Tag: Rising prices | Vivek Kaul

“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)

Vivek Kaul

The American author Upton Sinclair once said that “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
This seems to be true about the “so called” real estate consultants who operate in this country. Their main job it seems is to bring out a research report every few months, where the conclusion is that “real estate prices will continue to go up”.
This despite the fact when their own data contradicts this conclusion. Let’s take the case of a recent research report titled India Real Estate Outlook brought out by Knight Frank. The report takes a look at the real estate scenario prevailing across some of the biggest cities in India.
In the case of Mumbai, the report points out that there is a huge demand-supply gap. The unsold inventory of residential apartments in the city stands at 2,13,742 units. In June 2014, the quarters-to-sell ratio stood at 12.
“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 report points out.
What this means is that it will take close to three years to exhaust the existing number of unsold residential apartments in Mumbai, if people continue to buy homes at the rate they have been in the preceding two years. What is interesting is that the unsold inventory has gone up dramatically over the last few years. In December 2011 the number had stood at five, the report points out. This means that in December 2011, it would have taken around one year and three months to dispose of the inventory of unsold residential apartments in Mumbai. By June 2014, the number had increased to three years.
What this tells us is that the supply of residential apartments in Mumbai is substantially more than their demand. And anyone who understands basic economics will know that in order to clear this inventory the real estate companies need to cut prices, so that people come out and buy these unsold apartments.
Nevertheless, the Knight Frank report goes around to conclude that “On the residential price front…the forecasted increase for the entire year (2014) is 10.1%.” It goes on to explain the reasons for this forecast. “This period [the first six months of 2014] has seen significant completion of transit infrastructure that has the potential to alter the dynamics of the region’s property market,” the report points out. The Versova-Ghatkpoar Metro, the Eastern Freeway and the Santacruz-Chembur Link Road are some of these projects.
The report writers forget(or rather ignore) a rather fundamental point here about how markets operate. Markets start factoring in information well in advance. They don’t wait for a particular development to be completed before factoring in that information into the price. An excellent example of this are the real estate prices in parts of Navi Mumbai, which are close to the proposed new airport. The airport is nowhere in the picture, but prices have been driven up for years, around this story.
Hence, the infrastructure that the report points out to, has already been there in the minds of people for a while now. And if they had been so impressed by it, they would be buying homes, and the quarters-to-sell ratio would have come down. Now that as the report points out, hasn’t happened, making the point irrelevant. Another reason, which is a favourite with most research report writers these days, has also been offered. Now that Narendra Modi is in power, things will improve and people will buy more homes.
As mathematician John Allen Paulos writes A Mathematician Plays the Stock Market “Because so much information is available…something insightful sounding can always be said.” But what sounds insightful need not be correct.
The question that the research report does not answer is: why have the real estate prices in Mumbai going up, despite the fact that people haven’t been buying residential apartments. The Residex Index of National Housing Bank points out that real estate prices in Mumbai have risen by 18.7% between the end of December 2011 and March 2014. This despite the fact that the inventory of unsold residential homes has been growing dramatically. In this scenario, where people are not buying as many homes as are being produced, prices should have been falling and not going up.
The reason for this is straightforward. The real estate market in India is rigged in favour of real estate companies and politicians who are the real owners of these companies. There is no free market in real estate. Most real estate companies are fronts for politicians. What makes this very clear is the fact that even though there are thousands of real estate companies operating across India, there is not a single pan India real estate company.
And these politicians and their real estate companies have an incentive in holding the prices to be high. They operate as a cartel to do that. Of course, no real estate consultant can “afford” to talk about these reasons given that they make their money from real estate companies. And real estate companies would want its consultants to keep constantly mouthing the lines that “prices will
continue to go up”. The research reports brought out by these real estate consultants play precisely that role. They help in managing the price expectations in the minds of prospective buyers.
Whenever such a report is released, its splashed all over the media. The media, in turn, because it depends on advertising from real estate companies, tends to highlight the price escalation and the sales will increase part (or they just don’t bother to read beyond the press release). They don’t bother to ask the most fundamental question: If there is so much inventory, why are prices going up? Take the case of South Mumbai. As the report points out “the inventory level in the South Mumbai market will take the maximum time of 18 quarters (4.5 years) to sell. The age of inventory, calculated as the time elapsed since launch, is also the longest, at 15 quarters.” So why are prices still rising is something that no one has bothered to ask?
This is how real estate consultants help real estate companies manage price expectations in the minds of prospective consumers. So, the next time you read a report saying real estate prices will go up, check for the source. If a real estate consultant is saying so, the information needs to be taken with a pinch of salt. As Guy Sorman writes in An Optimist’s Diary “Economic actors don’t all have the same information at their disposal. Without institutions to improve transparency, insiders can easily manipulate markets.” This is precisely what is happening in India—the insiders have managed to take all of us for a ride.

The article originally appeared on www.Firstbiz.com on Aug 30, 2014

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

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