{"id":3888,"date":"2015-10-15T13:22:57","date_gmt":"2015-10-15T07:52:57","guid":{"rendered":"https:\/\/teekhapan.wordpress.com\/?p=3888"},"modified":"2015-10-15T13:22:57","modified_gmt":"2015-10-15T07:52:57","slug":"real-estate-prices-are-not-just-about-corruption-they-are-also-about-affordability","status":"publish","type":"post","link":"https:\/\/vivekkaul.com\/2015\/10\/15\/real-estate-prices-are-not-just-about-corruption-they-are-also-about-affordability\/","title":{"rendered":"Real estate prices are not just about corruption; they are also about affordability"},"content":{"rendered":"


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

Last week, Suraj Parmar, a leading Thane builder committed suicide. In his suicide note Parmar talked about the corruption in the system. A report in The Indian Express<\/a> quoted V V Laxminaryan, the joint commissioner of police of Thane, as saying: \u201cTh<\/em>e suicide note speaks of several problems that Parmar was facing, including difficulties in obtaining approvals and the stop-work notices issued to him. The note goes on to say that several people were repeatedly demanding bribes, that he had already paid them a lot in the past but that their demands were still continuing and it had become too much for him to deal with<\/em>.\u201d<\/p>\n

Corruption in real estate at the government level has always been an issue. But now if builders are to be believed it has reached never before seen levels. As Niranjan Hiranandani, director of Hiranandani Group told NDTV.com<\/a>, after Parmar\u2019s suicide: \u201cIn the last couple of years, I think corruption is over but extortion has started. So, I think what was unbearable to the builder was the fact that there was no corruption in that sense of the term, but it had gone far beyond corruption levels that have ever happened<\/em>.\u201d<\/p>\n

A June 2011 news-report in The Economic Times gets into the details<\/a> of the issue. In Maharashtra, which happens to be the biggest real estate market in the country, a builder typically needs around 60 approvals to construct a property. Of this, 50 approvals need to be taken from the municipal corporation where the property is being built.<\/p>\n

The Economic Times report then goes on to quote Pune builder Kumar Gera, as saying: \u201cThese clearances should not take more than three months\u2026But in most states, it takes anywhere between one year and four years. And they add 20-30 % to a builder’s project cost<\/em>.\u201d<\/p>\n

This is, in turn, passed on to consumers who want to buy homes. As a report in the Daily News and Analysis points out<\/a>: \u201cAt every step, there is a price to be paid to obtain necessary clearances. The \u2018Golden Gang\u2019, a group of corporators and civic officials, calls the shots and builders are bound to cough up exorbitant sums to avoid harassment. This expenditure, so to speak, is then passed on to home buyers. That explains why real estate in Mumbai, Thane and Navi Mumbai is so prohibitively expensive<\/em>.\u201d<\/p>\n

In fact, as a real estate consultant told The Economic Times: \u201cBuilders don’t just pass it on\u2026They often add to it big time<\/em>.\u201d So builders add their own corruption premium<\/em> to the price of homes they sell.<\/p>\n

Most builders use corruption in government and increasing input costs to explain that the price of homes won\u2019t fall anytime in the near future. Take the case of cement, a major input into building homes. As a recent newsreport in The Economic Times points out<\/a>: \u201cCement prices have jumped 20-40 per cent over the past two months in top cities despite demand from the real estate industry, which is its largest buyer, being low<\/em>.\u201d<\/p>\n

In this scenario the price of homes won\u2019t fall, say builders. But this logic just takes into account the supply side of the equation. It only talks about the builders who supply homes and the costs they have to incur. What about the end consumers who want to buy these homes?<\/p>\n

As John Kay writes in an essay titled Guess Who\u2019s Come to Dinner<\/em> which is a part of the book Everlasting Light Bulbs \u2013 How Economics Illuminates the World<\/em>: \u201cBut surely people can\u2019t spend an increasing proportion of their incomes on housing<\/em>.\u201d The affordability of homes also needs to be taken into account.<\/p>\n

Also, owning a house is just not about putting up a down-payment, taking a home loan and paying the builder. There are other costs involved as well. Hence, as Kay puts it, it is important \u201cto focus on the costs of house ownership rather than the cost of houses<\/em>.\u201d<\/p>\n

Given this, affordability isn\u2019t just being able to pay the price of the house. There is more to it than that. As Kay writes: \u201cMortgage repayments<\/em> [home loan EMIs basically] are only a\u2026part of the cost of buying a house: you have to pay for repairs and maintenance, heat and light, property taxes<\/em>.\u201d Then there is the cost of moving in, the cost of setting up the place, and so on.<\/p>\n

In a scenario where home prices are anyway high all these costs make the entire cost of owning a home even more expensive. So, the point that builders make about their inability to cut prices doesn\u2019t have any meaning. They can build homes and sell them at prices they think are right, but the question is will there be any takers at that price? And the answer is clearly no.<\/p>\n

In any market there are always two sides \u2013 demand and supply. And that is a basic point that our builders need to remember. So, they can continue holding on to their prices, but at those prices there will be not much demand for homes. As Kay writes in another essay titled A Fetish for Manufacturing<\/em>: \u201cThe rewards of different activities<\/em> [are] detached from their position in the hierarchy of needs. You only<\/em> [get] paid for producing goods that people<\/em> [want].\u201d<\/p>\n

Kay makes another interesting point, which I would like to talk about here. As he writes: \u201cIn classic bubbles \u2013 from tulip mania to the dot.com frenzy \u2013 people bought things, not for their intrinsic worth, but to sell on to others at a higher price. That rarely happens with houses<\/em>.\u201d<\/p>\n

This is not true in the Indian context. Homes in India have \u201cnot\u201d always been bought \u201cfor their intrinsic worth\u201d but they have also been bought \u201cto sell on to others at a higher price\u201d. And that clearly is not happening anymore. Over the last few years you would have been better off letting your money sit idle in a savings bank account rather than investing in real estate. Given this, the interest in owning real estate has come down. That is clearly visible from the huge number of unsold homes across cities as well as fall in the launch of new projects.<\/p>\n

As Kay writes: \u201cAs in every asset market, short term price movements are driven by beliefs, not underlying realities<\/em>.\u201d The underlying reality is that at these prices it does not make any sense to invest in real estate. But the belief that real estate prices always go up is still reasonably strong. The question is for how long will the belief remain strong?<\/p>\n

I think we are half way there.<\/p>\n

The column originally appeared in The Daily Reckoning<\/a> on October 15, 2015.<\/p>\n","protected":false},"excerpt":{"rendered":"

Last week, Suraj Parmar, a leading Thane builder committed suicide. In his suicide note Parmar talked about the corruption in the system. A report in The Indian Express quoted V V Laxminaryan, the joint commissioner of police of Thane, as saying: \u201cThe suicide note speaks of several problems that Parmar was facing, including difficulties in … <\/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":[30,66],"tags":[176,819,1921,3007,3538],"qubely_featured_image_url":null,"qubely_author":{"display_name":"Vivek Kaul","author_link":"https:\/\/vivekkaul.com\/author\/vivekkaul\/"},"qubely_comment":0,"qubely_category":"Equitymaster<\/a> Real Estate<\/a>","qubely_excerpt":"Last week, Suraj Parmar, a leading Thane builder committed suicide. In his suicide note Parmar talked about the corruption in the system. A report in The Indian Express quoted V V Laxminaryan, the joint commissioner of police of Thane, as saying: \u201cThe suicide note speaks of several problems that Parmar was facing, including difficulties in…","jetpack_sharing_enabled":true,"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/posts\/3888"}],"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=3888"}],"version-history":[{"count":0,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/posts\/3888\/revisions"}],"wp:attachment":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/media?parent=3888"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/categories?post=3888"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/tags?post=3888"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}