In a Country of 10 crore Urban Households, Builders Sold 2.62 Lakh Homes Last Year  

I recently wrote a column in the Mint newspaper titled India and China: A tale of ghost towns in two gigantic countries. This piece is an extension of a small part in that column. Ideally, you should read the column before reading this piece, nevertheless, this piece stands on its own as well.

The real estate rating and research firm Liases Foras recently put out some interesting data in a report titled, Residential Real Estate Market Report. Let’s look at this pointwise.

1) The home sales in the top 60 cities in India in 2020 stood at 2.62 lakh units. This was down 31% from 2019, when it had stood at 3.77 lakh units.

2) The sales in tier I cities (Ahmedabad, Bengaluru, Chennai, Hyderabad, Kolkata, Mumbai Metropolitan Area, National Capital Region, Pune) stood at 1.85 lakh units in 2020, down 32% from sales in 2019 when 2.75 lakh units had been sold.

3) The sales in tier II cities in 2020 stood at 76,603 units down 25% from 2019 when 1.03 lakh units had been sold.

4) The overall unsold housing inventory was down 6% to 12.52 lakh units in 2020, against 13.32 lakh units in 2019. The value of homes sold in 2020 stood at Rs 1.73 lakh crore, whereas the value of the inventory outstanding is at around Rs 8.65 lakh crore. At this rate, it will take five years to sell the current inventory (Rs 8.65 lakh crore divided by Rs 1.73 lakh crore).

Of course, this does assume that no new construction will happen over the next five years, which is a wrong assumption to begin with. Hence, the current inventory will take longer than five years to sell, unless sales pick up at a dramatic rate, which as far as I see it is unlikely to happen, given the state of the economy and the general purchasing power of Indians, which the real estate industry never seems to take into account.

Let’s use this data and make some assumptions to explain all over again why the Indian real estate industry is in a mess and what can be possibly done to revive it.

1) In 2020, a total of 2,62,055 homes were sold across the top 60 cities in India with the total value of these sales being Rs 1,72,770 crore. This means that the average price of a home sold stood at Rs 65.92 lakh (Rs 1,72,770 crore of sales divided by 2,62,055 homes sold). In comparison to 2019, the average home price has barely fallen. In 2019, the average home price was Rs 65.96 lakh (Rs 2,48,861 crore of sales divided by 3,77,295 homes sold).

Let me not analyze this number further and make a few adjustments first.

2) Let’s consider the tier I and tier II cities separately. The average home price in tier I cities in 2020 was at Rs 74.37 lakh (Rs 1,37,921 crore of sales divided by 1,85,452 homes sold). The average home price in tier I cities in 2019 was Rs 73.57 lakh (Rs 2,02,089 crore of sales divided by 2,74,680 homes sold).  In tier I cities, despite home sales crashing by 32% in terms of number of units sold, the average home price has gone up marginally. There can be various local reasons for it which the overall average won’t reveal, but on the whole it is safe to say that real estate sales don’t seem to follow the basic law of demand in India. They never have and which is why the sector has been in a mess for more than half a decade now.

3) Within tier I cities, let’s make one more adjustment by first checking what was the average home price in Mumbai Metropolitan Region (MMR), which tends to be higher than other parts of the country, simply because prices in Mumbai city tend to be very high. The average home price in MMR in 2020 was Rs 94.98 lakh (Rs 46,043 crore of sales divided by 48,479 homes sold). The average home price in 2019 had stood at Rs 99.11 lakh (Rs 67,938 crore of sales divided by 68,543 homes sold). Hence, the price in MMR has come down by 4.2% on an average between 2019 and 2020.

4) Now let’s calculate the average price of a home in non MMR tier I cities. The average home price in a non MMR tier I city in 2020 stood at Rs 67.07 lakh (Rs 91,878 crore of sales divided by 1,36,973 homes sold). The average home price in a non MMR tier I city in 2019 had stood at Rs 65.08 lakh (Rs 1,34,151 crore of sales divided by 2,06,137 homes sold). Hence, the average home price in non MMR tier I city in 2020 has gone up by a little over 3%.

5) Now finally let’s look at the average home price in a tier II city. The average home price in a tier II city in 2020 stood at Rs 45.49 lakh (Rs 34,849 crore of sales divided by 76,603 homes sold). The average price in 2019 had stood at Rs 45.58 lakh (Rs 46,772 crore of sales divided by 1,02,615 homes sold). Given this, the average home price in tier II cities has barely moved between 2019 and 2020.

What does all this data tell us?

1) At the risk of sounding as cliched as I can sound and have been sounding for years, the price of real estate in India is too high. Of course, we are looking at average prices here, but do take into account the fact that even in tier II cities the average home price is close to Rs 50 lakh.

In a tier I city without Mumbai, the average home price is close to Rs 67 lakh. Of course, there are tier I cities, like Pune and Ahmedabad, where the average price is closer to Rs 50 lakh. But even that is very high when one takes into account the fact that the per capita gross national disposable income in 2020-21 is expected to be around Rs 1.46 lakh.

Thus, the per capita household disposable income amounts to Rs 7.3 lakh (given that there are five people in an average Indian household). What needs to be kept in mind here is that this is the mean income of a household or the average income of an Indian household and not the median income or the income of an average Indian household. Hence, the income of the an average Indian household must be much lower than Rs 7.3 lakh per year.

2) Clearly, the real estate builders are building homes only for a certain section of the population, the very rich. And that has limited their market. In 2001, the number of urban households had stood at 5.58 crore. In 2011, this had jumped by 41.3% to 7.89 crore. Looking at this data, it is safe to say that by 2021, the number of urban households would have crossed 10 crore. Let’s assume it is at 10 crore households, which I think is a reasonable assumption to make, given that the number of actual households should be much greater looking at the past trend and increasing urbanisation.

3) A bulk of these 10 crore households would be living in the top 60 cities of urban India. In these cities, in 2020, a total of 2.62 lakh new homes were sold by builders. In 2019, the number was at 3.77 lakh homes. Let’s further assume that Liases Foras probably does not capture all the new homes being sold by builders across these 60 cities. Even if the homes sold were double of this number, they are barely a very small fraction of less than 1% of the total number of households in urban India. And this is true not just about 2020, it is equally valid for 2019, a non-covid year.

Of course, not all homes sold are new homes. People who have bought homes as an investment in the past and are now selling them, also need to be considered. There is no data available for this, but even if there was, the prices at which these homes were sold couldn’t have been significantly different from the new homes being sold by builders, hence, limiting their affordability.

4) As I had said in my Mint piece earlier this week, India needs real affordable housing, homes which can be built and sold profitably in the range of Rs 5-20 lakh in Indian cities. Of course, these homes will be smaller in size, but they will be definitely much better and more humane than living in slums. And imagine if something like this takes off, what it could do to economic activity in a post covid world. Building of real estate leads to a lot of economic activity. Every apartment requires, cement, bricks, sand, steel, pipes etc. It also requires people to take on home loans.

The real estate sector has forward and backward linkages with 250 ancillary industries. This basically means that when the real estate sector does well, many other sectors, right from steel and cement to furnishings, paints, etc., do well. The multiplier effect is huge.

Also, real estate is one sector which can create a lot of semi-skilled and unskilled jobs, very quickly, thus help people move away from agriculture, which tends to employ more people than is economically feasible.

5) Of course, this is easier said than done. First, it needs the real estate industry to consider the idea of doing business profitably at a much lower price, which it currently doesn’t seem to have got its head around to. Over the past few years, the real estate industry has maintained that it is difficult to cut prices given that input costs have gone up over the years.

It recently blamed the steel and the cement sector for driving up real estate prices. The cement industry has responded by saying: “only Rs 150/sq. ft of built up area constitutes cement costs. The amount being so low … is this not hoodwinking gullible consumers?”

I am no civil engineer and have absolutely no idea about what it costs to build a building, an apartment and so on. But what I do understand is that if real affordable housing has to become the order of the day, home prices need to come down and come down dramatically.

6) One thing holding back affordable housing is the cost of land in and around big cities. At the heart of this is the issue of Change in Land Usage (CLU). Agricultural land beyond a certain size cannot be owned, as per the land ceiling regulations. This limit varies from state to state. What this does is that it limits the amount of land available in cities unless the state government intervenes. And the moment that happens, the cost of the land starts to go up.

7) The central government and the state governments own a massive amount of land in Indian cities, which is lying unused. Over the years, some of it can be made available for real affordable housing. Of course, wherever there is land and there are politicians, there is scope for corruption (I really have no answer for this, honestly).

8) In a recent research report, IIFL securities looked at the cost of redevelopment projects in Mumbai. The figure that caught my eye is that the construction cost is 30.8% of the total cost. So, whatever the real estate industry might say, the construction costs forming less than a third of the overall cost, are really not the problem. I guess in non-redevelopment projects the construction cost as a proportion might be more, but even with that the problem is somewhere else.

It is the remaining charges that need to be brought down. Interestingly, charges related to the government in different ways (everything from floor space index charges to staircase premium to taxes to liaison cost) made up for around 40% of the overall cost. Clearly, the government is the problem here. The dependence on revenue from real estate for state governments needs to come down.

9) I am not an expert on this, but I do feel that this is an idea that needs to be made to work and there are experts out there who can look at it in a more detailed and feasible way.

To conclude, the problems holding back Indian real estate are huge and it will be very tough to sort them out. But as the corporates like to say in adversity there is opportunity. And real affordable housing is a huge opportunity, only if someone can figure out how to run a profitable business at lower costs. As the late Professor CK Prahalad would have said there is a fortune to be made at the bottom of the pyramid.

10 Things You Need to Know About Indian Real Estate in 2021

If you are the kind who follows the business media closely, you would probably be thinking that for the last few months all people have done across India is buy homes to live in. But is that really true? The short answer is no, though sales did pick up during October to December 2020, in comparison to the three month period before that. But whether that was pent up demand or genuine demand coming back, only time will tell.

A thriving real estate sector really helps the overall economy grow at a fast pace. But given the mess that the Indian real estate sector has been in for many years, and the fact that the deep state of Indian real estate won’t allow market forces to work to help clean it up, that isn’t really going to happen.

Let’s look at the issue in more detail.

1) As per the annual roundup of residential real estate published by PropTiger Research, sales in 2020 contracted by 47% to 1.83 lakhs across eight large cities (Delhi NCR, Mumbai, Pune, Ahmedabad, Chennai, Bengaluru, Hyderabad, Kolkata).

In short, 2020 was a bad year for real estate. Having said that, sales during October to December 2020 picked up and 58,914 units were sold, which was 68% more in comparison to the number of units sold during July to September 2020. In comparison to October to December 2019, sales were down 27%, during the period.

Of course, the real estate sector wants us to believe that demand is back and all is well with the sector. Nevertheless, this jump in sales can be because of pent up demand. Whether it sustains in the months to come remains to be seen. This is an important caveat to keep in mind.

2) More than half of these sales have happened in Mumbai and Pune. The reason offered for this is the cut in stamp duty carried out by the state government. The Maharashtra government cut the stamp duty applicable on real estate transactions from 5% to 2%. This was applicable until December 31, 2020.

The stamp duty cut driving up builder sales, is true to some extent. Given that the price of an apartment in a city like Mumbai runs into crores, even a 3% saving on the price runs into a decent amount of money. But more than the stamp duty cut, a substantial drop in prices, especially for homes priced at more than Rs 2 crore, is the main reason for the sales in the city picking up.

Independent real estate expert Vishal Bhargava has pointed this out in the past in his columns (Those who like to follow Mumbai’s real estate scene, should seriously read all that Vishal writes).

Of course, you haven’t read about this in the mainstream media simply because the mainstream media depends on advertisements from real estate companies and needs to keep driving the notion that real estate prices don’t fall, over and over again. (Another reason you need to support my work).

One reason for a fall in prices is the fact that businessmen who run small and medium enterprises have been facing a tough time since covid broke out. And they are looking at alternate avenues to raise money to keep their businesses going. This includes selling the real estate assets they have accumulated in the past. There is some distress sale as well.

Also, other than Mumbai and Pune, the other six cities account for less than half the sales. This tells us clearly that real estate sales in these cities are at best sluggish.

3) The clearest trend in the PropTiger data is that 48% of the sales have been for apartments selling at a price of less than Rs 45 lakh. What this tells us is that high prices remain the biggest challenge of owning a home in India. It also tells us that while home prices haven’t really fallen, on the whole across India, despite the lower demand, the demand that remains is primarily at the lower end of the price spectrum. Hence, the market has corrected itself in its own way, despite home prices not coming down in absolute terms. This is an important lesson that the real estate industry needs to learn.

Also, 74% of the sales have happened for home prices of less than Rs 75 lakh.

4) As far as prices are concerned, the PropTiger report points out: “Weighted average prices for new launched projects across the top-eight cities remained stagnant in the past few quarters, with prices moving in close ranges.”

This is something that is also reflected in Reserve Bank of India’s 10 city house index, though the cities tracked by this index are not the same as the cities tracked by PropTiger.

Source: Centre for Monitoring Indian Economy.

The cities tracked by the RBI’s 10-city house index are Mumbai, Delhi, Chennai, Kolkata, Bengaluru, Ahmedabad, Lucknow, Kanpur, Jaipur and Kochi. The index tells us that the average one-year return of owning real estate in India during the period July to September 2020, stood at 1.13%. This is the lowest since the index came into existence. The index also tells us that the return on real estate during 2020 has been marginally negative.

What this means is, and as I have often said in the past, Indian real estate is going through a time correction and not a price correction. The inflation seen over the last two years has been around 6% per year on an average. This means in real terms, the prices have already corrected by more than 12%, over a two year period.

5) This trend is likely to continue given the huge amount of inventory that remains piled up with builders. The overall inventory stock is at 7.18 lakh units across eight cities as per PropTiger. It has come down from 7.91 lakh units in 2019, simply because builders aren’t launching as many new projects as they used to.

Having said that, with the sales slowing down, at the current sales pace it will take around 47 months to clear the remaining inventory. Even though all this inventory is not ready to move in, a significant portion is. Also, it is worth remembering that the prospective buyers have a choice when it comes to buying a home. Over the years, investors across the country have ended up buying a huge number of homes in the hope of a price appreciation. Many of these homes have remained locked and are available for sale.

As Bhargava wrote in a recent column: “Resale transactions are traditionally 2/3rd of the market.” Even if this proportion were to come down, resale transactions of locked homes will continue to form a significant chunk of the market, making it difficult for builders to cut down their inventory quickly. Also, even if builders don’t offer ready to move in homes, there is a significant supply that will keep coming in from individuals who have bought real estate as an investment over the years.

6) Homes priced below Rs 45 lakh form 48% of the inventory. What does this tell us? It tells us that the real demand for homes is at a price even below Rs 45 lakh, probably below Rs 25 lakh. This is something that the builders need to keep in mind. It may not work in a city like Mumbai, where land available is limited and expensive, but it will definitely work for the other seven cities that PropTiger tracks and other parts of India, where cities can expand in all directions and land is really not an issue.


7) It is worth remembering here that builders have benefitted because of the Reserve Bank of India allowing banks and non-banking finance companies, to restructure commercial real estate loans.

As former RBI governor Urjit Patel writes in Overdraft—Saving the Indian Saver:

“In February 2020, ‘living dead’ borrowers in the commercial real-estate sector – under a familiar guise (‘a ghost from the past’, if you will) viz., ad hoc ‘restructuring’ – have been given a lifeline. It is estimated that over one-third of loans to builders are under moratorium.”

Patel does know a thing or two about banks and lending and hence, needs to be taken seriously. It remains to be seen for how long will the RBI continue supporting the builders. The longer, the RBI supports the builders, the longer they can hold on to a significant price cut. This also means that inventory will take longer to clear and home prices will continue to stagnate. It is all linked.

8) At a macro level this means that the ability of real estate to create jobs for the unskilled and the semi-skilled, will continue to remain limited. It is also worth remembering that real estate as a sector can have a huge multiplier effect on the overall economy.

The real estate sector has forward and backward linkages with 250 ancillary industries. This basically means that when the real estate sector does well, many other sectors, right from steel and cement to furnishings, paints, etc., do well.

If this were to happen, the Indian economy would really benefit in the post-covid times. But sadly it won’t, given that the deep state of Indian real estate which includes, builders, banks and politicians, will make sure that the sector is continued to be treated with kids gloves and any problems which could lead to a price cut, are kicked down the road. Trying to maintain the status quo in the sector is not helping the Indian economy.

9) Dear reader, some of you by now must be like all this gyan is fine, but tell me one simple thing, should I buy home or should I hold on to my money. The answer as always is, it depends. It is worth remembering here, that what we can possibly do with our money is a very individual thing.

If you are looking to buy a home to live in and have the capacity to pay an EMI and arrange for a down-payment, then this is a good time as any to buy a home. Owning a house has its own set of advantages. Parents and in-laws feel you have settled in life. There is no danger of the landlord acting cranky. And once you have children it gives them some kind of stability with friends, activities as well as the school they go to. Of course, address proofs don’t need to change, every time you move house.

Having said that do keep in mind that we live in tough times and the negative economic impact of covid is yet to go away. Also, there can be further cycles of the spread of the virus. Before taking on a home loan, ensure that you have some money in the bank to be able to continue paying the EMI in case you lose your source of income.

When it comes to investing in a house, it continues to remain a bad idea on the whole. Of course, there will always be some good opportunities and some distress sales happening.

10) Finally, everyone who makes a living out of selling real estate will spend 2021 trying to tell us that demand is coming back, people are buying homes, new trends are springing up and all is well.

As PropTiger points out:

“By making bare the limitations involved in other investment assets, the pandemic has forced people to rethink their investment strategies, tilting it in favour of home ownership.”

This is basically rubbish which has been written well. Why would anyone in their right mind during tough economic times, invest a large part of their savings and/or take on a large loan to buy an illiquid asset?

Some people who can afford it, may have definitely bought new homes in order to adjust to the new reality of work from home, but beyond that the proposition that PropTiger is making, remains a difficult one to buy.

If it were true, some of the massive amount of easy money that is currently floating around in the financial system, would have gone into real estate as well. But given that sales have crashed 47% during 2020 tells us that it clearly hasn’t.

In fact, the outstanding home loans of banks between March 2020 and November 2020 have gone up by just Rs 44,463 crore. This is around two-fifths of the increase (38.7% to be precise) in outstanding home loans of Rs 1,14,636 crore seen between March 2019 and November 2019. This is despite the fact that home loan interest rates have come down to as low as 7%.

So, people are generally being careful when it comes to buying a home by taking on a loan and that is the right strategy to follow at this point of time.

Should You Buy a Home This Festival Season?

In the last decade, afternoon naps have become a very important part of my life. In fact, it is safe to say that I live so that I can have the pleasure of taking afternoon naps and reading crime fiction. (Imagine all the economics I have to break my head on, for such simple pleasures in life).

After taking an afternoon nap yesterday I was trying to get my brain going again by drinking a cup of overboiled masala tea. At around 4.54 pm, a mail titled 10 Reasons to Buy a Home This Festive Season, hit my mailbox. The headline ensured that my brain was back to functioning at full strength.

In the economic environment that currently prevails, only someone closely associated with the real estate business could come up with a headline/title like this. Not surprisingly, this piece was written by someone working at a senior position for a real estate consultant, whose well-being depends on the sector doing well. His incentive is clearly misaligned with that of a prospective buyer looking to buy a home to live in.

Also, the festival season sales pick up is something that the real estate sector has been trying to sell for more than half a decade now. This tells you that bad ideas rarely go out of circulation.

This headline motivated me to write this piece titled should you buy a home this festival season, which you are currently reading.
Let’s take a look at this pointwise.

1) One of the reasons offered to buy a home in the mail I got, is the oldest cliché in the game, which goes like this: “Living in a rented house is a recurring financial drain without returns on investment”. This reasoning is bought by one too many people even though it is the rubbish of the highest order.

Let me explain through an example. I stay in central Mumbai, in what is euphemistically termed as a studio apartment. My monthly rental outgo is Rs 23,000. What sort of a home loan will I get if I am willing to pay the same amount as an EMI? At an interest rate of 7% per year on a home loan to be repaid over twenty years, I will get a home loan of around Rs 29.67 lakh. On this loan, the EMI works out to Rs 23,003.

Let’s say to this home loan I add my own savings of around Rs 10.33 lakh and I have a total of Rs 40 lakh, with which I can buy a flat. I will not get anything at this price around where I live unless I am willing to move into a shanty.

To get an apartment at this price I will have to move 35-40 km or even more from where I stay. And that will beat the entire idea because I like staying where I do and renting is the only way I can afford it. I am not looking to build an asset here. I just want to stay bang in the middle of the town.

2) Also, the rental yield typically tends to be 1.5-2% (annual rent divided by the market price of the house) or slightly higher. Even the cheapest home loan is 7%. Plus there are other costs associated with owning a home. When you a buy a house a stamp duty has to be paid to the state government. A property tax needs to be paid every year. Then there is the maintenance charge that needs to be paid to the housing society. On top of this there is the general risk of owning property in India.

3) Further, if I go and live 35-40km from where I am, I will end up paying for it in terms of the time I will have to spend to get anywhere. And time ultimately is money. So, yes one might end up building an asset but with almost no control over one’s time.

Hence, equating living in a rented house to a financial drain is top class rubbish which only someone working in the real estate industry can come up with and propagate  over and over again. This argument starts to make sense only when the rental yields and home loan interest rates are in a similar sort of territory. For that to happen, rental yields need to double and home loan interest rates need to halve (both will then be around 4%).

4) Another reason offered in the mail, to buy a house is: “Buying now equals buying at the lowest possible price.” Lowest possible price, vis a vis what? Entry level flats in the biggest cities, where the bulk of the demand is, cost at least Rs 40-50 lakh. Let’s consider a flat which costs Rs 40 lakh. A 20% downpayment works out to Rs 8 lakh. This means a home loan of Rs 32 lakh. The EMI on this works out to Rs 24,809 (7% interest, 20 years repayment period).

A bank typically assumes that around 35-40% of the after tax take home salary can go towards paying this EMI. If the assumption is that around 35% of the salary goes towards EMI, the total after-tax take home salary works out to around Rs 8.5 lakh. The pre-tax salary has to be even higher, more than Rs 10 lakh. How many people make that kind of money in a country where the per capita income is just over Rs  1.5 lakh, is a question well worth asking. This very conservative example explains why real estate in India remains beyond the level of most Indians.

5) There is another problem with the lowest possible price argument. Given the opaqueness surrounding the real estate sector in India, there is nothing like a market price at any given point of time. So how do you even know that the price offered to you is the lowest possible price? Do you just believe what the builder or his broker are saying? Do you have any idea what the price was last year or the year before that?

6) Also, we are told that “home loan interest rates are at 15-year low”. Hence, you should buy a house. The economy during the period April to June contracted by a nearly fourth. It is expected to contract by 10% this year, a level of contraction never seen since Indian independence. Just because home loan interest rates are low should you go out and buy a house? The more important question to answer as always is whether you are in a position to pay the EMI payable against the low interest rates. No wonder this very important point has been missed out on.

It is worth remembering that home loans are floating interest rate loans and interest rates can keep changing in the years to come. If you take on a 20-year home loan now, it doesn’t mean that interest rates will continue to remain low for the next 20 years.

7) And then there is this, my absolute favourite, which I have been hearing for years now: “The property market is poised on the cusp of a full-fledged revival. Once the revival kicks in, property prices will harden and asset appreciation begins in all seriousness.”

This statement reminds me of the different chairpersons that the State Bank of India has had in the last twelve years. Starting with 2009, each one of them has said at some point of time that when it comes to the banking sector in India, the worst is behind us. Well, it’s 2020, the banking sector still has official bad loans of close to Rs 9 lakh crore and they are expected to go up dramatically post-covid.

Every festival season for the last six years the real estate sector has been talking about an impending revival. This revival did not happen when the Indian economy was growing.  And now they expect the revival to happen in a year when the economy is contracting big time. The size that the Indian economy achieved in 2019-20, will now most likely be achieved again only in 2022-23. Jobs have been lost. Incomes have fallen. Small businesses have shut-down or are on the verge of shutting down and the real estate sector is talking about asset appreciation beginning in all seriousness.

I mean all selling involves some amount of fibbing but if you keep doing it all the time and it doesn’t turn out to be true, it loses its power. People start believing in the opposite narrative. As the old fable of the jackal shouting sher aaya sher aaya goes.

8) Here’s another reason the mail offered, to buy a house: “After a protracted period of financial upheaval, it has become necessary to revisit all expenses which represent undue pressure on personal finances. Living in a rented house is a recurring financial drain without returns on investment [emphasis added].”

The part italicised in the above paragraph I have already dealt with in the first point. Nevertheless, the above paragraph needs to be tackled on its own as well. What is the writer saying here? Given the tough economic conditions created by covid, it is time to revisit all expenses. Yes, that makes sense.

But then he goes on to say that renting doesn’t make any sense and you need to make an even bigger expenditure in buying a house and paying an EMI. Buying a house would involve running down savings to make a downpayment and paying a stamp duty. Then there would be moving charges.

At the same time an EMI would have to be paid on a home loan. The chances are that the EMI will be much more than the rental.

Why would anyone who is in financial trouble and trying to cut down on his expenses, be expected to take on higher expenses by buying a house? What’s the logic here? There is no logic to this except to confuse the prospective buyer.

Essentially you are being asked to be penny wise and pound foolish.

9) In the last couple of weeks, the real estate industry has been trying very hard to convince us that the buyers are back in the market and they are lining up to buy homes. Like the mail I got put it: “The best home options are being snapped up at a rapid pace.”

Similar stories have been seen in the media as well. Like the Mumbai edition of The Times of India points out today: “Unlocked MMR shines with 60% rise in home sales in Q2”. Only when you read the story carefully you realise that sales in the Mumbai Metropolitan Region (MMR) during July and September were 60% higher than sales during April to June. And that’s hardly surprising. There were barely any sales in April and May, due to the lockdown. Hence, this was bound to happen.

The real question is how do things look in comparison to July to September 2019. This reveals the real story. Sales between July to September 2020 are 40% lower than the same period last year. Of course, the newspapers are trying to project a real estate revival story given that they are dependent on huge advertisements from real estate companies. Also, it is worth remembering that a lot of home sales that happened in July to September must be pent up demand from April to June, which has spilled over.

10) Another tactic being employed here is to project a lack of supply. As the mail I got puts it: “Developers have curtailed new supply”. Maybe they have. But the larger point here is that lakhs of apartments were bought as an investment in the decade leading to 2015. Many investors are still sitting on it, hoping for a better return. But now due to covid, there are bound to be quite a few distress sales going around. So, it’s a matter of hanging around and looking for one.

As I have said in the past, the real estate market right now is going through a weird low supply low demand situation. There is low demand for real estate (given the high price) and there is low supply as well (given that real estate companies and individual owners are unwilling to cut prices). I may want to buy a home but unless I have enough money and the ability to borrow to do so, I am really not adding to demand. Just wanting something, without having the money to finance it, doesn’t really add to demand.

This situation can only turnaround if the demand improves or if the supply improves. The demand will improve only when the economy turns around and India grows at 7-8% for a sustainable period of time, leading to increased incomes. The supply will improve if prices fall (which means more people are willing to sell the homes they own), of course, that will lead to an increase in demand as well.

Dear reader, you must be wondering by now, itna gyan de diya, now tell us if we should buy a home or not. First and foremost, what does buying a house have to with one year’s festival season or for that matter any other’s? You are not buying a mobile phone, which you buy almost every couple of years and wait for the best deal during the festival season. A home is only bought once or twice during a lifetime.

You should buy a house if you want to live in it, can afford to make the downpayment and most importantly, have a stable income which will allow you to keep paying the EMI on the home loan in the years to come. This also includes the idea of buying a bigger home to adjust to the new reality of working from home.

As mentioned earlier, the most important part here is stable income. If your job or business is on shaky ground, now is not the time to buy a house. If you want to continue living in the posher area of the city, but can only afford to pay a rent for it, then now is not the time to buy a house.

Remember, while you might be building an asset by not paying a rent but by paying an EMI, you are probably also making a compromise in terms of the time you have at your disposal to live the life you want to. If you are comfortable with the idea of a daily rat race then please go ahead and buy a house.

On the flip side, there are advantages to owning a home. One is the fact that you don’t have to change homes frequently, like you have to if you are living on rent. Over the years, I have come to the conclusion that this fear is oversold. The days when landlords used to be only landlords are gone (of course a lot of such people do survive).

Now there are many landlords who have full-fledged corporate careers and are more interested in a regular rental than changing people who they rent out their homes to, every 11 months. Remember it’s a pain for them as well. Also there is the risk of not finding a tenant on time and losing out on a month’s rent. And any sensible landlord will want to avoid that.

The biggest advantage to owning a home is that it tends to make your parents happy (in terms of getting settled in life). Also, the kids can have a slightly stabler life. But it all boils down to whether you can afford to buy a home. On this front, every individual’s situation is different and you need to figure that answer out for yourself. If you feel comfortable with buying a house right now then please go ahead and do that. Don’t wait.

As far as investing in real estate is concerned so that you can flip it later, that idea went out of style in 2013 or 2014 at best. If you still believe in it then either you deal in a lot of black money or probably don’t realise that the times have changed.

Why HDFC Finds Homes to Be More Affordable, When They Clearly Aren’t

Summary: HDFC is getting better home loan customers that doesn’t mean homes have become more affordable. HDFC’s conclusion of homes becoming more affordable is an excellent example of survivorship bias.

Before I start writing this, I have a confession to make. I have written about this issue before, around five years back. But given that things haven’t really changed since then, it is a good time to write about it again. Hence, to all my regular readers who have been following me over the years and might have read this earlier, sincere apologies in advance.

Home loans in India are given by two kinds of institutions – banks and housing finance companies (HFCs). Among the HFCs, Housing Development Finance Corporation (HDFC) has been a pioneer in the area of home loans.

The company regularly publishes an investor presentation along with every quarterly result.

I am not sure for how long the company has been doing this, but its website has these presentations going as far back as March 2013, a little over seven years. Since then, the company has had a slide in its investor presentation which talks about the improved affordability of owning a home in India. Usually, it is the eight or the ninth slide in the presentation (sometimes, but very rarely tenth).

This is the slide in the latest presentation for the period April to June 2020.

Improved affordability of homes

Source: HDFC Investor Presentation, June 30, 2020.

Let’s look at the chart between 2000 and 2020, the last two decades. The home loan market in the country before that was too small and evolving and hence, prone to extreme results. So, it makes sense to ignore that data.

What does the chart tell us? It tells us that affordability of homes in the country has gone up over the years. The chart defines affordability as home price divided by the annual income of the individual buying the home.

In 2020, the average home price has stood at around Rs 50 lakh. Against this, the average annual income of the individual buying the home stands at around Rs 15 lakh. Given this, the affordability factor is at 3.3 (Rs 50 lakh divided by Rs 15 lakh).

Hence, the average individual in 2020 is buying a home which is priced at 3.3 times his annual income. (Please keep in mind that the property prices are represented on the left-axis and the annual income is represented on the right axis).

As can be seen from the chart, the affordability factor at 3.3 is the lowest in twenty years. Hence, affordability of homes has gone up. QED.

The trouble is, this goes totally against what we see, hear and feel all around us. Real estate companies have lakhs of unsold homes with absolutely no takers. They have thousands of crore of unpaid loans. The banks and non-banking finance companies (NBFCs) have restructured these loans over the years and not recognized them as bad loans in the process, with more than a little help from the Reserve Bank of India (RBI). Bad loans are loans which haven’t been repaid for a period of 90 days or more.

Further, investors who bought real estate over the years have been finding it difficult to sell it. Indeed, if homes had become more affordable, this wouldn’t have been the case. Real estate companies would have been able to sell homes and repay the loans they have taken from banks and NBFCs. And the RBI wouldn’t have to intervene.

So, what is it that HDFC can see that we can’t? Before I get around to answering this question, let me tell you a little story. During the Second World War, the British Royal Air Force (RAF) had a peculiar problem.

It wanted to attach heavy plating to its airplanes in order to protect them from gunfire from the German anti-aircraft guns as well as fighter planes. The trouble was that these plates were heavy and hence, had to be attached strategically at points where bullets fired by the German guns were most likely to hit. The British couldn’t plate the entire plane or even large parts of it.

The good part was that they had historical data regarding which parts of the plane did the German bullets actually hit. And this is where things got interesting. As Jordan Ellenberg writes in How Not to Be Wrong: The Hidden Maths of Everyday Life: “The damage [of the bullets] wasn’t uniformly distributed across the aircraft. There were more bullet holes in the fuselage, not so many in the engines.”

So, historical data was available and hence, the decision should have turned out to be a very easy one. The plates needed to be attached around the plane’s fuselage. But this logic was missing something very basic. The German bullets should have been hitting the engines of airplanes more regularly than the historical evidence suggested, simply because the engine “is a point of total vulnerability”.

A statistician named Abraham Wald realised where the problem was. As Ellenberg writes: “The armour, said Wald, doesn’t go where bullet holes are. It goes where bullet holes aren’t: on the engines. Wald’s insight was simply to ask: where are the missing holes? The ones that would have been all over the engine casing, if the damage had been spread equally all over the plane. The missing bullet holes were on the missing planes. The reason planes were coming back with fewer hits to the engine is that planes that got hit in the engine weren’t coming back.” They simply crashed.

This is what is called survivorship bias or the data that remains and then we make a decision based on it.

As Gary Smith writes in Standard Deviations: Flawed Assumptions Tortured Data and Other Ways to Lie With Statistics: “Wald…had the insight to recognize that these data suffered from survivor bias…Instead of reinforcing the locations with the most holes, they should reinforce the locations with no holes.”

Wald’s recommendations were implemented and ended up saving many planes which would have otherwise gone down. (On a different note, both the books from which I have quoted above, are excellent books on how not to use data, especially useful if you are in the business of torturing data to make it say what you want ).

If you are still scratching your head and wondering what does this Second World War story have to do with HDFC finding homes more affordable, allow me to explain. Like the British before Wald came in with his explanation, HDFC is also looking at the data it has and not the overall data.

Look at the left-hand of the corner of the chart, it says based on customer data. The analysis is based on HDFC’s own historical customer data. When HDFC talks about an average home price of Rs 50 lakh and an income of Rs 15 lakh, it is basically talking about the set of people who have approached the HFC for a loan and gotten one. Hence, HDFC’s conclusion of better affordability is drawn from the sample it has access to.

But does this really mean that affordability has improved? Or does it mean that the quality of HDFC’s customers has improved over the years? The customers that HDFC is giving a home loan to are ones who can afford to buy homes. The HFC clearly has no idea about people who want to buy homes but simply do not have the financial resources to do so.

They don’t show up as a part of any sample, hence, the evidence on them is at best anecdotal. These people are like planes whose engines were hit and hence, they did not make it back to their base, in the Second World War. And like there was no data on the planes which got hit and didn’t make it back, there is no data on these people as well. Basically, HDFC’s data and conclusion are victims of the survivorship bias

In fact, HDFC’s investor presentation has always carried another interesting slide on low penetration of home loans in India. The following chart is from the latest presentation.


Home loans as a percentage of GDP

Source: HDFC Investor Presentation, June 30, 2020.

Total home loans outstanding given by both banks and HFCs in 2020 stands at 10% of the GDP (On a slightly different note, the ratio of homes loans given by banks to home loans given by HFCs is 64:36). In March 2014, the total outstanding home loans in India had stood at 9% of the GDP. If homes indeed were affordable this ratio would have gone up faster.

To conclude, it’s time that HDFC remove this misleading slide from its investor presentation or at least say that the affordability has improved for its customers and not for the country as a whole.

RERA is Not a Fairy Tale That It is Being Made Out to Be

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Fairy tales have happy endings.

The Real Estate (Regulation and Development) Act, 2016, or RERA for short, which came into effect from May 1, 2017, was supposed to be a fairy tale.

A fairy tale that would end all the trouble that homebuyers have while buying a house.

It would be put the big bad builders in their proper place.

But RERA is turning out to be like a bad art movie from the 1980s, where the system would inevitably crush the spirit of the hero, and win. (If you want to precisely know what I mean here try watching a movie called Paar).

This is what seems to be happening with RERA. Allow me to explain.

RERA is a central Act. But land is a state subject. Any real estate project needs land. Given this, state governments have the right to frame the operational rules for RERA.

And this has given them an opportunity to dilute the key provisions of RERA. This they have done with full impunity.

Before we get into the details, let’s try and understand why an Act like RERA was required in the first place.

Let’s say you want to buy a product. Let it be any product. It could be something as simple as an eraser for your child (I wonder if children still use erasers) or something a little more complicated like an air conditioner.

What do you do when you want to buy an eraser? You head to the local stationery shop, you pay the price of the eraser and you get the eraser.

What do you do when you want to buy an air conditioner? You head to a shop selling whitegoods and choose the air conditioner you want, given your budget, brand preferences, the preferences of your family and the space you have to install it.

The retailer doesn’t hand over the air conditioner to you immediately, like is the case with the eraser. (And that would be stupid given that how would you carry the air conditioner back to your house). So, the next day, the retailer delivers the AC at your house. In a few hours, a couple of people come and install it. And we are done.

What is the point I am trying to make here? When you buy a particular product from the market that is exactly what you get. I mean there is no chance of your buying an air conditioner of one and a half tonnes and the retailer delivering a one tonne air conditioner.

In the odd case that this happens, it is bound to be some mistake at the retailer’s end and will be soon corrected.

Along the same lines, when you buy an eraser, the stationery shop doesn’t insist on selling you a pencil sharpener or a ball pen for that matter.

At the cost of repeating, you get what you want and what you have paid for and not something else.

But when it comes to buying a home in India things don’t work in the same way.

Imagine you paid for a three-bedroom hall kitchen in a society which is supposed to have a swimming pool, a club house, a lot of greenery and what not.

The way things work in India, your chances of getting what has been advertised and what has been paid for, are very low.

In fact, in many cases, the size of the apartment gets smaller. In many cases, the number of floors goes up. In the original plan the number of floors planned were ten. By the time, the building gets built, it has fifteen floors.

And in such cases, no is bothered about the fact that the foundation was originally dug for ten floors and now 15 floors have been built on it.

In some cases, the builder does not deliver on time. This leads to the homebuyer who had bought the home with the idea of living in it, having to continue paying a rent and at the same time paying the EMI on the home loan that has funded the home.

In some cases, the builder simply takes money from the buyers and disappears.

Considering all these points, a homebuyer in India considers himself lucky if he gets a home at the end of the promised period, at all.

So what if it’s slightly smaller. So what if it doesn’t have the facilities that it was originally supposed to have. So what if the drawing room gets seepage after the first rains.

An Indian homebuyer can adjust with all this and more.

The RERA was supposed to help the homebuyer on such fronts. It essentially has four key provisions:

a) 70 per cent of the money collected for a home project by the builder is supposed to be held in a separate bank account. Further, the money can be used only for the project and can be withdrawn according to what proportion of the project has been completed. This has been done to ensure that the builder spends a bulk of the money for the project he has raised money for and not spend it on other things, as builders are wont to do.

b) RERA recommends a fine for the builder which can extend up to 10 per cent of the cost of the project and/or a prison of up to three years, if the provisions of the Act are not followed.

c) The builder needs to treat any structural defects in the project arising within five years of him handing over possession to the buyer, free of charge.

d) RERA includes ongoing projects within the Act as well, by defining an ongoing project as a project “for which the completion certificate has not been issued” on the date of commencement of the Act. This provision was put in to ensure that many projects which have been endlessly delayed over the years, come under the Act. And in the process the Act offers help to the harried buyers.

All these provisions have been diluted by the state governments in the operational guidelines of RERA that have been notified. Take a look at Table 1.

Table 1:

StatesDefinition of on – going projectsPenelties for non – compliancePayment ScheduleNorms for escrow withdrawalClause for structural defects
Andra PradeshDilutedDilutedIn lineIn lineIn line
BiharIn lineDilutedLacks clarityIn lineIn line
GujratLacks clarityLacks clarityLacks clarityLacks clarityLacks clarity
KeralaDilutedIn lineIn lineDilutedDiluted
Madhya PradeshIn lineDilutedLacks clarityLacks clarityLacks clarity
MaharashtraIn lineDilutedWith conditionsIn lineIn line
OdishaIn lineDilutedLacks clarityIn lineIn line
RajasthanIn lineDilutedIn lineIn lineLacks clarity
Uttar PradeshDilutedDilutedLacks clarityIn lineLacks clarity
Andaman and Nicobar IslandsIn line
ChandigarhIn line
Dadra and Nagar HaveliIn line
Daman and DiuIn line
LakshadweepIn line
National Capital Territory DelhiIn line

Source: Crisil ResearchThe conclusion that one can draw from Table 1 is that if you want to fully benefit from RERA you need to be a homebuyer in a union territory.

The interesting thing is that around two-thirds of the states still haven’t notified the operational guidelines of RERA as yet. This tells us how serious state governments are about implementing RERA.

To conclude, RERA hits at the heart of the basic problem with state level politics in India. The state level politics thrives on the nexus between builders and politicians. In some states builders are politicians and politicians are builders. It is difficult to differentiate between the two.

The trouble is that against whom the rules are being made are also the ones deciding on the rules. Hence, it is not surprising that the rules have been diluted or they lack clarity in comparison to the RERA Act of the central government.

But this is real life. And real life is not a fairy tale.

The column originally appeared on Equitymaster on May 4, 2017