapnies by public sector banks and private sector banks. It would be interesting to see the growth in lending to this sector by public sector banks.
My guess is that over the years the lending by public sector banks to real estate companies has grown at a much faster pace than their overall lending. As I have mentioned in the past most Indian real estate companies are fronts for the ill-gotten wealth of politicians. And given this, a possible explanation for the lending to real estate companies growing at a faster pace than overall bank lending, is that the politicians have been forcing public sector banks to continue to lend to real estate companies.
And this has had several repercussions. As I mentioned earlier in the piece, lending to real estate companies continued to grow despite unsold homes piling up and a fall in new launches. So what were real estate companies using the borrowed money for?
This continued lending helped real estate companies to continue repaying their old loans to banks. Hence, new debt allowed real estate companies to pay off old debt. A perfect Ponzi scheme. It also allowed real estate companies to not cut prices on their unsold homes. If bank loans had not been so forthcoming, the real estate companies would have to sell off their existing inventory to repay their bank loans. And in order to do that they would have to cut prices.
The latest data from the RBI points out that this trend may now be coming to an end. As mentioned earlier the lending to commercial real estate over a one year period has grown by 8.9% whereas overall lending has grown by 8.6%. A possible reason could be the change in regime at the centre with the BJP led NDA government replacing the Congress led UPA government.
If this trend sustains in the months to come, and the lending to the real estate companies grows slower or around the same pace as overall lending by banks, then real estate companies will have to start selling their unsold homes at lower prices.
as a recent report in The Economic Times points out: “Home sales plunged 17% in top six markets last year and unsold inventory level rose to 647,484 units, according to property consultant Knight Frank India.” This inventory has to start hitting the market at some point of time. The real estate companies cannot keep sitting on it endlessly. The only question is when.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Firstpost on May 5, 2015

Five questions for Rahul Gandhi on his sudden love for distressed home buyers


Rahul Gandhi is on a learning spree these days. Yesterday he learnt that Indian middle class also has a problem. A report in The Indian Express points out Rahul as saying: “Mujhe aaj kuch seekhne ko mila. Meri soch thi ki zameen ke mamle pe kisan ko, mazdoor ko, adivasiyon ko dabaya jaata hain. Magar aaj mujhe seekhne ko mila, zameen ke mamle pe middle class logon ko bhi dabaya jaata hai. (I learnt something today. So far, I used to think that only farmers, labourers and tribals are suppressed in land matters. But today I learnt that the middle class is also suppressed).”
The Gandhi family scion said this after meeting distressed home buyers in the National Capital Region. That he did not know that the issue of “land” also impacts the country’s middle class, after having been an MP for more than a decade, is a clear indicator of how well connected he has been with issues that concern the people of this country. But yes he is trying and it’s never too late.
Rahul also said: “They are told that you will get the flat on a particular day but for years they don’t get the flat. They are told the super duper area of the flat would be so much but what is delivered is different.”
There are multiple questions that crop up here. The situation that these home buyers are in currently, did not crop up over the last one year of the Narendra Modi government. It has been work in progress since 2008. So why has Rahul woken up to it now? The answer is fairly straightforward. This sudden concern for the middle class home buyer is a part of the Rahul relaunch.
The second question is how have all these builders managed to get away with taking money from the buyers and not delivering homes even many years later. Rahul met distressed home buyers from the National Capital Region. The Congress party was in power in Haryana (parts of which come under the National Capital Region) for an extended period of time. What did this government do for distressed home buyers in the city of Gurgaon, which is a part of the National Capital Region?
The third question is how have real estate builders in this country managed to have a free run for all these years. When almost every form of investment in this country is regulated, be it mutual funds, stocks, insurance, derivatives and so on, how has real estate managed to be given a free run for so long? The Congress party has been in power at the centre in every decade since independence. Why did it do nothing on this front all these years? Why was the Real Estate (Regulation and Development) Bill introduced only as late as 2013? This after the Congress led UPA government had been in power in Delhi for nine years. Maybe, Rahul can explain all this to the people of this country as well, the next time he decided to speak to the media.
The fourth question is that when opening something as simple as a savings bank account requires multiple documents, why can real estate be almost be bought over the counter, as long as the buyer is willing to pay in cash? How did the system evolve in the way it has? Guess, Rahul can speak to his seniors in the Congress party and maybe they can give him an answer.
The fifth question is what has Rahul’s Congress party done to control the amount of black money being generated in the country, in all the years that it has been in power. As per the Global Financial Integrity report titled
Illicit Financial Flows from Developing Countries: 2003-2012, around $439.6 billion of black money left the Indian shores, between 2003 and 2012. If this was the amount of black money that left the Indian shores, imagine the kind of black money that must have been generated during the period.
The Congress led UPA government was in power for much of this period. A substantial portion of the black money that is generated finds its way into real estate, driving up prices and making things very difficult for genuine home buyers who want to buy homes to live in them.
This has led to a situation where the real estate market has totally become investor driven. What did the Congress led UPA government do about this in the ten years that it has been in power?
To conclude, since Rahul Gandhi is in a learning phase, it’s time he saw Yash Chopra’s 1965 classic
Waqt. And in it he should concentrate on a dialogue written by Akhtar-Ul-Iman and spoken by Raj Kumar in the movie, which goes like this: “Chinoi Seth…jinke apne ghar sheeshe ke hon, wo dusron par pathar nahi feka karte(Chinoi Seth…those who live in glass houses don’t throw stones at others).”

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek) 

The column originally appeared on DailyO on May 4, 2015