{"id":3221,"date":"2015-01-21T23:51:43","date_gmt":"2015-01-21T18:21:43","guid":{"rendered":"https:\/\/teekhapan.wordpress.com\/?p=3221"},"modified":"2015-01-21T23:51:43","modified_gmt":"2015-01-21T18:21:43","slug":"busting-a-few-more-real-estate-myths","status":"publish","type":"post","link":"https:\/\/vivekkaul.com\/2015\/01\/21\/busting-a-few-more-real-estate-myths\/","title":{"rendered":"Busting a few more real estate myths"},"content":{"rendered":"

\"India-Real-Estate-Market\"<\/a>Vivek Kaul <\/span><\/span><\/span><\/p>\n

The last column on real estate <\/span><\/span><\/span><\/span><\/span><\/a>which appeared on January 19, 2015, stuck a chord with a lot of readers. Given that, I thought it made sense to dwell a little more on this topic and the \u201cspin\u201d that real estate <\/span><\/span><\/span>wallahs <\/i><\/span><\/span><\/span>try to give it.
\nOne logic that I have heard being given over and over again is that India has too little land and too many people. Given this, real estate prices can never fall. They will only keep going up ad infinitum and hence, you need to invest in real estate and earn a perpetual return. This is the most widely used logic to justify high real estate prices in the country. But a little bit of number crunching basically tells us that there is nothing right about this theory.
\nLet’s look at India has \u201ctoo many people\u201d theory first. As per the 2011 census, India has an average of 382 people living per square kilometre. When it comes to density of population India is ranked 33rd in the world. Let’s compare this with Japan. The country has 336 people living per square kilometre and is ranked 39th in the world.
\nJapan had a huge real estate boom in the 1980s. The boom came to an end towards the end of the 1980s and prices fell big time after that. As George Akerlof and Robert Shiller point out in <\/span><\/span><\/span>Animal Spirits<\/i><\/span><\/span><\/span>: \u201cUrban land prices…in Japan (where land is every bit as scarce as it is in other countries)…fell 68% in real terms in major Japanese cities from 1991 to 2006.\u201d And if real estate prices could fall in Japan, which has a slightly lower population density than that of India, they can in India as well.
\nEven in India real estate prices have fallen in the past. It’s just that people don’t rememember about it anymore. As Manish Bhandari of Vallum Capital wrorte in a report titled\u00a0<\/span><\/span><\/span>The End game of speculation in Indian Real Estate has begun<\/i><\/span><\/span><\/span>: \u201cThe previous deleveraging cycle in year 1997-2003 witnessed price correction by more than 50% in Mumbai Metro Region (MMR) property.\u201d And this was just a little over a decade back. Bull markets lead to bad memories and theories justifying high prices.
\nIn fact, real estate prices have been falling in some parts of the country. <\/span><\/span><\/span>A December 2014 newsreport in The Economic Times suggested<\/span><\/span><\/span><\/span><\/span><\/a> that \u201csecondary market prices of properties in posh South Delhi localities have fallen 25-30 per cent over the last one year as a pileup of inventory and need for money turn many investors into desperate sellers.\u201d \u201cCompared with peak prices, the discount is as much as 40 per cent, say brokers,\u201d the report added.
\nAnother important point here is that the consumer sentiment seems to be turning against real estate. Recently a buyer sentiment survey was carried out by IIM Bangalore and Magicbricks. <\/span><\/span><\/span>A report on the survey in The Economic Times<\/span><\/span><\/span><\/span><\/span><\/a> said that: \u201c[The survey] orecasts that the homebuyers expect real estate prices to drop over the next six months. In fact, the aggregate Housing Sentiment Index (HSI), measured across the 10 cities, dropped sharply by 29% in the 3rd quarter of 2014-15 to 81. (An HSI score of 100 suggests the prices would remain static).\u201d
\nNow compare this with another survey that the business lobby ASSOCHAM had got done in June 2013, which said: \u201cOver 85 per cent of urban working class prefer to invest in real estate saying it is likely to fetch them guaranteed and higher returns.\u201d So, the sentiment clearly seems to be changing. And there is no greater danger to the price of an asset class than changing sentiment of those who want to invest in it.
\nThe second theory offered is that India has very little land to house its huge population. Again a little number crunching tells us that this is not correct. The\u00a0<\/span><\/span><\/span>Indian Institute for Human Settlements<\/i><\/span><\/span><\/span>\u00a0in a report titled\u00a0<\/span><\/span><\/span>Urban India 2011 <\/i><\/span><\/span><\/span>esimates that \u201cthe top 10 cities are estimated to produce about 15% of the GDP, with 8% of the population and just 0.1% of the land area.\u201d
\nEconomist Ajay Shah in a May 2013 column in <\/span><\/span><\/span>The Economic Times did some number crunching <\/span><\/span><\/span><\/span><\/span><\/a>to show that India has enough land to house its millions. As he wrote \u201cA 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\u2019s land area assuming an FSI(floor space index) of 1. There is absolutely no shortage of land to house the great Indian population.\u201d
\nOne corollary of this theory is that as cities expand they will take away land from agriculture and that will create a problem as well. Again this is a specious argument. <\/span><\/span><\/span>Data from World Bank\u00a0<\/span><\/span><\/span><\/span><\/span><\/a>shows that around 60.3% of India\u2019s land area is agricultural land. The bank defines agricultural land as \u201cshare of land area that is arable, under permanent crops, and under permanent pastures.\u201d
\nIn fact, only the United States has more agriculural land than India. A<\/span><\/span><\/span>s India Brand Equity Foundation<\/span><\/span><\/span><\/span><\/span><\/a>, a trust established by the Ministry of Commerce and Industry points out: \u201cAt 157.35 million hectares, India holds the second largest agricultural land globally.\u201d Only, the United States has more agricultural land than India. Take the case of China. India has more arable land than China. This, despite the fact its total area is only a little over 34% that of China.
\nHence, agricultural land near the cities can easily be diverted towards construction of more housing without it having any signficant impact on agricultural production.
\nThe basic problem lies in the fact that too much black money has gone into real estate and has driven up prices ( as I wrote in the last column) to previously unimaginable levels. This has led to builders and politicians who back these builders to sit on a huge amount of unsold inventory instead of cutting prices to clear it. They have got used to these high prices. Also, so much money has already been made that sitting on inventory till prices start to recover, doesn’t seem like a bad idea at all to them.
\nAs an article in <\/span><\/span><\/span>The Caravan magazine pointed out few years back:<\/span><\/span><\/span><\/span><\/span><\/a> \u201cThere isn\u2019t a bubble of real homes\u2026If 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.\u201d
\nAnd this is because the ill-gotten wealth of politicians and their cronies has found its way into the sector through \u201cbenami\u201d means over the years. However, there continues to be demand for reasonably priced property even in big cities. Only if there was someone trying to fulfill this unmet consumer demand.
\nTo conclude, it is worth sharing this example that Ruchir Sharma talks about in his book <\/span><\/span><\/span>Breakout Nations<\/i><\/span><\/span><\/span>: \u201cLately 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.\u201d
\nAnd this is where the real problem lies.\u00a0<\/span><\/span><\/span><\/p>\n

The article originally appeared on www.equitymaster.com as a part of The Daily Reckoning <\/a>on Jan 21, 2015<\/p>\n","protected":false},"excerpt":{"rendered":"

Vivek Kaul The last column on real estate which appeared on January 19, 2015, stuck a chord with a lot of readers. Given that, I thought it made sense to dwell a little more on this topic and the \u201cspin\u201d that real estate wallahs try to give it. One logic that I have heard being … <\/p>\n

Read more<\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"qubely_global_settings":"","qubely_interactions":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[2,14,30,59,66],"tags":[196,492,531,3005,3008,3162],"qubely_featured_image_url":null,"qubely_author":{"display_name":"Vivek Kaul","author_link":"https:\/\/vivekkaul.com\/author\/vivekkaul\/"},"qubely_comment":1,"qubely_category":"Analysis<\/a> Business<\/a> Equitymaster<\/a> Politics<\/a> Real Estate<\/a>","qubely_excerpt":"Vivek Kaul The last column on real estate which appeared on January 19, 2015, stuck a chord with a lot of readers. Given that, I thought it made sense to dwell a little more on this topic and the \u201cspin\u201d that real estate wallahs try to give it. One logic that I have heard being…","jetpack_sharing_enabled":true,"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/posts\/3221"}],"collection":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/comments?post=3221"}],"version-history":[{"count":0,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/posts\/3221\/revisions"}],"wp:attachment":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/media?parent=3221"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/categories?post=3221"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/tags?post=3221"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}