Real Estate prices

How UPA govt subsidies helped generate black money and contributed to the real estate bubble

bubble
One of the points that I have made over and over again in the columns that I have written on black money is that theNarendra Modi government needs to concentrate on domestic black money as well.

Since coming to power in May last year, the Modi government has made a lot of noise and come up with legislation on trying to curb the black money leaving the shores of this country. Black money is essentially money which has been earned but on which tax has not been paid.

Nevertheless, it is important to realise that ultimately almost all the black money is domestic i.e. it is generated within the country when people earn money (through legal or illegal means) and do not pay any tax on it.

Given this, it is more important to concentrate on trying to bring down the total amount of black money being generated instead of trying to get back the black money that has already left India. One way to do this is to get more people under the income tax net. Efforts are being made on this front.

A PTI report points out that: “The income tax department has launched an ambitious drive to bring under its net 10 million new taxpayers, after the government recently asked the official to achieve the target within the current financial year.”

Region wise targets have been set. Pune leads the list with a target of more than 10 lakh new assesses. This is an interesting move and if it is successful this will lead to more people paying income tax and hence, the total amount of black money within the system will come down.

When the total amount of black money comes down, lesser black money will go into real estate. And this will help in ensuring that only those who really want homes to live in,will buy. This will help in controlling real estate prices.

Other than getting more people to pay income tax, the government also needs to concentrate on blocking leakages on the subsidy front. In 2004-2005, the total subsidies offered by the government stood at Rs 47,432 crore. By 2013-2014, this number had ballooned to Rs 2,54,632 crore. The total subsidies of the government had jumped by 5.4 times during the period. In comparison, the total expenditure of the government had jumped by only 3.15 times.

Only if the subsidies were reaching those for whom they were intended for, it would not have been a problem. In October 2009, Montek Singh Ahluwalia, the then deputy chairman of the Planning Commission had said: “a Plan panel study on PDS [public distribution system] found that only 16 paise out of a rupee was reaching the targeted poor.”

So where did the remaining 84 paise go? It was stolen in between. Obviously people who stole the subsidies would neither be declaring this money as income and nor be paying any income tax on it.

As Saurabh Mukherjea and Sumit Shekhar of Ambit write in a recent research titled Real Estate: The unwind and its side effects: “Subsidies under the UPA regime grew at a staggeringCAGR[compounded annual growth rate] of 19% per annum…A substantial portion of these subsidies(30-50%) was pilfered by the political class and used by them to fund investment in gold and real estate.”

In comparison to Ahluwalia’s estimate, Mukherjee and Shekhar are being extremely conservative. Nevertheless, the point being made is the same—that government subsidies are terribly leaky. The politicians who stole this money obviously did not declare this as income. This black money then found its way into real estate and drove up real estate prices.

As a FICCI report on black money published in February 2015 points out: “The Real Estate sector in India constitutes for about 11 % of the GDP of Indian Economy, as these transactions involve high transaction value. In the year 2012-13, Real Estate sector has been considered as the highest parking space for black money.”

So what has happened since the UPA was voted out of power? In 2015-2016, the total amount of subsidies have been budgeted at Rs2,43,811 crore, which is lower than the Rs 2,54,632 crore that had been spent in 2013-2014. One reason for this is obviously a fall in oil prices. The number in 2014-2015 had stood at Rs 2,66,692 crore.

This cut in subsidies along with the fact that some subsidies are now directly being paid into bank accounts is likely to help bring down both black money as well as real estate prices. As Mukherjea and Shekhar write: “The NDA has cut subsidies sharply (down 9% in 2015-2016) and is shifting subsidies to Direct Benefit Transfer (DBT); at least 10% of the overall subsidies have already been moved to the DBT. As a result, the ability ofthe politician-and-builder to pilfer subsidies to fund real estate construction has been checked.”

While cutting down on subsidies further may not be politically possible, if more and more of subsidies are paid directly into the bank account of the beneficiaries, the total amount of black money within the system is likely to come down.

Taking these steps rather than chasing black money that has left the shores of this country makes more sense and will have a greater impact on bringing down real estate prices in India. This will go a long way in making homes affordable for those who want to buy homes to live in rather than to invest.

As Mukherjea and Shekhar put it: “the NDA Government is engineering a clamp down on black money in India. The 2015-2016 Union Budget explicitly aimed to disincentivise the black economy and curb the demand for physical assets. With the new Black Money Bill (which was passed by the Parliament on May 26) and with the Cabinet approving the Benami Transactions Bill in May this year, the crackdown on blackmoney will continue further.”

These steps need to continue.

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

The column originally appeared on Firstpost on July 20, 2015

 

RBI keeps repo rate at 8%: Lower interest rates are not a solution to slow economic growth

ARTS RAJANVivek Kaul

Ramachandra Guha in a wonderful essay titled An Anthropologist Among Marxists writes about what he calls a “possibly, apocryphal anecdote.” As he writes “When Indira Gandhi was assassinated, her ashes were sent to different cities to allow public homage. When her ashes lay lay in Calcutta’s Government House they were visited one evening by the state’s finance minister. In the previous year this man had delivered no less than two hundred and sixty-two speeches on the discrimination against West Bengal in the release of funds from the central treasury. As the minister came out of the Government House, he was asked how he felt when confronting the mortal remains of his most resolute political opponent. He replied in character: Centre Kom Diye Che (the centre has again given us less than our rightful share).”
In another essay titled Political Leadership Guha writes “Jyoti Basu’s government, it was said, began every discussion on federalism with the words, “Centre kom diye che.”
The communists who ruled West Bengal for more than three decades liked to blame all the problems of the state on the central government, which they felt did not give the state a fair share of the funds.
Dear Reader, if you are wondering why am I talking about West Bengal and its politics in a piece which has the term “interest-rates” in the headline, allow me to explain. Over the last few years, everyone from politicians to businessmen to bankers have called for interest rates to be cut as a solution for reviving economic growth in India. The assumption is that at lower interest rates people will borrow and spend more and that will lead to economic growth.
In that sense, these individuals are not very different from the communist politicians of West Bengal for whom “Centre kom diye che” was an explanation for all the problems of the state. Along similar lines, individuals calling for a cut in interest rates seem to believe that higher interest rates are a major reason for the slowdown in economic growth, and a cut can really get people borrowing and spending all over again.
The former finance minister P Chidambaram was a major propagator of this belief. His successor Arun Jaitley has carried of where Chidambaram left. Other than the politicians, bankers have also regularly asked the Reserve Bank of India (RBI) to cut interest rates.
Today with the RBI deciding to keep the repo rate unchanged at 8% in the fourth bi-monthly monetary policy, the interest-rate-wallahs will be at it again. Repo rate is the rate at which the RBI lends to banks.
The RBI had its reasons for not changing the repo rate. As it pointed out in a statement “Since June, headline inflation has ebbed…The most heartening feature has been the steady decline in inflation excluding food and fuel…to a new low. With international crude prices softening and relative stability in the foreign exchange market, some upside risks to inflation are receding. Yet, there are risks from food price shocks as the full effects of the monsoon’s passage unfold, and from geo-political developments that could materialise rapidly.”
Nevertheless, over the next few days you will see bankers, real estate company owners, industry lobbies and possibly even the finance minister Jaitley, wondering why the RBI did not cut the repo rate, to get lending going again.
The most recent occasion when the interest-rate-wallahs came out in the open was when the bankers asked the RBI to cut the repo rate, after the growth in bank loans fell to a five year. As on September 5, 2014, the one year growth in bank loans stood at 9.7%. During the same time last year the number was at a significantly higher 17.9%.
The belief as explained earlier is that at lower interest rates people will borrow more. But as the American baseball coach Yogi Berra once famously said “In theory there is no difference between theory and practice. In practice there is.”
Lower interest rates do not always lead to more borrowing and revival of economic growth. An excellent example of this is what has happened in the aftermath of the financial crisis that broke out in September 2008. Western central banks brought down interest rates to very low levels in the hope that people will borrow and spend more, and help revive economic growth. But that did not happen. All it did was lead to many stock market bubbles all over the world.
Closer to home let’s take a look at car sales. The sales have revived from May 2014, after having continuously fallen for nine months. In August 2014, car sales grew by 15.16%, in comparison to the same period last year. This has happened without much change in interest rates. Why is that the case? Let’s try and understand this through a simple example. Let’s assume that an individual takes a car loan of Rs 4 lakh to be repaid over a period of five years at an interest rate of 10.5%. The EMI on this loan works out to around Rs 8,598.
Let’s say that interest rates were to come down by a massive 100 basis points (one basis point is one hundredth of a percentage)to 9.5%, all at once. At this interest rate, the EMI would work out to around Rs 8,401 or around Rs 200 lower than the earlier EMI. Now how many people will go and buy a car just because the EMI is now lower by Rs 200?
Anyone who has the ability to repay an EMI of Rs 8,401 can also repay an EMI of Rs 8,598. Hence, what people look at while taking on a loan is their ability to service the EMI. This involves at looking at factors like job prospects, the prospects of the company the individual works for and some idea of how he expects the broader economy to do. A major reason for the revival in car sales has been the election of Narendra Modi as the prime minister of India.
People have bought his election slogan “acche din aane waale hain” and hence, have taken on car loans and bought cars because for now they believe that their future will be better than their past. Interest rates have had no role to play in the revival of car sales.
Let’s consider real estate next. Here again the belief is that if interest rates are cut people will borrow and buy homes. This logic again doesn’t really hold. Home prices are now way beyond what an average Indian can afford. Let’s consider the city of Mumbai.  A July 2014 report in The Times of India quotes Pankaj Kapoor of property research firm Liases Foras as saying “In Mumbai, the average cost of a flat is Rs 1.2 crore.”
An estimate made by Forbes puts the average income of a Mumbaikar at $5900 or around Rs 3.54 lakh (assuming $1 = Rs 60) per year. This means it would need nearly 34 years of annual income (Rs 1.2 crore divided Rs 3.54 lakh) for an average Mumbaikar to buy a home in this city currently. What this tells us very broadly that homes in Mumbai are very expensive. Similar calculations done for other parts of the country are most likely to show similar results.
Hence, the point is that homes in most parts of the country are now much more expensive than what most Indians can afford. Given this, lower EMIs because of lower interest rates aren’t going to help much. The real estate market has priced itself out.
This was the demand side of things. Now let’s look at what the economists call the supply side. Investments made by corporates have fallen rapidly over the last few years. As Sanjeev Sanyal of Deutsche Bank Market Research writes in a research report titled India 2020: The Road to East Asia and dated September 2014, “Gross Fixed Investment by the private corporate sector dropped from a peak of 14.3% of GDP in 2007-08 to 8.5% of GDP in 2012-13 (and likely even lower in 2013-14) with investments in machinery and equipment being particularly hit.”
The interest-rate-wallahs would like us to believe that this fall in investment has primarily been because of the high interest rates that have prevailed over the last few years. Nevertheless is that really the case? As Rahul Anand and Volodymyr Tulin write in an IMF Working Paper dated March 2014 and titled Disentangling India’s Investment Slowdown “Our results suggest that real interest rates account for only one quarter of the explained investment downturn. However, we find that standard macro-financial variables (interest rates, external demand, relative prices, global financial market volatility and others) do not fully explain the recent investment slump. Finally, using the new measure of economic policy uncertainty, the results suggest that heightened uncertainty and deteriorating business confidence have played a key role in the recent investment slowdown.”
Hence, if the current government really wants to get corporate investment going it needs to bring in a lot of much delayed structural reform. Also, it is worth remembering here that a some of the major business groups in India have already borrowed a lot of money and are having tough time paying interest on the debt they already have. Hence, where is the question of borrowing more?
Further, it also needs to be remembered that financial savings in India have fallen dramatically over the last few years. The latest RBI annual report points out that “the household financial saving rate remained low during 2013-14, increasing only marginally to 7.2 per cent of GDP in 2013-14 from 7.1 per cent of GDP in 2012-13 and 7.0 per cent of GDP in 2011-12…the household financial saving rate [has] dipped sharply from 12 per cent in 2009-10.”
Household financial savings is essentially the money invested by individuals in fixed deposits, small savings scheme, mutual funds, shares, insurance etc. The household financial savings were at 12% of the GDP in 2009-10. Since then, they have fallen dramatically to 7.2% in 2013-14. A major reason for the fall has been the high inflation that has prevailed since 2008.
The rate of return on offer on fixed income investments(like fixed deposits, post office savings schemes and various government run provident funds) has been lower than the rate of inflation. This has led to people moving their money into investments like gold and real estate, where they expected to earn more. If the household financial savings number has to go up the rate of interest on offer on fixed income investments needs to be higher than the rate of inflation. Only recently has the consumer price inflation fallen to levels below the rate of return available on fixed income investments. This situation has to be allowed to persist if the financial savings of India are to increase.
To conclude, calling for lower interest rates on almost every occasion is not a solution to anything. It is time the interest-rate-wallahs understand this.

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

Why believing that real estate prices will never fall is a stupid idea

India-Real-Estate-MarketVivek Kaul

In a piece I wrote yesterday I said that banks in India play an important role in ensuring that real estate prices do not fall. The main point was that loans given by banks to commercial real estate, between November 2012 and November 2013, has grown at a much faster rate than their overall lending.
This has happened in an environment where real estate companies have a lot of unsold homes(or what is referred to as inventory in technical terms). The number of new projects being launched by real estate companies has also fallen significantly.
Hence, fresh loans given by banks has helped real estate companies pay off their old loans. And this has ensured that they haven’t had to cut prices in order to sell their unsold inventory. If bank loans to commercial real estate hadn’t grown as fast as it has, then the real estate companies would have had to sell off their existing inventory to repay their bank loans. And in order to do that they would have to cut prices.
In response to this piece several readers said that real estate prices never fall. Still others agreed that there is a real estate bubble in India but that bubble would never burst (whatever that meant). And this is not the first time I have received such responses.
So what is it that leads people to believe that real estate prices never fall? People have seen real estate prices only go up over the last 10 years. A home that was bought for Rs 25 lakh is now worth Rs 2 crore. Hence, there is a firm belief that real estate prices can only keep going up.
In fact such confidence was observed even during the American real estate bubble that ran from the late 1990s to late 2006.
As Alan S. Blinder writes in After the Music Stopped “A survey of San Francisco homebuyers… found that the average price increase expected over the next decade was 14 percent per annum…The Economist reported a survey of Los Angeles homebuyers who expected gains of 22 percent per annum over the same time span.”
At an average price increase of 14% per year, a home that cost $500,000 in 2005 would have cost $1.85 million by 2015. At 22% it would have cost $3.65 million.
If we apply this in an Indian context we get some fairly interesting numbers. A three bedroom apartment near the Sector 12 metro station in Dwarka, a sub-city of Delhi, went for around Rs 25 lakh nearly 10 years back.
Now it costs around Rs 2 crore. If prices rise at 14% per year it will cost Rs 7.4 crore in 10 year’s time. At 22% it will cost Rs 14.6 crore. If prices rise at the same rate as they have in the last ten years, then the home would cost around Rs 16 crore. And these are huge numbers that we are talking about here. This small calculation tells us how ridiculous it is to assume that real estate prices will continue to go up at the same rate as they have in the past.
We all know what happened in the United States. The real estate bubble peaked in 2006. Prices started to fall after the last. For the last 16 months real estate prices as measured by the 20 City S&P/ Case- Shiller Home Price Index, have been rising. But they are still 20.7% below their 2006 peak.
A similar thing is playing out in the Indian context as well, wherein people are extrapolating the price rise of the last 10 years over the future. They are “anchored” into the price rise that real estate has seen over the last 10 years and this has led them to believe that prices will continue to rise forever.
What they forget is that real estate prices fell dramatically between 1997 and 2003. As Manish Bhandari of Vallum Capital writes in a report titled The End game of speculation in Indian Real Estate has begun “The previous deleveraging cycle in year 1997-2003 witnessed price correction by more than 50% in Mumbai Metro Region (MMR) property.” Yes, you read it write, prices fell by 50% in Mumbai, the last place you expect prices to fall, given that the city is surrounded by the sea on three sides and can grow only in one direction.
Other than the price rise, another reason behind the belief that real estate prices will continue to go up is the fact that there is only so much land going around. In fact, this reason has been offered for more than 100 years.
As George A. Akerlof and Robert J. Shiller point out in Animal Spirits “In a computer search of old newspapers, we found a newspaper articles from 1887—published during the real estate boom in some U.S. cities including New York—which used the idea to justify the boom amid a rising chorus of skeptics: “With the increase in population, the demand for land increases. As land cannot be stretched within a given area, only two ways remain to meet demands. One way is to build high in the air; the other is to raise price of land…Because it it perfectly plain to everyone that land must always be valuable, this form of investment has become permanently strong and popular.”
The point I am trying to make here is that the ‘limited land’ argument to justify high real estate prices is as old as land being bought and sold. Nevertheless, in most cases there is enough land going around. This is reflected in the American context in the fact that real estate prices have barely risen over the last 100 years, once they are adjusted for inflation.
As Akerlof and Shiller write “Moreover, real home prices in the United States rose only by 24% from 1900 to 2000, or 0.2% per year. Apparently land hasn’t been the constraint on home construction. So home prices have had negligible real appreciation from the source.”
What about India? While land maybe an issue in a city like Mumbai, it clearly is not much of an issue anywhere else. There is enough land going around.
Economist Ajay Shah did some number crunching in a May 2013 column in The Economic Times. He showed that there is enough land to house India’s huge population. As he wrote “A little arithmetic shows this is not the case. If you place 1.2 billion people in four-person homes of 1000 square feet each, and two workers of the family into office/factory space of 400 square feet, this requires roughly 1% of India’s land area assuming an FSI(floor space index) of 1. There is absolutely no shortage of land to house the great Indian population.”
Also, it is worth pointing out here that real estate prices have fallen dramatically even in countries like Japan where land unlike the United States is scarce. “Urban land prices have recently fallen in Japan (where land is every bit as scarce as it is in other countries). In fact they fell 68% in real terms in major Japanese cities from 1991 to 2006,” write Akerlof and Shiller. And the property prices in Japan are still lower than they were in the 1980s.
The moral of the story is that just because something has continued to happen till now, does not mean that it will continue to happen in the future as well. There are many fundamental reasons behind why the Indian real estate bubble is unsustainable (I made some of them in yesterday’s piece).
Let me make a few more here. Indian real estate has now become totally unaffordable. As Bhandari writes “The current real estate price represents affordability of very few, while average users have to sell their twenty years of future earnings to afford a house.”
The employment situation remains extremely grim. In a report titled Hire and Lower – Slowdown compounds India’s job-creation challenge,Crisil estimates that “employment outside agriculture will increase by only 38 million between 2011-12 and 2018-19 compared with 52 million between 2004-05 and 2011-12.” This in an environment where “India’s working age population would have swelled by over 85 million. Of these, 51 million would be seeking employment.”
With fewer non agriculture jobs being created a direct implication would be that incomes will not continue to grow at the same pace as they have in the past. And that in turn will mean a lower amount of money waiting to get into real estate. There are other economic indicators also which clearly show that the Indian economy has slowed down considerably than in comparison to the past. And the real estate sector will have to adjust to this reality.
Bhandari believes that the scenario that played out during the period 1997 ad 2003 will play out again, very soon. As he points out “One of the most important proponents of fall in the property prices is likely to start from the deleveraging cycle, by the Indian banking sector, which is running a multi decade investment to deposit ratio (108%). The reversal of easy business cycle, scarcity of capital, tight monetary cycle in domestic and international market will force scheduled commercial banks to deleverage their balance sheet over the next three to four years. One can observe the same scenario, witnessed in 1997-2003, when deleveraging by the Indian Banking Sector was accompanied by deleveraging corporates that had accumulated huge debts on their books during good times. This augurs a difficult time for the Real Estate Industry.”
Even with all these reasons it is difficult to predict when the Indian real estate bubble will start running out of steam. But that does not mean that real estate prices will never fall in India. It may happen this year. Or in 2015. Or the year after that.
But in the end, all bubbles burst. It is just a matter of time. As Blinder aptly puts it “Anyway, one thing we do know about speculative bubbles—whether in houses, stocks, or anything else—is that they eventually burst.” And what that tells us is that days of earning huge returns from Indian real estate are more or less over.
The article originally appeared on www.firstpost.com on January 8, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek) 

Why car sales are falling but not realty prices

homeCar sales for the month of February 2013 are down dramatically. For the month of February 2013 they fell by 25.71% to 1,58,513 units in comparison to the same month last year.
In this column yesterday, this writer argued that falling car sales is a reflection of the overall economy slowing down. People expect the bad times to either continue or to get even worse in the months to come. And this makes them hold onto the money they would have otherwise used to buy high cost items like a car. It also means that they do not want to commit to an EMI right now. Given these reasons car sales have slowed down.
The question that immediately cropped up was that if car sales are falling, using the same logic real estate sales should also be falling and that should lead to a fall in real estate prices. If cars are a big ticket purchase, then buying a house is the biggest expenditure that most people incur during their lifetime. Also the price of cars over the last few years hasn’t risen much whereas the price of homes has gone through the roof, making them terribly expensive.
So why are people ready to buy homes but not cars? The answer of course is not straightforward. But before I come to that allow me to deviate a little.
The economist George Akerlof wrote a research paper titled The Market for Lemons in 1970. For this paper, Akerlof ultimately received the Nobel Prize. In this paper he discusses the market for second hand cars (or used cars) and the problem people have in selling them.
Akerlof divided the second hand car market into two types of cars, peaches and lemons. Peaches were cars which were in a good shape where as lemons were cars which were in a bad shape. The individual selling the car obviously knows whether his car is a peach or a lemon but the individual buying the car doesn’t. So seller has what economists refer to as ‘insider information’ which the buyer doesn’t have.
The point is that in this transaction one side has much more information than the other side. So there is an asymmetry of information. As Nate Silver writes in The Signal and the Noise – The Art and the Science of Prediction “In a market plagued by asymmetries of information, the quality of goods will decrease and the market will be dominated by crooked sellers and gullible and desperate buyers.”
The real estate market in India is a tad like that. The sellers have all the information in the world and buyers have very little of it, almost next to nothing. And this manifests itself into situations which do not benefit the buyers at all.
Allow me to explain. Everyone talks about how real estate prices have been going up. This writer was recently told by someone that the flat he had bought in 2002 for around Rs 20-25 lakh was now going for Rs 2 crore. Fair point. But are there transactions happening at such an expensive price point? And if they are happening how are they in comparison to the past?
The point is that just looking at the price doesn’t give us the answer. One also has to look at the number of buyers looking to buy at that price point because only that can tell us how strong the trend is.
Unfortunately such kind of information is not available to most buyers in India. Hence, people who sell real estate, all the brokers and property dealers of the world, deal with buyers from a position of strength and always try to project a scenario where prospective homes are scarce. The buyers have no clue of whether deals are actually happening or not and hence tend to believe the brokers.
A real estate index which tell us the broad direction of the market would be a great thing to have. While attempts have been made in the past to launch a real estate index, nothing robust has come out till date.
There are reasons to believe that people are not buying as much real estate as they were in the past. This is not conclusive evidence but some evidence nevertheless. Try reading any newspaper article which makes a pitch for the Reserve Bank of India cutting interest rates, the CEOs of real estate companies come across as the most desperate of the lot. This tells you at some level that they are not selling as much as they are building. But how will an interest rate cut of 25-50 basis points (one basis point is one hundredth of a percentage) lead to people buying homes is beyond me.
Newspapers provide another indicator. Every week the front page of one newspaper or another has an advertisement for a new real estate launch happening somewhere, where the buyer has to put a minuscule portion of the cost of the home upfront. This money that is raised is typically used by the builder to payoff money that is due instead of building the homes that he has advertised. A story in The Carvan Magazine makes this point by quoting a property dealer : “If these builders were suddenly asked not to sell any more projects, I’m telling you, most of them couldn’t balance their books tomorrow.” So in effect most real estate companies are running Ponzi schemes where they are using money being brought in by the newer investors to pay off the older investors. As long as this Ponzi scheme keeps going real estate prices will continue to be high. If newer investors stop bringing in money, the builders will have to start selling the homes that they have built in order to pay off people who they owe money to.
Another interesting number is the proportion home loans form out of total loans given by banks. Home loans peaked at 12.9% of total banking credit in March 2006. As on December 28, 2012, they formed around 9.3% of total banking credit. And this in a scenario where housing prices have gone up many times between March 2006 and December 2012. Hence, it would only fair to assume that people are buying a fewer number of homes, at least by taking on home loans.
So if people are buying fewer homes why are the prices not falling? Those who work in the real estate industry would like us to believe that the cost of constructing a house has gone up. While that may be true to some extent the argument doesn’t justify the astonishing levels of price rise.
The material used in construction of a house and other forms of real estate was and continues to be easily available. Lumber which is used in large amounts is a renewable resource. Glass is made out of quartz, the second most common mineral on earth. Gypsum, which is the main constituent of plaster as well as wall board is very commonly available mineral. Cement is made out of limestone which forms 10% of all sedimentary rock formations on earth. (Source: The Subprime Solution by Robert Shiller). That leaves out the price of land on which the homes are constructed. We will just come to that.
A major reason for home prices not coming down despite the stagnant demand for homes is the fact that the market is dominated by investors/speculators and not real buyers who buy homes because they want to live in them. Anybody who has doubts about this can take a walk through the newer areas of the National Capital Territory. Most of the flats remain empty, giving an eerie feeling of a ghost town. All these flats are owned by investors/speculators. And it is these people who keep playing a game of passing the parcel among themselves and in a way ensure that prices of homes do not fall. Also they have made so much money in the past (and given that most of it is black money) they are in no hurry to sell these homes.
The story in The Caravan quotes a property dealer to make a similar point. “There isn’t a bubble of real homes…If all these apartments were actually built, and built fairly to schedule, I guarantee you that they would find real buyers. The demand is out there. But there is a huge bubble in imaginary homes—in homes that will be delayed indefinitely or just never get built.”
Also most of the black money in India finds its way into property one way or another. Most of the ill-gotten wealth of politicians is also deployed in property. And any fall in price of real estate would mean the value of their wealth coming down.
But at the end of the day there is only so much black money going around as well. What creates the illusion of the real estate prices continuing to remain high is the supply of land. While India does not have a scarcity of land like Japan does, the problem is that politicians control the supply of land. Every state and central and politician has land held in benami. And this is the real bubble that has kept home prices high.
As Ruchir Sharma writes in Breakout Nations “Lately Indian businessmen have been regaling one another with accounts of a leading politician from Mumbai who is known to have amassed a huge wealth through property deals. At a private screening of a new Bollywood movie, this politician asked the producer to replay a particular song-and-dance number, over and over. When the producer asked if he was taken with the leading lady, the politician said no, he was eyeing the location and wondering where the producer had found such an attractive stretch of open space in Mumbai.”
If home prices have to come down, it is this link that needs to be broken.
The article originally appeared on www.firstpost.com on March 14, 2013

(Vivek Kaul is a writer. He tweets @kaul_vivek)