Tag: Real Estate | Page 15

10 February, 2015

Despite rising number of unsold homes, real estate prices continue to rise

The Confederation of real estate developers association of India (CREDAI) a real estate lobby, has written to the government to provide relief to the real estate sector in the upcoming budget which is scheduled towards the end of this month.
“We want infrastructure status for real estate apart from that there should be exemption from the tax and less formalities to obtain home loans for the buyers,” a CREDAI official told the Times News Network.
These moves, the lobby believes, will provide the sector some “cheer”.
Before this, CREDAI had constantly been talking about the need for the Reserve Bank of India(RBI) to cut the repo rate or the rate at which it lends to banks. Raj Modi, president of CREDAI in the National Capital Region had said in January 2015 : “We have been raising the concerns of developers over higher rates from the government. We are happy that RBI has taken a step by cutting the rates. We expect that this will encourage banks to ease their home loan rates…This will help developers to expedite their projects which were otherwise facing fund crunch. Home buyers’ dreams of owning a home would also get a boost as we expect an accelerated purchase cycle.”
This comment came after the RBI decided to cut the repo rate by 25 basis points to 7.75%:
The position taken by CREDAI till date seems to be that people are not buying homes because interest rates are high. If RBI starts cutting the repo rate it will lead to banks cutting the interest rate they charge on their home loans. People will borrow and buy homes. And everybody will live happily ever after.
Only if things were as straightforward as that. I have explained in the past that the major reason why Indians are not buying as many homes as they were in the past is because prices are too high in comparison to the income of people. Further, despite slowing sales, most real estate companies and builders have not budged and refused to cut prices.
This becomes clear through the research report titled India Residential Market Preview for the period October to December 2014, released by Liases Foras, a real estate research and rating company. The research report provides data for six cities (Mumbai Metropolitan Region, National Capital Region, Chennai, Bangalore, Hyderabad and Pune).
The report clearly shows that sales continue to remain slow as the total number of unsold homes pile up. “The unsold stock rose 17% from 709 mn SqL in Dec 13 (Oct to Dec 2013) to 832 mn SqL in Dec 14 (Oct to Dec 2014),” the report points out. Yearly sales across the six cities that the report covers declined by 1.1%.
Despite huge number of unsold homes and falling sales, home prices continued to rise, though not at the same pace as they have in the past (as can be seen from the accompanying table).

City	Weighted Average Price of a Flat in Oct to Dec 2013	Weighted Average Price of a Flat in Oct to Dec 2014	% increase in price	Months of unsold inventory as on Dec 2014	Months of unsold inventory as on Dec 2013
Mumbai Metropolitan Region	Rs 1.23 crore	Rs1.32 crore	6.62%	40	48
National Capital Region	Rs 73.09 lakh	Rs 74.79 lakh	2.33%	40	56
Bangalore	Rs 85.21 lakh	Rs 85.55 lakh	0.40%	17	35
Chennai	Rs 61.57 lakh	Rs 63.37 lakh	2.92%	22	41
Pune	Rs 55.84 lakh	Rs 56.94 lakh	1.96%	21	15
Hyderabad	Rs 70.51 lakh	Rs 74.77 lakh	6.05%	31	24

Source: Liases Foras

A glance through the column in the table which lists the weighted average price of a flat across various cities, makes it clear how homes have become totally unaffordable across the length and breadth of India. And this is where the problem lies.
Other data also clearly shows this unaffordability of homes across India. Take a look at the following table from the National Housing Bank. It shows the breakdown of home loans given by housing finance companies for buying old homes.

Source: National Housing Bank

As is clear from the above table more than half of the total loans given by housing finance companies have been given to homes worth more than Rs 25 lakh. The data for 2014 is not available. Nevertheless, there is not much reason to believe that the situation would have changed much from what it was in 2013.
The following table shows a breakdown of home loans given by housing finance companies towards the buying of homes (both old and new).

Source: National Housing Bank

The above table shows that more than 47% of all home loans given by housing finance companies were for homes above Rs 25 lakh. This number has jumped dramatically since 2012, when it was at 43%. It also needs to be pointed out that at Rs 25 lakh it would be next to impossible to buy anything half decent in the six cities that Liases Foras tracks. It would be interesting to know, what portion of the total home loans is made of home loans over Rs 50 lakh.
Hence, homes are so expensive that it has led to a situation where the share of housing as a proportion of the Indian GDP is very small. As can be seen from the following table, the only countries that are behind us when it comes to housing are Bangladesh, Sri Lanka and Pakistan.

Source: National Housing Bank

Hence, affordability is the major issue when it comes to real estate. As the Report on Trend and Progress of Housing in India 2013 points out: “This phenomenon[i.e. affordability] has the potential to exclude a large segment of the society as they get priced out of the formal housing finance market…It continues to remain the most critical aspect of housing for a vast segment of the population.”
Interestingly, the Technical Group of Housing Shortage estimates that the housing shortage in urban India was at 18.78 million in 2012. In rural India the number was at 43.9 million.
What this clearly tells us is that India’s real estate companies and builders have been building homes for only a a very small segment of the population. And even this segment is now not in a position to buy the homes that are being build, given the price that they are being sold at.
It is time the real estate sector woke up to this opportunity. The government also needs to address this, by rapidly addressing supply side issues like archaic building bye-laws, delays in project approvals etc. At the same time it also needs to figure out how to drive down high land costs. And on top of everything, it needs to figure out how to tackle the massive amount of black money that the sector attracts.

The column originally appeared on www.equitymaster.com as a part of The Daily Reckoning on February 9, 2015

6 November, 2014

Mr Jaitley here is why Indians can’t buy a home to live in

Politicians and intellectuals who rarely venture out of their homes in Delhi, seem to have a table top theory to explain everything that is wrong with this country. A favourite theory doing the rounds these days is that India is not progressing because interest rates are too high. And given that, the Reserve Bank of India needs to cut interest rates. Once it does that people will buy homes, cars and what not, and high economic growth will return again. QED.
But is that really the case? Recent data released by the real estate research firm Liases Foras clearly shows that homes in Indian cities are terribly expensive.

The weighted average price of a flat in Mumbai is Rs 1.34 crore. For Bangalore this stands at Rs 88 lakh and for the National Capital Region at Rs 75 lakh. Nevertheless, this table does not tell us how bad the situation really is. In order to understand that we need to take the per capita income of these cities into account.

The state level economic surveys give out the per capita income of various cities. The only trouble here is that the latest numbers are not available. Hence, in order to account for that I have adjusted these incomes by assuming an average increase in per capita income of 10% per year. (Further, I couldn’t find the average income of Chennai, and hence haven’t taken it into account for making this calculation. Also, for the Mumbai Metropolitan Region I have used the average of the per capita incomes of Mumbai and Thane, respectively. For the National Capital Region, I have used the per capita income of Delhi, and hence the calculation is a little understated to that extent.)

The following table gives the per capita income of five cities in 2014-2015. In order to show how

high the real estate prices are we will basically divide the entries in the first table by the entries in the second table. Hence, we will end up calculating that how many years of current income is needed to buy a flat in a particular city. And the results are very interesting.
It takes 68 years of current income to buy a flat in the Mumbai Metropolitan Region. For Bangalore the number is at an even higher 81.5 years. This seems on the higher side. And there is a reason for it. I have used the per capita income of Bangalore division (which is what I could find in the

Karnataka Economic Survey of 2013-2014). And Bangalore division includes not just Bangalore but also other places like Kolar, Shimoga, Tumkur etc., where per capita incomes are lower than that in Bangalore.
Even if we assume that per capita income in Bangalore is double the per capita income in Bangalore division, it will take around 40 years of current income to buy a home in Bangalore.
Of the five cities, Pune is the cheapest to buy a home in. But even there is takes close to 32 years of current annual income to buy a home.
Further, home prices continue to remain despite the fact that there is a huge inventory of unsold homes, as the following table from Liases Foras shows us.

National Capital Region has an inventory of 83 months. What this means is that if the current number of unsold homes is to be sold, it would need nearly 83 months or around seven years for that to happen. One reason for the unsold inventory is that most builders are not interested in developing affordable homes. Everyone wants to cater only to the richer segment of the population.
Also, the tables clearly prove that high interest rates are really not why people are not buying homes. They are not buying homes because homes are very expensive. Fresh home loans can be got these days at anywhere between 10-11 percent. Assuming this interest rate where to fall in the days to come, how much difference would it make? Would people buy homes?
Let’s understand this through an example of an individual who wants to buy a home in Hyderabad. As mentioned earlier the average price of a home in Hyderabad is Rs 75 lakhs. The individual puts in a downpayment of Rs 15 lakh (20% of the value of the home) and takes a home loan of Rs 60 lakh at 10 percent to repaid over 20 years. On this the EMI would work out to around Rs 57,900.
If the interest rates were to fall to 9 percent, the EMI would fall to around Rs 54,000. So, would the individual now buy a home just because the EMI will be around Rs 4,000 per month lower? Unless, home prices fall and builders start concentrating a little more on affordable housing, lower EMIs are not going to help.
This is something that Jaitley and others of his ilk operating out of Delhi, need to realize. To conclude, if Jaitley, the quintessential dilli-wallah, had asked one of his IIT educated babus to do some basic number crunching, he wouldn’t be saying the silly thing that he did.

The article was originally published on Nov 6, 2014 on www.FirstBiz.com

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

22 October, 2014

Don’t blame Rajan: It’s time the interest-rate-wallahs stopped punching the RBI

Vivek Kaul

It fashionable these days to criticize the Reserve Bank of India at the drop of a hat. The senior columnist Prem Shankar Jha is the latest person to join this bandwagon. The newest interest-rate-wallah on the block in a column in The Times of India held the RBI responsible for India’s slow economic growth over the last few years. As he writes “[The] Indian economy is not on the road to recovery. The reason is the sustained high interest rate regime of the past four years. Industry has been begging for cuts in the cost of borrowing since March 2011… On August 5, RBI governor Raghuram Rajan surprised the country by announcing that he would not lower interest rates, because at 8% consumer price inflation was still too high.”
I guess Jha must have among the few people surprised by Rajan’s decision given that among those who follow the workings of the Indian central bank closely, almost no one had expected Rajan to cut interest rates.
The premise on which interest-rate-wallahs work is that at lower interest rates people will borrow and spend more, which will lead to economic growth. But the entire premise that low interest rates will lead to a pick up in consumption and hence, higher economic growth, doesn’t really hold. (As I have explained here).
The other big reason offered is that companies can borrow at lower rates of interest. The bigger question that interest-rate-wallahs tend to ignore is how much control does the RBI really have over interest rates that banks pay their depositors and in turn charge their borrowers? Over the last few weeks, banks have cut interest rates on their fixed deposits. The list includes State Bank of India, Punjab National Bank and Central Bank of India. (You can read about here, here and here). The Indus Ind Bank also cut the interest it pays on its savings account to 4.5% from the earlier 5.5% for a daily balance of up to Rs 1 lakh, starting September 1, 2014.
All these cuts in interest rates have happened despite the RBI maintaining the repo rate at 8%. Repo rate is the interest rate at which the RBI lends to banks. So what has changed that has allowed these banks to cut the interest rates at which they borrow?
Let’s look at some numbers. As on October 3, 2014, over a period of one year, the loans given by banks rose by 9.87%. During the same period the deposits raised by banks rose by 11.54%. How was the situation one year back? As on October 4, 2013, over a period of one year, the loans given by banks had risen by 15.18%. During the same period the deposits had grown by 12.9%.
Hence, the rate of loan growth for banks has fallen much faster than the rate at which their deposit growth has fallen. Given this, it is not surprising that banks are cutting fixed deposit rates, given that their rate of loan growth is falling at a much faster rate.
As Henry Hazlitt writes in Economics in One Lesson “Just as the supply and demand for any other commodity are equalized by price, so the supply of demand for capital are equalized by interest rates. The interest rate is merely a special name for the price of loaned capital. It is a price like any other.”
As Hazlitt further points out “If money is kept…in…banks…the banks are eager to lend and invest it. They cannot afford to have idle funds.”
Hence, given that the rate of loan growth is much slower than the rate of deposit growth, it is not surprising that banks are cutting interest rates on their fixed deposits. Given this, the impact that RBI’s repo rate has on interest rates is at best limited. It is more of a broad indicator from the RBI on which way it thinks interest rates are headed.
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. It has come down from 12% of the GDP in 2009-10 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 led to people moving their money into investments like gold and real estate, where they expected to earn more. Hence, the money coming into fixed deposits slowed down leading to a situation where banks could not cut interest rates., given that their loan growth continued to be strong.
What also did not help was the fact that the borrowing requirements of the government of India kept growing over the years.
The RBI was not responsible for any of this. The only way to bring down interest rates is by ensuring that inflation continues to remain low in the months and the years to come. If this happens, then money flowing into fixed deposits will improve and that, in turn, will help banks to first cut interest rates they offer on their deposits and then on their loans.
The government needs to play an important part in the efforts to bring down inflation. In fact, it has been working on that front. In a recent research report analysts Abhay Laijawala and Abhishek Saraf of Deutsche Bank Market Research write that the “the government is firmly ‘walking the talk’ on fiscal consolidation” through a spate of “recent administrative moves on curbing food inflation (such as fast liquidation of surplus foodstock, modest single-digit hike in MSPs, an effort to eliminate fruits and vegetables from ambit of APMC etc.)”
To conclude, RBI seems to have become everyone’s favourite punching bag even though its impact on setting interest rates is rather limited. It is time that interest-rate-wallhas like Jha come to terms with this.

The article originally appeared on www.FirstBiz.com on Oct 22, 2014

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

10 September, 2014

Here’s how India’s government unwittingly aids the growth of ponzi schemes

Over the last few years a spate of Ponzi schemes have come to light. These include Sahara, Saradha Chit Fund, Rose Valley Hotels and Entertainment and most recently PACL. A Ponzi scheme is essentially a fraudulent investment scheme in which money brought in by new investors is used to redeem the payment that is due to existing investors.
The instrument in which the money collected is invested appears to be a genuine investment opportunity but at the same time it is obscure enough, to prevent any scrutiny by the investors. So PACL invested the money it collected in agricultural land. Rose Valley, Sahara and Saradha had different businesses in which this money collected was invested.
These Ponzi schemes managed to raise thousands of crore over the years. In a recent order against PACL, the Securities and Exchange Board of India(Sebi) estimated that the company had managed to collect close to Rs 50,000 crore from investors. Sahara is in the process of returning more than Rs 20,000 crore that it had managed to collect from investors, over the years.
The question is how do these schemes manage to collect such a large amount of money. A June 2011, news-report in The Economic Times had estimated that PACL had managed to collect Rs 20,000 crore from investors at that point of time. This means that since then the company has managed to collect Rs 30,000 crore more from investors. An April 2013 report in the Mint quoting state officials had put the total amount of money collected by the Saradha at Rs 20,000 crore.
These Ponzi schemes have managed to collect a lot of money in an environment where the household financial savings in India have been falling. Household financial savings is essentially the money invested by individuals in fixed deposits, small savings scheme, mutual funds, shares, insurance etc.
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.”
While the household financial savings have dipped, the money collected by Ponzi schemes has grown by leaps and bounds. What explains this dichotomy? Some experts have blamed the low penetration of banks as a reason behind the rapid spread of Ponzi schemes in the last few years. K C Chakrabarty, former deputy governor of the Reserve Bank of India, in September 2013 had pointed out that only 40,000 out of the 6 lakh villages in India have a bank branch.
Hence, investors find it easier to invest their money with Ponzi schemes, which seem to have a better geographical presence than banks. While this sounds logical enough, the trouble with this reasoning is that the bank penetration in India has always been low. It clearly isn’t a recent phenomenon. So, why have so many Ponzi schemes come to light only in the last few years?
Another reason offered is that the rate of return promised by these Ponzi schemes is high and is fixed at the time the investor enters the scheme. This is an essential characteristic of almost all Ponzi schemes. Take the case of Rose Valley. The return on the various investment schemes run by the company varied from anywhere between 11.2% to 17.65%.
In case of PACL The Economic Times report referred to earlier pointed out that “If a customer puts down Rs 50,000 for a 500 square yard plot, he or she can expect to get back Rs 1,01,365 in six years, or Rs 1.85 lakh in 10 years.” This meant a return of 12.5% and 14% on investments. An April 2013 report in the Business Standard pointed out that the fixed deposits of Saradha “promised to multiply the principal 1.5 times in two-and-a-half years, 2.5 times in 5 years and 4 times in 7 years.” This basically implied a return of 17.5-22%.
It is clear that returns promised by these Ponzi schemes have been significantly higher than the returns available on fixed income investments like fixed deposits, small savings schemes, provident funds etc., which ranged between 8-10%. Given this, it was the greed of the investors which drove them to these Ponzi schemes, and in the end they had to pay for it.
Again that would be a simplistic conclusion to draw. Rose Valley was paying 11.2% on one of its schemes. PACL was offering 12.5%. This returns weren’t very high in comparison to the returns on offer on other fixed income investments.
In fact, most Ponzi schemes tend to offer atrociously higher returns than this. Charles Ponzi on whom the scheme is named had offered to double investors’ money in 90 days. Or take the case of the Russian Ponzi scheme MMM, which came to India sometime back. Its sales pitch was that Rs 5000 could grow to Rs 3.4 crore in a period of twelve months. Speak Asia, a Ponzi scheme which made a huge splash across the Indian media a few years back, promised that an initial investment of Rs 11,000 would grow to Rs 52,000 at the end of an year. This meant a return of 373% in one year. Another Ponzi scheme Stock Guru, offered a return of 20% per month for a period of up to 6 months.
In comparison, the returns
offered by the likes of Rose Valley, Saradha, Sahara and PACL are very low indeed. But investors have still flocked to them. In fact, in its order against PACL, Sebi estimated that the company had close to 5.85 crore investors. So, the question is why are so many people investing money in such schemes?
The answer lies in the high inflation that has prevailed in the county since 2008. For most of this period the consumer price inflation and food inflation have been greater than 10%. In this scenario, the returns on offer on fixed income investments have been lower than the rate of inflation. Hence, people have had to look at other modes of investment, in order to protect the purchasing power of their accumulated wealth. A lot of this money found its way into real estate and gold. And some of it also found its way into Ponzi schemes. This is the “real” reason behind the explosion in the kind of money that has been raised by these Ponzi schemes.
But why is the rate of interest on offer on fixed income investments been lower than the rate of inflation? This is where things get really interesting. Take a look at the graph that follows. The government of India since 2007-2008 has been able to raise money at a much lower rate of interest than the prevailing inflation. The red line which represent the estimated average cost of public debt(i.e. Interest paid on government borrowings) has been below the green line which represents the consumer price inflation, since around 2007-2008.

How has the government managed to do this? The answer lies in the fact that India is a financially repressed nation. Currently banks need to invest Rs 22 out of every Rs 100 they raise as deposits in government bonds. This number was at higher levels earlier and has constantly been brought down. Over and above this Indian provident funds like the employee provident fund, the coal mines provident fund, the general provident fund etc. are not allowed to invest in equity. Hence, all the money collected by these funds ends up being invested in government bonds.
As the Report of the Expert Committee to Revise and Strengthen the Monetary Policy Framework points out “Large government market borrowing has been supported by regulatory prescriptions under which most financial institutions in India, including banks, are statutorily required to invest a certain portion of their specified liabilities in government securities and/or maintain a statutory liquidity ratio (SLR).”
This ensures that there is huge demand for government bonds and the government can get away by offering a low rate of interest on its bonds. “The SLR prescription provides a captive market for government securities and helps to artificially suppress the cost of borrowing for the Government, dampening the transmission of interest rate changes across the term structure,” the Expert Committee report points out.
The rate of return on government bonds becomes the benchmark for all other kinds of loans and deposits. As can be seen from the graph above, the government has managed to raise loans at much lower than the rate of inflation since 2007-2008. And if the government can raise money at a rate of interest below the rate of inflation, banks can’t be far behind. Hence, the interest offered on fixed deposits by banks and other forms of fixed income investments has also been lower than the rate of inflation over the last few years.
This explains why so much money has founds its way into Ponzi schemes, even though the rate of return they have been offering is not very high in comparison to other forms of fixed income investment. To conclude, the government of India has had a significant role to play in the spread of Ponzi schemes.

A slightly different version of this article appeared on Quartz India on September 10, 2014

(Vivek Kaul is the author of Easy Money: Evolution of the Global Financial System to the Great Bubble Burst. He can be reached at [email protected])

2 September, 2014

How politicians, banks and builders conspire to keep real estate prices high

“Sex sells,” is an old adage in show business and advertising. If I were to come up with a similar sort of statement when it comes to writing on business and economics it would have to be “real estate sells.” An article on the real estate scenario in India has more chances of being read than anything else.

People who make a living from the real estate industry, be it brokers, real estate consultants or builders, like to tell us time and again that real estate prices are only going to go up. So, it’s time that we forgot about all other ways of spending money and bought a house.
Various reasons are offered, right from shortage of land(they are not making any more of it) to now that Narendra Modi has become the prime minister, everything is going to be fine. In my previous pieces on real estate (you can read a few of them here and here) I have tried to expose several myths that over the years have come to be associated with the sector.
In this piece we will just look at one data point that tells us loud and clear that real estate prices should not be going up, as has been justified by those make a living from real estate, time and again. Look at the following chart:

City	Quarters to Sell Unsold Inventory
Mumbai	12
National Capital Territory	9
Pune	Approx 7.5
Bangalore	7
Hyderabad	8—8.5
Chennai	7
Source: Knight Frank India Real Estate Outlook

“Quarters-to-sell(QTS) can be explained as the number of quarters required to exhaust the existing unsold inventory in the market. The existing unsold inventory is divided by the average sales velocity of the preceding eight quarters in order to arrive at the QTS number for that particular quarter,” the India Real Estate Outlook Report brought out by Knight Frank points out.

What this shows us clearly is that there is a huge amount unsold inventory when it comes to residential apartments across metropolitan India. In fact, what is worse is that this number has been going up over the last few years.

The above table shows us the quarters-to-sell unsold inventory in Mumbai. This stands at 12 in June 2014. What this means is that it will take close to three years to sell the current accumulated inventory of unsold homes in Mumbai. This number was at 5 in December 2011. Hence, Mumbaikars are going slow when it comes to buying homes is a conclusion that can be easily drawn. And that is not surprising given the astronomical prices that builders want for a home in the maximum city.
Here is a similar table for the National Capital Territory (i.e. Delhi and its adjoining areas).

The quarters-to-sell unsold inventory in the NCR in June 2014 stood at a little over nine. This means that it will take a little over two years to sell all the unsold residential apartments in NCR. The number had stood at around 6 in June 2012.
If we look at this graph for other cities like Bangalore, Hyderabad, Pune etc, it is along similar lines, though the curve may not be as upward sloping as it is in the case of Mumbai and NCR.
Take the case of Bangalore where the curve is kind of flat. This tells you that people in Bangalore haven’t slowed down on buying residential homes at the same rate as people in Mumbai and NCR have. Hence, the quarters-to-sell unsold inventory has more or less hovered around 6.

Indeed, what these graphs clearly tell us is that the supply of residential apartments in India’s biggest cities has clearly been more than their demand. And given this Mumbai has 2,13,742 residential apartments which have been built but not sold. The same number in NCR stands at 1,67,000.
Hence, between two of India’s biggest residential markets, the total number of unsold homes stands a little over 3.8 lakhs. In total, the sales fell by 27% during the first six months of 2014, in comparison to the same period last year. Nevertheless, those associated with real estate expect prices to continue to go up. The Knight Frank report forecasts that the real estate prices in Mumbai will “ increase for the entire year (2014) [by] 10.1%.” An increase in prices is forecast for NCR and other cities as well.
The point here is that with so many unsold homes, how can housing prices continue to go up, unless they are rigged? Further real estate
developers are sitting on a huge amount of debt. As a recent report in the Business Standard pointed out “At end of March 2014, the country’s top listed developers were sitting on Rs 39,772 crore of debts.”
As we know most real estate developers in India are not listed on the stock market. Hence, the total amount of their debt must be considerably higher than Rs 39,772 crore. So how are real estate developers going to repay this debt unless they get around to selling the homes they have built? One answer is that they keep launching newer projects, raise money and use that money to repay their previous debt. (I discuss this in detail here). And then launch newer projects to collect money to build their previous projects. So the cycle works.
But in the recent past the number of new launches has been falling. During the first six months of 2014, the number of new launches fell by 32% in comparison to the same period last year, the Knight Frank report points out. Hence, new launches as a source of funds seems to have slowed down, but they do bring in some money nonetheless.
Another possible explanation is lending by banks. Bank lending to the commercial real estate sector has been growing at a much faster rate than overall lending. Between July 26, 2013 and July 25, 2014, lending by banks to commercial real estate grew by 18.2%. In comparison, the overall lending grew by just 11.3%.
With newer launches slowing down, the only possible explanation for this lending is that banks are essentially giving fresh loans to real estate companies so that the companies can repay their old loans. This has allowed real estate companies to not cut prices on their unsold inventory. If bank loans had not been so forthcoming, the real estate companies would have to sell off their existing inventory to repay their bank loans. And in order to do that they would have to cut prices.
Further, most real estate companies as we know are a front for politicians. During the Congress led United Progressive Alliance, a huge number of scams and a lot of corruption happened. Hence, the conspiracy theory I would like to offer here is that the money that politicians got through various rounds of corruption during the UPA rule has also found its way into the real estate market. This has allowed real estate companies to continue holding prices at high levels, despite supply far outstripping demand.
As I mentioned in the previous piece I wrote on real estate, real estate consultants make money from real estate companies and hence, it is but natural for them to keep telling us that prices will continue to go up. Nevertheless, data from the International Monetary Fund shows that real estate prices in India between the period January to March 2014, fell by 9%. This was the most in a sample of 52 countries. (Click here for table) The IMF of course does not have an incentive to ensure that real estate prices in India continue to remain high.
To conclude dear reader, if you still have the money to buy a house, this is the time to drive a hard bargain.

The article originally appeared on www.Firstbiz.com on September 2, 2014

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