Why Real Estate Prices Haven’t Crashed After Notebandi


Demonetisation or notebandi was expected to push down real estate prices. Some experts had said that by March 2017 real estate prices would fall by 30 per cent. This was supposed to happen because after demonetisation, the cash needed to carry out the black part of the real estate transactions would not be available.

In India, a portion of most real estate transactions is almost always carried out in black. This involves the buyer paying the seller in cash. This essentially ensures that the buyer saves on paying stamp duty, whereas the seller saves on paying a capital gains tax.

With the cash needed to carry out a part of the real estate transaction in black not being available post demonetisation, prices would fall. Or so we were told. (To know my views on the issue, click here).

The question is have real estate prices fallen in the aftermath of demonetisation? The government seems to think so. Take the case of what the
Survey says about this issue: “[Real estate] prices declined, as wealth fell while cash shortages impeded transactions… Prices could fall further as investing undeclared income in real estate becomes more difficult.”

Sometime last week the chief economic adviser Arvind Subramanian said: “The aim of demonetisation, is in fact, to bring down real estate prices.” He also added: “Real estate on the other hand, you do see a dip in prices, in sales, in launches and of course, some of it may be adverse of the economy, but in the long run, some of that is also good, because in equilibrium, the aim of demonetisation, is in fact, to bring down real estate prices.

The question is have real estate prices really fallen? Take a look at the following chart sourced from the latest Economic Survey, which Subramanian perhaps forgot to look at.


The chart essentially shows real estate launches, sales and price, over a period of time. If you look at the right-hand side of the chart, you can clearly see that the red and the blue curves have fallen at a very fast pace. This tells us that demonetisation has led to a huge slowdown in both real estate sales as well as launches.

If we look at the chart carefully, launches of new homes by builders, were down by 60 per cent by December 2016 (the end of the fourth quarter of 2016) in comparison to end 2015. The sales were down by around 40 per cent over a similar period. All of this was not because of demonetisation because both launches and sales were already falling even before demonetisation.

In comparison, the price curve just shows a small dip in the post demonetisation period, this despite the sales crashing. Also, the prices (like sales and new launches) had already been falling even before demonetisation.

So, what does all this tells us? It tells us that the contention of the Economic Survey and Arvind Subramanian of the real estate prices falling should be taken with a pinch of salt. In comparison to the fall in sales and new launches, real estate prices have barely moved.

It also tells us that the government should be carefully reading the documents that it puts out. In this case, the graph says one thing and the analysis accompanying it, says exactly the opposite thing.

So, what explains this phenomenon of falling sales and more or less flat prices? The Indian real estate scenario is always a little tricky to explain. In any other market, if sales had fallen by 40 per cent, the market would have crashed by now. So, what gives? There are no clear cut answers here but only speculative ones.

Most Indian real estate companies are fronts for the ill-gotten wealth of politicians. The builders who operate as fronts have promised a certain rate of return to politicians, and hence, are not able to cut prices. This is one possible explanation. Another explanation that keeps getting offered is the fact that the builders and politicians have made a lot of money over the years, and hence, are in no hurry to cut prices to sell the real estate inventory of homes that has been built up.

A third explanation offered is that banks which have lent money to the builders don’t want them to cut prices. A fourth explanation that was offered to me by a reader was that even though home-sales fell they did not fall by as much as they should have. What does this mean? It basically means that some of the smaller builders post demonetisation, have managed to sell some of their inventory to those who had black money in the form of high denomination notes of Rs 500 and Rs 1,000.

They took this money and used it to pay off their debt to their suppliers. The suppliers then used the money and paid it off to those who they owed money to. Essentially, the demonetised notes were paid down the chain, until they reached the workers who went ahead and deposited the money into their bank accounts. So, the world worked, and black money was converted into white.

I am sure there might be other explanations for this as well. But these are the explanations that I came across and have put them out. With very little data going around, Indian real estate, as always, remains very difficult to analyse.

The column originally appeared in Equitymaster on February 6, 2017

Real estate prices are not just about corruption; they are also about affordability


Last week, Suraj Parmar, a leading Thane builder committed suicide. In his suicide note Parmar talked about the corruption in the system. A report in The Indian Express quoted V V Laxminaryan, the joint commissioner of police of Thane, as saying: “The suicide note speaks of several problems that Parmar was facing, including difficulties in obtaining approvals and the stop-work notices issued to him. The note goes on to say that several people were repeatedly demanding bribes, that he had already paid them a lot in the past but that their demands were still continuing and it had become too much for him to deal with.”

Corruption in real estate at the government level has always been an issue. But now if builders are to be believed it has reached never before seen levels. As Niranjan Hiranandani, director of Hiranandani Group told NDTV.com, after Parmar’s suicide: “In the last couple of years, I think corruption is over but extortion has started. So, I think what was unbearable to the builder was the fact that there was no corruption in that sense of the term, but it had gone far beyond corruption levels that have ever happened.”

A June 2011 news-report in The Economic Times gets into the details of the issue. In Maharashtra, which happens to be the biggest real estate market in the country, a builder typically needs around 60 approvals to construct a property. Of this, 50 approvals need to be taken from the municipal corporation where the property is being built.

The Economic Times report then goes on to quote Pune builder Kumar Gera, as saying: “These clearances should not take more than three months…But in most states, it takes anywhere between one year and four years. And they add 20-30 % to a builder’s project cost.”

This is, in turn, passed on to consumers who want to buy homes. As a report in the Daily News and Analysis points out: “At every step, there is a price to be paid to obtain necessary clearances. The ‘Golden Gang’, a group of corporators and civic officials, calls the shots and builders are bound to cough up exorbitant sums to avoid harassment. This expenditure, so to speak, is then passed on to home buyers. That explains why real estate in Mumbai, Thane and Navi Mumbai is so prohibitively expensive.”

In fact, as a real estate consultant told The Economic Times: “Builders don’t just pass it on…They often add to it big time.” So builders add their own corruption premium to the price of homes they sell.

Most builders use corruption in government and increasing input costs to explain that the price of homes won’t fall anytime in the near future. Take the case of cement, a major input into building homes. As a recent newsreport in The Economic Times points out: “Cement prices have jumped 20-40 per cent over the past two months in top cities despite demand from the real estate industry, which is its largest buyer, being low.”

In this scenario the price of homes won’t fall, say builders. But this logic just takes into account the supply side of the equation. It only talks about the builders who supply homes and the costs they have to incur. What about the end consumers who want to buy these homes?

As John Kay writes in an essay titled Guess Who’s Come to Dinner which is a part of the book Everlasting Light Bulbs – How Economics Illuminates the World: “But surely people can’t spend an increasing proportion of their incomes on housing.” The affordability of homes also needs to be taken into account.

Also, owning a house is just not about putting up a down-payment, taking a home loan and paying the builder. There are other costs involved as well. Hence, as Kay puts it, it is important “to focus on the costs of house ownership rather than the cost of houses.”

Given this, affordability isn’t just being able to pay the price of the house. There is more to it than that. As Kay writes: “Mortgage repayments [home loan EMIs basically] are only a…part of the cost of buying a house: you have to pay for repairs and maintenance, heat and light, property taxes.” Then there is the cost of moving in, the cost of setting up the place, and so on.

In a scenario where home prices are anyway high all these costs make the entire cost of owning a home even more expensive. So, the point that builders make about their inability to cut prices doesn’t have any meaning. They can build homes and sell them at prices they think are right, but the question is will there be any takers at that price? And the answer is clearly no.

In any market there are always two sides – demand and supply. And that is a basic point that our builders need to remember. So, they can continue holding on to their prices, but at those prices there will be not much demand for homes. As Kay writes in another essay titled A Fetish for Manufacturing: “The rewards of different activities [are] detached from their position in the hierarchy of needs. You only [get] paid for producing goods that people [want].”

Kay makes another interesting point, which I would like to talk about here. As he writes: “In classic bubbles – from tulip mania to the dot.com frenzy – people bought things, not for their intrinsic worth, but to sell on to others at a higher price. That rarely happens with houses.”

This is not true in the Indian context. Homes in India have “not” always been bought “for their intrinsic worth” but they have also been bought “to sell on to others at a higher price”. And that clearly is not happening anymore. Over the last few years you would have been better off letting your money sit idle in a savings bank account rather than investing in real estate. Given this, the interest in owning real estate has come down. That is clearly visible from the huge number of unsold homes across cities as well as fall in the launch of new projects.

As Kay writes: “As in every asset market, short term price movements are driven by beliefs, not underlying realities.” The underlying reality is that at these prices it does not make any sense to invest in real estate. But the belief that real estate prices always go up is still reasonably strong. The question is for how long will the belief remain strong?

I think we are half way there.

The column originally appeared in The Daily Reckoning on October 15, 2015.

The RBI rate cut won’t revive the real estate sector; lower home prices will

I don’t know what you want to call me, Santa Claus or hawk. My name is Raghuram Rajan and I do what I do
– Raghuram Rajan, governor of the Reserve Bank of India, yesterday in a press conference

During the course of the last few weeks, anyone who had any opinion on the Indian economy was saying just one thing: “Raghuram Rajan should cut interest rates.” Given this, there was tremendous pressure on Rajan to cut the repo rate, or the rate at which the Reserve Bank of India (RBI) lends to banks.
The expectation was that Rajan would cut the repo rate by 25 basis points. One basis point is one hundredth of a percentage. He surprised everyone by cutting the repo rate by 50 basis points to 6.75%.

Or as a Facebook friend put it quoting Akshay Kumar from the movie Rowdy Rathore: “Main jo bolta hoon woh main karta hoon. Aur jo main nahin bolta hoon, woh main definitely karta hoon (I do what I say. And what I don’t say I definitely do that).”

One of the first reactions that came in on the rate cut was from Rajeev Talwar, co-CEO of DLF, India’s largest listed real estate company. Talwar said that a 50 basis points rate cut was a “pleasant surprise” from the RBI governor. He also suggested that now that the governor had “bitten the bullet”, it is time he allowed “teaser home loans…at least for a period of two years” and that would “give a huge boost to new buyers”.

The insinuation here is that high interest rates had kept people away from buying homes. Nevertheless, is that really true? Let’s take a look at what the numbers suggest. The RBI publishes the sectoral deployment of credit data every month. As per this data, the overall lending by banks grew by 8.2% between July 25, 2014 and July 24, 2015. During the same period the total amount of home loans given by banks grew by 17.8%.

How was the scene in July 2014? Between July 26, 2013 and July 25, 2014, the overall lending by banks had grown at a much faster 12.6%. During the same period home loans grew by 17.4%.

What do these data points tell us? While the overall lending growth of banks has come down, the home loans have grown at a faster rate, despite high interest rates. Further, during the last one year, 21.6% of overall lending by banks was in the form of home loans. This number had stood at 13.2% between July 2013 and July 2014.

Hence, Talwar insinuating that the real estate sector has been down in the dumps because of high interest rates, is basically all bunkum. Take the case of the State Bank of India, the largest bank in the country. Between June 30, 2014 and June 30, 2015, home loans formed around 36% of all the domestic lending carried out by the bank. And this is a huge number.

If builders had their way, they would happily turn all Indian banks into home finance companies. But the fact of the matter is that banks are already giving out a substantial portion of their overall lending as home loans.

If real estate companies are still not managing to sell enough homes and have managed to accumulate a huge amount of inventory of unsold homes, high interest rates are not responsible for it in anyway. The home loan lending by banks hasn’t slowed down one bit and continues to grow at a good pace.

The only way to revive the real estate is to cut prices. But that is something that the builders don’t want to do, having gotten used to easy money in the form of high prices over the years. Hence, they keep blaming everyone but themselves.

As Navin Raheja, chairman and managing director of Raheja Developers recently said: “I don’t think there is any further possibility of developers to reduce the price further because there is no way they can reduce the prices…If you look at it, last 10 years, there have been so many new developers which came without knowing the dynamics of the sector and later on they went into distress selling.” I sincerely wonder where this so called “distress selling” is happening, a few projects here and there notwithstanding.

The larger point here is that this sort of attitude will only hurt real estate developers in the time to come. They want to sell stuff at a price at which most people can’t afford to buy. A recent study by real estate consultant JLL points out that 69% of the unsold homes in Mumbai are priced more than Rs 1 crore. This when the weighted average price of a home in the city is around Rs 1.3 crore.

The real estate developers have refused to look at this basic fact and continue to price homes at high rates. Data from JLL shows that of the new launches that happened in Mumbai between April and June 2015, only 3.2% of the homes being built were priced between Rs 31-65 lakh. There were none under Rs 30 lakh.

As I have often pointed, the impact that falling interest rates have on EMIs isn’t huge. A  home loan of Rs 50 lakh, at an interest rate of 10% and a tenure of 20 years, leads to an EMI of Rs 48,251. At 9.5%, assuming the fifty basis point repo rate cut is passed on to the borrower, the EMI works out to around Rs 46,607, which is around Rs 1,650 lower.

No one is going to go buy a house with a loan of Rs 50 lakh, because the EMI is now Rs 1,650 lower. Also, in order to get a home loan of Rs 50 lakh, the individual interested in buying a home would need to arrange Rs 12.5 lakh for a down-payment (assuming an optimistic ratio of 80:20). Over and above this, some portion of the payment will have to be made in black as well.

What all this clearly tells us that most of what is being built by real estate developers will continue to remain unsold. The real estate developers have priced themselves out of the market. The sooner they come around to this reality, the better it will be for all of us.

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

The column originally appeared on Firstpost on Sep 30, 2015

Property prices must fall: Rajan reads out the riot act to real estate wallahs

Vivek Kaul

Raghuram Rajan, the governor of the Reserve Bank of India (RBI), merely stated the obvious when he said today (August 20, 2015): “It would be a “great help” if realty developers sitting on unsold stock bring down prices…Once the prices stabilise, more people will be keen to buy houses.”

The RBI governor added that property prices need to fall before interest rates on home loans come down, any further. “I think we need the market to clear. With growing unsold stock, we need to see the ways to do it. Some of it might be by making loans easier, but we also don’t want to create a situation where prices stay high at the level which means demand can’t pick up,” he said.

There are multiple points that need to be made here: First is that Rajan was essentially replying to all the real estate wallahs (real estate companies, lobbies and others associated with the sector) who demand interest rate cuts at a drop of a hat. The message from the RBI governor is loud and clear. The home prices are in a bubble zone and he does not want to inflate the bubble further by cutting interest rates. Home prices need to fall.

Also, it is worth mentioning here that even at high interest rates home loans given by banks continue to grow at a very brisk pace. The Reserve Bank of India (RBI) puts out the sectoral deployment of credit data every month. As per these numbers, the total amount of home loans given by banks grew by 15.6% to Rs 6,53,400 crore, over the last one year. In comparison, the overall lending by banks grew by just 7.3%. These numbers were as of June 2015.

How was the situation in June 2014? Home loans had grown by 17.1% to Rs 5,65,000 crore. In comparison the overall lending by banks had grown by 12.8%. What this clearly tells us is that even though the overall lending growth of banks has crashed from 12.8% to 7.3%, home loans continue to grow at a fairly brisk pace.
Further, banks have given out Rs 88,400 crore of home loans in the last one year. This formed around 21% of all the lending carried out by banks. For a period of one year ending June 2014 and June 2013, home loans formed around 12.7% and 12.2% of the total loans given by banks.

What this clearly tells us that banks are giving out a greater amount of home loans as a proportion of their overall loans, than they were in the past. And if this hasn’t led to a fall in inventory of unsold homes, the only reason is that home prices have gone up way beyond what most people afford. Hence, even though the total amount of home loans has gone up, the total number of home loans being given out may have even fallen (This data is not available).

The only way this situation can be corrected is if home prices fall, which is precisely what Rajan said.

The other interesting point that needs to be made here is that central bank governors normally stay away from calling a bubble, a bubble. Alan Greenspan, the Chairman of the Federal Reserve, from 1988 to 2006, was a pioneer in this school of thought. He told the US Congress in June 1999: “Bubbles are generally perceptible only after the fact. To spot a bubble in advance requires a judgment that hundreds of thousands of informed investors have it all wrong. Betting against markets is usually precarious at best.”

So, the Federal Reserve could not spot the dotcom bubble, explained Greenspan. But once it had burst, steps could be taken to ease its fallout, Greenspan felt. As he said in a speech titled Economic Volatility on August 30, 2002: “The notion that a well-timed incremental tightening could have been calibrated to prevent the late 1990s bubble is almost surely an illusion. Instead, we noted in the previously cited mid-1999 con­gressional testimony the need to focus on policies ‘to mitigate the fallout when it occurs and, hopefully, ease the transition to the next expansion.’”

There is a fundamental problem with this argument. Greenspan was basically saying that the Federal Reserve could not recognize a bubble, but it could figure out when the same bubble had burst.

Raghuram Rajan exposes the flaw in this argument in his book Fault Lines. As he wrote: “This speech seemed to be a post facto rationalization of why Green­span had not acted more forcefully on his prescient 1996 intuition: he was now saying the Fed should not intervene when it thought asset prices were too high but that it could recognize a bust when it happened and would pick up the pieces.” Greenspan had used the term “irrational exuberance” to describe the dotcom bubble in a speech he had made in December 1996, and then chosen to do nothing about it.

Rajan clearly does not believe in the fact that a central bank cannot identify a bubble. What he said today regarding property prices being high and that they need to fall, before people can start buying homes again, clearly proves that.

Further, the real estate wallahs seem to have come up with a new explanation for why real estate prices cannot fall any further(they have barely fallen to start with). As Shishir Baijal, chairman and managing director of Knight Frank India, a real estate consultancy, told Mint recently: “Theoretically, if prices come down, perhaps the demand can increase. But I’m not sure if developers have any leeway left now for reducing prices. This is because input cost has increased quite a lot over the past few years— be it cost of labour, construction and material, or even the historical cost of land itself, which is very high. It does not look like there is any scope left for a serious correction in prices.”

This, after he had said: “there is a mismatch [between demand and supply] because people are finding it unaffordable (to buy).”And this came, after he had said: “If you look at investor demand, property is not their primary choice anymore. This is due to muted price appreciation, high level of unsold inventory, and the fact that there are other more lucrative financial instruments to choose from. Earlier, there weren’t any options as the equity market was not performing.”
So, investors are not buying because they are not getting high returns from investing in real estate, anymore. The end users are not buying because prices are high. But prices will still not fall, say the real estate wallahs. What sort of an argument is that?

If home prices do not fall, the real estate sector will continue to remain in a mess for a much longer period of time. The market will go through what analysts call a longer time correction (i.e. prices will stagnate for a long period), if prices don’t fall. And this can’t possibly be good for anyone—buyers will continue to stay away, and sellers won’t be able to sell.

This will mean that the real estate companies will continue to hold on to unsold homes that they have accumulated over the years. Given this, Rajan was absolutely right when he said if the market has to function, and buy and sell transactions have to happen, home prices need to fall. The sooner the real estate wallahs understand this, the better it will be for all of us.

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

The article originally appeared on Firstpost.com on August 20, 2015

A few confessions on real estate forecasting

India-Real-Estate-MarketIn the recent past I have written quite a few columns on real estate. In some of these columns I have clearly said that I expect the real estate prices to continue to fall in the time to come.

In response to this point a question that gets often asked is: “Should I buy a home now?” This is a very difficult question to answer, given that it has zero information built into it. It doesn’t tell me where the person asking the question is based out of.  Does he want to a buy a home to live in? Or is he looking to invest? Further, what is the financial situation of the individual? So on and so forth.

I will try and answer this question in today’s column in a fairly general sort of way. If you are looking to invest in real estate this clearly is not the time to invest, given that the prices are falling and the return over the last one year has been extremely subdued. The time to invest in real estate will come once the prices have fallen from the current levels.

How about buying a home to live in? That really depends on your financial position and how stable you are in the current rented accommodation you are living in. If the landlord is likely to let you continue to live, then it is best to wait it out. You will definitely get a better deal in the days to come.

If he is not and you have enough money going around then it is best to buy a home. Obviously, you need to ensure that you aren’t using up all your savings in making the down-payment and stretching your home loan limit to the hilt. While you will end up paying more now than if you were to buy a home somewhere down the line, there will be other happier things to look forward to.

The social pressure that comes with not owning a house will go away. The child (or children) will have a more stable environment to live in. And given these reasons, if you have the money and need a home to live in, it makes sense to go ahead and buy one.

All this comes with a small caveat—if you are thinking of buying a home in the National Capital Territory, be very careful. As Santhosh Kumar, CEO – Operations & International Director, JLL India recently wrote:The National Capital Region (NCR) has some locations that buyers are best advised to avoid. Various issues like delays in delivery, oversupply, speculation and infrastructure deficit have been plaguing these markets, rendering them unsuitable for first-time home purchase.”

Another question that is often asked is: “By when do you think price of real estate will fall dramatically?” This remains a very tricky question to answer because there is no credible price-volume data going around on Indian real estate. (i.e. how many homes were sold and what at price).

The only real estate data that is available at the agglomerated level is supplied by real estate consultants. The trouble is that these consultants make more money when the real estate sector is doing well i.e. prices are on their way up. Given that, even though the data supplied by them is showing excessive inventory of unsold homes and more or less flat prices on an average across the country, the actual situation might be much worse (which means the crash in real estate prices might happen sooner rather than later, but this cannot be said for sure).

Further, the data supplied by real estate consultants is at best limited to metropolitan cities. Given that, there is almost no information about the price-volume trend of real estate beyond the top cities in the country. So how does one predict, when will prices fall dramatically all across the country without much data?
Further, the real estate indices that India are not “real time” enough. The two main indices put out by the National Housing Bank and the Reserve Bank of India, are really not up-to-date.

Then there is the biggest variable of them all: black money. How does one figure out whether the total amount of black money going into real estate has gone up or come down? In this scenario one can make educated guesses from the data that is available and anecdotal evidence that keeps coming in.

An interesting experiment was carried out by a friend of mine recently. He called up several real estate brokers from two different numbers. On the first call he pretended to be a buyer and was told “Sir, daam abhi bhi badh raha hai (the price is still going up).” On the second call he pretended to be a seller and was told “Sir, there are no buyers in the market.” What conclusion can we draw from this? I leave that up to you.

As far as black money is concerned, the situation in National Capital Region, makes for an interesting reading. As analysts Saurabh Mukherjea and Sumit Shekhar of Ambit write in a recent research report titled Real Estate: The unwind and its side effects: “In Delhi, the ratio of unaccounted value of real estate transactions to the total value is as high as 78%. The same ratio is 50% in Kolkata and Bangalore. In smaller towns and semi urban centres, nearly 100% of property transactions are conducted in cash.”

Hence, among the bigger cities, the maximum amount of black money goes into real estate in Delhi and the National Capital Region. And this I feel has been coming down. The real estate rating and research agency Liases Foras estimates that the National Capital Region had an unsold home inventory of 71 months (the real situation might be worse) as on March 31, 2015. This means that if sales continue at the current pace it would need another 71 months to sell the existing number of unsold homes. An inventory of eight to 12 months is considered healthy.

What this huge inventory clearly tells us is that the amount of black money coming into real estate has come down in the National Capital Region and this is good news for genuine buyers who want homes to live in.

Over and above this, the real estate prices have run up way beyond what most Indians can afford. And once you take this into account, prices are bound to fall. This becomes very clear from the point that rental yields are now as low as 2% (again a data point provided by real estate consultants and given that the situation might be worse). Rental yield is essentially annual rent that can be earned from a home divided by its market price. No market can keep working beyond a point without catering to what the customers really want.

All these reasons, lead me to believe that real estate prices will continue to fall in the days to come. Though please don’t ask me when will they crash? Because I really don’t know.

This is one of those funny situations where one will be partially wrong till one is proven right. All I can say to conclude is: stay tuned!

The column originally appeared on The Daily Reckoning on July 28, 2015