RERA: There’s no way home prices will go up anytime soon


The Real Estate (Regulation and Development) Act, 2016 (RERA), came into force on May 1, 2017. After this those who make their living in the real estate industry have been suggesting that real estate prices will go up in the days to come.

The logic being offered is that this will be because of compliance costs of RERA which the buyers will ultimately have to pay for.

Given that India does not have any data which agglomerates real estate prices at the country level, those connected with the real estate industry can get away with such statements, because no one else has any idea anyway.

Data from PropEquity Research shows that unsold home inventories stood at close to 4.72 lakh units in the top eight cities across India, as on March 31, 2017. These are homes that have been built but not been sold.

During the period January to March 2017, the inventory of unsold homes came down by 3.12 per cent. Despite this fall, the unsold inventory overhang continues to be huge, across the country. Data from PropEquity suggests that overhang is 60 months in Noida, 43 months in Mumbai, 38 months in Chennai and 30 months in Bengaluru.

If this unsold inventory has to be sold, the home-prices cannot go up from where they are, RERA notwithstanding. The fact that so much inventory has accumulated in the first place tells us very clearly that people are not buying homes to begin with. The only reason for this is that homes across urban India are fairly expensive in comparison to the capacity of people to pay.

This is obvious from the rental yield (annual rent divided by the market price of the home). Typically, the rental yield currently varies between 1.5-2 per cent. This basically means that in order to buy a home right now, one has to pay 50 to 67 times the annual rent. This tells us very clearly that it makes more sense to rent a home and at the same time that home-prices are very expensive. Of course, rental housing comes with its own set of issues in India, with insecure landlords being the biggest one.

Data from PropEquity suggests that property prices fell by 1.7 per cent for January to March 2017. This is clearly not enough. If this inventory overhang has to clear, prices need to fall further. What will force the builder’s hand further is that with RERA in place, new launches to raise finance for previously delayed projects or to pay off debt, will not so be easy, anymore.

A careful look at home loan data of 2016-2017 also suggests that home-prices have fallen.

In 2015-2016, only 16.8 per cent of the home loans given by banks were given to the priority sector. A housing loan of up to Rs 28 lakh in a city with a population of 10 lakh or more, which finances the purchase of a home with a price of up to Rs 35 lakh, is categorised as a priority sector housing loan.

In 2016-2017, 23 per cent of the home loans given by banks were given to the priority sector. This basically means that banks are giving out more sub Rs 28 lakh home loans for financing more homes worth less than Rs 35 lakh, than they were in the past.

This basically means that home-prices have either come down or builders are building more of sub Rs 35 lakh homes. Either ways, this is a good trend. It is not so obvious given that no agency agglomerates real estate prices in India at a national level. But the home loan data from banks clearly suggests this.

Last week, Keki Mistry, the bossman at HDFC, the largest housing finance company in the country suggested that given the low interest rates and the time correction of prices that has happened, it is a good time to buy a house.

Of course, for a home loan lender, it is always a good time to buy a house. What does Mistry mean by time correction of prices? He basically means that even though home-prices haven’t fallen much in absolute terms, they have fallen once we adjust for inflation.

It is worth re-stating here that if the builders have to sell off their unsold inventory of homes, they need to cut prices. Even if they manage to hold on to the current prices, they will not be in a position to increase prices, over the next few years. Hence, the time correction of prices is likely to continue. Given this, those who want a home to live-in and are in a position to continue to wait, should do that.

As far as interest rates are concerned, what Mistry forgot to mention is that home loans have a floating rate of interest, which keeps changing. Hence, over the 15-20 year term of a home loan, interest rates can and will vary. And given this, low interest rates initially, does not make much of a difference in the overall scheme of things. What is needed are lower home-prices.

The column originally appeared on  on May 9, 2017

India Needs a Formal Rental Market for “Housing For All By 2022” to Succeed

Trying to rent a house is one of the most nerve wracking experiences one can go through. I have gone through it in three different cities (Mumbai, Pune and Hyderabad). The way the landlords look at you with pity, is a scene straight out of the movies. It’s like their way of telling you, what you haven’t even been able to buy a house? You loser, look at me.

Having found a house and then trying to handle the landlord on a regular basis takes your diplomatic skills to another level (I used to have a landlord once who used to land up every Saturday morning asking for stock tips and then spend a good three hours badgering me for them).

The entire system is built against anyone who wants to live in a rented accommodation or cannot afford to buy a home unless he moves so far away from the city (I am talking about the bigger metropolitan cities here) that the rest of his life is spent commuting to and from office.

The interesting thing is that the rental share of urban housing stock has gone down over the decades. As per the 1961 census it was at 54 per cent and by 2011 it had fallen to 27.5 per cent. This explains why finding a house on rent can be such a pain.

The proportion of homes on rent has fallen dramatically over the years. This, as urbanisation (or the number of people living in cities) has gone up. As per the 2011 census 31.2 per cent of the population lived in urban areas. This figure is expected to go up in the years to come.

Rental share of urban housing stock in India has progressively declined with urbanisationThe fall in rental housing stock is a worrying trend. A major reason for this has been the rent control acts which are in operation in various cities across India. As KPMG points out in a research note titled Decoding housing for all by 2022: “Rent control policies aimed at protecting tenants have had their consequences of deterring investments in rental housing in India, causing the share of rental stock to decline from 54 per cent in 1961 to 27.5 per cent in 2011 which drove EWS/LIG households into slums.” (EWS = economically weaker sections. LIG = lower income groups).

In fact, as the Tenth Five Year Plan Document (2002-2007) points out: “The Rent Control Act, in fact, is the single most important reason for the proliferation of slums in India by creating a serious shortage of affordable housing for the low income families. Low and middle-income families typically live in rented accommodation all over the world and the need for such accommodation in our cities will only increase as the economy modernises, labour mobility increases and urbanisation takes place.” Further, India’s urban rental housing stock is low as per global standard.

The rent control acts lead to a shortage in rental housing in various ways. As the Five Year Plan document points out, it leads to: “Negative effect on investment in housing for rental purposes. • Withdrawal of existing housing stock from the rental market. • Accelerated deterioration of the physical condition of the housing stock.”

Another impact of rent control is to give Indian cities a shabbier look in comparison to cities in other developing countries. With the tenants living under rent control, the landlord has no incentive in renovating the buildings. Just one walk around South and Central Mumbai tells us that very clearly.

In fact, Mumbai has had to bear the brunt of the rent control act. As Sahil Gandhi, Vaidehi Tandel, Shirish Patel, Abhay Pethe, Kabir Agarwal and Sirus J. Libeiro point out in a working paper titled Decline of Rental Housing in India: A Case Study of Mumbai: “There has been near universal consensus that rent controls of the kind seen in Mumbai, known as “first generation rent control”, have a devastating impact on rental markets and, in general, housing and land markets in cities…Rent control in Mumbai has been particularly damaging for the housing market, which is characterized by ownership dwellings constructed mainly for the upper middle class on the one hand and a high incidence of slums housing the majority of the population on the other.”

The point is that if the government’s mission of “Housing For All by 2022” has to become a reality then rental housing needs to pick up in a big way. What is needed first and foremost for this dream to become a reality is a new rental law which is balanced “in favour of both the tenant and the land-lord could be drafted by the central government.” As KPMG points out: “A balanced rental law could help with the development of a formal rental market in India, and to some extent improve occupancy of the unoccupied houses estimated at about two crore.

A new rental law put out by the central government will be the starting point. It will then have to be adopted by the state governments. At least that way some of the locked and unoccupied homes will start hitting the market.

But will that lead to Housing for All by 2022? Only a little. The shortage in housing is at the lower end of the spectrum, as can be seen from the following table.

Housing Shortage in Urban IndiaThe unoccupied homes are more at the upper end.

Hence, for rental housing at the lower end to take off, the rental yield on homes needs to improve. This will only happen once prices come down to more realistic levels. Currently, the rental yield is around 2-3 per cent (the annual rent as a percentage of market price). Nobody in their right minds is going to build homes for rent with a rental yield like that. For rental yields to go up, the cost of constructing homes needs to fall. For this to happen, first and foremost, the cost of land in and around cities needs to fall.

For the cost of land to fall, the government needs to increase supply. This can be done by increasing the FSI allowed on buildings. Further, the government needs to increase supply of land by trying to sell some of the land that it owns in and around cities, land that it inherited from the British colonial administration.

These will be the first few steps towards Housing For All By 2022.

The column originally appeared in Vivek Kaul’s Diary on Equitymaster on August 31, 2016

The UnReal State of India’s Real Estate


Over the weekend a friend called and we talked about an interesting conversation he had had with his landlord.

My friend’s landlord is a successful corporate executive and doesn’t live in the same city as my friend does. The landlord had bought the flat that my friend currently lives in, sometime in late 2004.

At that point of time he had paid around Rs 18 lakhs for it. This is what my friend could gather from the conversation with his landlord. The flat is currently worth close to Rs 1.3 crore.

In a period of close to 12 years, the market value of the flat has gone up more than seven times. And this is where things get interesting.

My friend currently pays a rent of around Rs 27,000 per month or Rs 3.24 lakh per year for this flat. The rental yield works out to around 2.5%. Rental yield is obtained by dividing the annual rent by the current market price of the flat.

The question is why would someone want to continue owning an asset which generates a return of 2.5% per year. The interest rate offered on money kept in savings bank account is at least 4%.

So the point is when you can earn a minimum 4% fixed return with none of the headaches that come with owning real estate, why would you choose to earn 2.5%? Also, the actual rental yield is lower than 2.5%, given that a certain amount of maintenance has to be paid to the building society every month.

Then there is the cost of maintaining the flat. Further, property tax also needs to be paid every year. In this scenario it makes perfect sense to sell the flat and invest the money in bank fixed deposits, which currently pay around 7-8% per year.

I put this thought across to my friend and who in turn spoke to his landlord. And the answer he got was very interesting.

The landlord told my friend that his rental yield was 18%. It took me a while to understand how he came around to this number. He was calculating the rental yield on the original price that he had paid for the flat.

A rent of Rs 3.24 lakh on a purchase price of Rs 18 lakh works out to a yield of 18%. While, this is totally wrong, but this is the way my friend’s landlord is currently thinking. He thinks he is earning 18% from his flat and won’t sell.

But he can sell the flat, pay tax on the indexed capital gains and invest the remaining amount in a fixed deposit and earn much more than Rs 3.24 lakh he is currently earning. Over and above this, this investment comes with none of the headaches of owning real estate.

This is not exactly rocket science. It is simple mathematics. So what exactly is preventing my friend’s landlord from selling out? One answer could be tax deduction on the interest payment of the home loan that he had taken in order to buy the house.

But given that the loan is in its twelfth year of repayment, the interest component will be quite small in comparison to the landlord’s current income and really not worth the trouble.

So what gives? The landlord is totally anchored into the price appreciation that has happened till date. His investment has increased in value from Rs 18 lakh to Rs 1.3 crore in a period of over 11 years.

And this is something that is stuck in the landlord’s mind. Before I go any further, it is important that I explain the term anchoring here. As Garly Belsky and Thomas Gilovich write in Why Smart People Make Big Money Mistakes and How to Correct Them: “Anchoring is really just a metaphoric term to explain the tendency we all have of latching on to an idea or fact and using it as a reference point for future decisions. Anchoring can be particularly powerful because you often have no idea that such a phenomenon is affecting you.”

This applies in case of my friend’s landlord. He has seen the price of the appreciate from Rs 18 lakh to Rs 1.3 crore and has a strong belief that the appreciation will continue. In the process he has held on to this flat. He is anchored into that belief.

Is a similar sort of increase possible? It would mean that the price of the flat would be more than Rs 9 crore (Rs 1.3 crore x seven times) eleven years from now. That is totally unbelievable.

Also, the real estate prices haven’t gone anywhere over the last few years. Most people don’t take that into account. The money illusion is at work. As Belsky and Gilovich write: “This involves a confusion between “nominal” changes in money and “real” changes that reflect inflation.”

Real estate prices have remained flat across large parts of the country over the last few years. The average rate of inflation between 2012 and now has been around 7-8%. Once we factor this into account, the real estate prices have actually come down by a reasonable amount in real terms.

Again, this is something that my friend’s landlord in particular and most other real estate owners in general don’t seem to understand. It will take some time for these people to realise this. Plus, there is always the bit about owning something you can see and feel, which always works with owning real estate. This obviously does not apply to financial investments.

Further, with a huge amount of unsold inventory of real estate companies, as well as homes that have been built and bought as an investment, in the market, real estate is not going to match the returns that it gave between 2002 and 2012. Those days are long gone. Also, it has just become way too expensive.

Of course, people take years to come around to realising that they have been wrong for a long time. Mistakes are not easy to admit and this time will be no different. Until then, the stagnation in the real estate sector will continue.

The column originally appeared on Vivek Kaul’s Diary on April 11, 2016

How real estate consultants are trying to confuse home-buyers

India-Real-Estate-MarketVivek Kaul

One of the bigger problems with Indian real estate is that there is almost no independent data available for consumers to trust.  For instance, you may want to buy a home in a particular locality, how do you find out what the going price is?

Till very recently you would have had to call up a relative who has some idea of these things. Or you would call up a real estate broker. The real estate broker does not always have the best interest of the buyer on his mind simply because for him it is a one-time transaction.  He is unlikely to be dealing with the buyer ever again. With the advent of websites one can get some idea of what the price scene is in a particular locality.

The point being that the insiders who are a part of the real estate sector in India have no incentive in making things easy for the end consumer. And on most occasions they are bound to mislead.

Take the case of real estate consultants who are the major source of data when it comes to the real estate sector in India. Here is one instance where an attempt has been made to mislead prospective buyers. As Ashwinder Raj Singh is CEO – Residential Services of JLL India points out in a June 2015 column in The Indian Express: “Rental yields vary across the globe, but an average of 2 per cent of rental yield is considered a good deal for residential properties in India.”

Rental yield is essentially the annual rent that can be earned by renting out a home divided by its market price. Singh goes on to write: “In India, the cities which currently offer a higher rental yield are Mumbai, Pune, NCR-Delhi, Bengaluru, Kolkata, Chennai, Hyderabad, Ahmedabad. All these cities offer a rental yield of 2 per cent and above, and you can be assured that the average is not going down anytime soon. Investing in these cities will offer you the maximum returns on investment in properties bought for generating rental income.”

What is Singh saying here? You can hope to earn a return of 2% or a little more, by renting out a home, almost all across metropolitan India. The question is why would anyone in their right mind invest when the prospective return is 2%? That Singh does not tell us. And this when most savings bank accounts pay an assured return of 4%. There are banks which even pay 7% interest on their savings bank accounts.

Further, earning a return by depositing money in a savings bank account is a very easy of making money in comparison to earning a rent by buying a home. Real estate investment comes with its share of hassles. And earning a 2% return for those troubles is simply not go enough.

Singh of JLL India then goes on to say that the rental yield of 2% is not going to go down any time soon. Well, hasn’t it gone down enough already?
The second question is why have real estate consultants now started recommending real estate as a mode of earning a rental income. As anyone who has ever invested in real estate will tell you, investors buy real estate in the hope of making capital gains. Very few investors buy real estate in the hope of earning a rental income. There are easier ways of earning a regular income than through renting out real estate.

The problem is that real estate prices have not gone anywhere in the recent past. As Atul Tiwari and Rishi Iyer of Citi Research point out: “Different data points continue to suggest broad-based deceleration in residential prices across India. Residential prices grew just ~0.5% year on year as on March 31, 2015.”
The Citi analysts have used data from Prop Equity. They further point out that prices had been rising at double digit rates before this.

Data from Liases Foras, a real estate research and rating company, shows a similar trend. The average price in six cities (Mumbai Metropolitan Region, National Capital Region, Hyderabad, Chennai, Bangalore and Pune) went up by around 1%, for a one year period ending on March 31, 2015.

So, the insiders are telling us that the real estate prices have stayed almost flat over the last one year. And this explains why Singh of JLL India had to write a column pitching rental income of 2% that can be earned from investing in real estate.

In fact, there is enough anecdotal evidence to suggest that prices have fallen by almost 20% in many parts of the country. Given that there is no neutral agency putting this data together, there is no way of knowing how bad the scene is at the aggregated level. My guess is that it is much worse than what the real estate consultants are telling us.

All the price and sales data that is currently available comes from real estate consultants. And they have an incentive in the real estate prices continuing to go up. Their incomes depend on it.

Hence, there is a clear need for an independent agency which collates real estate data in the country. This will be a huge help to genuine real estate buyers who want to buy a home to live in. Hope the Modi government is listening.

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

The column originally appeared on Yahoo India on July 22, 2015

On the edge: Is Indian real estate heading for a 50% crash in prices?

We all know that real estate in India is terribly expensive and is now selling at prices making it practically unaffordable for almost everybody who wants to buy a home to live in. But how expensive is expensive? This is an important question that needs to be answered.

One way of looking at this problem is through the rental yield available on houses at any point of time. Rental yield is the annual return that can be earned by renting out a house. The number is obtained by dividing the annual rent of the house by its market price.

And what is the rental yield in India? As Ashwinder Raj Singh is CEO – Residential Services of JLL India points out in a June 2015 column in The Indian Express: “Rental yields vary across the globe, but an average of 2 per cent of rental yield is considered a good deal for residential properties in India.”

Singh goes on to write: “In India, the cities which currently offer a higher rental yield are Mumbai, Pune, NCR-Delhi, Bengaluru, Kolkata, Chennai, Hyderabad, Ahmedabad. All these cities offer a rental yield of 2 per cent and above, and you can be assured that the average is not going down anytime soon. Investing in these cities will offer you the maximum returns on investment in properties bought for generating rental income.”

Why would anyone invest for a return of 2 percent is a question that only perhaps Singh can answer? And at 2 percent the rental yield is already very low. We will leave this argument for another day.

Hence, we have an expert telling us that an average rental yield of 2 percent is considered good in India at this point of time. But is it enough? In a recent research report titled Real Estate: The Unwind and its Side Effects analysts Saurabh Mukherjea and Sumit Shekhar of Ambit provide the answer.

As they write: “In a fairly-priced real estate market, the rental yield tends to be somewhere close to the cost of borrowing. Instead, Mumbai has a rental yield of close to 2% (this is gross of tax and maintenance charges) whilst the lending rate hovers around 10%. The difference between lending rates and rental yields is one of the highest.”

What Mukherjea and Shekhar are essentially saying is that the rental yields in India are totally out of whack.


As the  chart (Exhibit 11) shows us, even China which has had a huge real estate bubble going has a rental yield better than that of India. In fact as the next chart (Exhibit 12) shows the difference between the interest rate at which money can be borrowed and the rental yield is one of the highest in the world, in India. At this point of time a home loan can be borrowed at 10 percent whereas the rental yield is 2 percent, a difference of 8 percent.


What does this tell us? The rental yield as explained above has two inputs: the annual rent and the market price of the house. A rental yield of 2 percent means that the market price of homes in India has risen at a much faster rate than the rents.

And why is this the case? As Mukhejea and Shekhar write: “Rental yields in property markets in India have remained extremely low as compared to its other Asian peers thereby pointing to the over-valuation of this asset class mainly because it can absorb black money.”

The rental yield cannot continue to remain out of whack. For it to come to the right level, the rents need to rise or the market prices of homes need to fall. Given the surfeit of homes available right now, it is highly unlikely that rents will rise. The chances of property prices falling are significantly higher.

As the Firstpost editor R Jagannathan wrote in a column in November 2014: “In India, borrowing costs for home loans are around 10.5-11 percent currently – when rental yields are a fourth of that level. If rental yields in India have to catch up with those in New York and London, Indian property rates have to fall by a third to a half.”

Mukherjea and Shekhar of Ambit make the same point when the say: “Even if one assumes that buyers are willing to live with only 5% rental yields (as they might have an extremely bullish view of capital gains arising from real estate in India), this would imply halving of real estate prices in Mumbai.” What is true about Mumbai is also true about other parts of the country.

Let me explain the maths through an example. Let’s say an individual buys a home for Rs 50 lakh. The rent that he can earn on this is Rs 1 lakh, meaning a rental yield of 2 percent (Rs 1 lakh expressed as a percentage of Rs 50 lakh).

For the rental yield to rise to 5 percent, what has to happen? One option is that the rent needs to rise to Rs 2.5 lakh. This would mean a rental yield of 5 percent (Rs 2.5 lakh expressed as a percentage of Rs 50 lakh). But as I explained above, the chances of rents going up at this dramatic rate are simply not there.

Hence, what needs to happen for the rental yield to be around 5 percent? Market price of homes needs to fall. A rent of Rs 1 lakh would lead to a rental yield of 5 percent, if the market price of the home is Rs 20 lakh (Rs 1 lakh expressed as a percentage of Rs 20 lakh). This means that the price of the home needs to fall from Rs 50 lakh to Rs 20 lakh or a fall of 60 percent. At a 50 percent fall, for a rental yield of 5 percent, the rent needs to rise to Rs 1.25 lakh (Rs 1.25 lakh expressed as a percentage of Rs 25 lakh).

This is the point that Mukherjea and Shekhar are trying to make.

While the maths looks all fine, the question is will this happen and how soon will this happen? The only way this will happen is if the black money going into real estate slows down to a trickle so that only genuine buyers are left in the market. This is easier said than done. The Modi government has had some focus on black money and let’s hope that continues and improves in the days to come, with the government focussing on domestic black money as well. A point worth repeating here is that ultimately almost all the black money is domestic given that it is generated within the country.

Also, it is worth remembering here that real estate prices don’t fall as rapidly as stock markets do. So, the right answer here is that real estate prices will fall and they will fall dramatically, but only over a period of time.

Stay tuned. The massacre has just started.

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

The column originally appeared on Firstpost on July 21, 2015