unreal estate

My mind's been so unsettled in the past few days that I have been unable to figure out what I want to write about on this blog. There are a number of issues always going on around me that I would like to comment on, but as it has happened so many times, I begin to collect my thoughts and form the words in my mind on a certain issue but soon descend into thinking of the pointlessness of it all.

There's actually a huge interest in me to write about the real estate market in the country, and the apparent lack of any norms or rules in governing it. It's a good story to write, but I am afraid there are so may angles to it that my utter lack of depth in the subject will be painfully visible. When I talk of the lack of norms or rules, I think what I really mean is the opacity that this market represents, right from how the land prices work to how projects are planned/constructed to how they are sold to the public.

It is this opacity which I feel works in the favor of everybody but the common man for whom a home is still a once in a lifetime investment, and it is of paramount importance to them that they get it right the first time. Unfortunately, real estate has this big dark underbelly where the real estate construction company owners, contractors, local politicians, national politicians, bureaucrats and such control the land and use the laws of the land, or the lack of them, to make a quick buck for themselves.

The Japanese economy tanked because it worked on the presumption that real estate prices just can't fall. Banks lent heavily and big money was spent on construction and real estate, and then the bubble burst, thus leading Japan into a soup which they are still trying to get out of, even after so many years!

The one thing today's free-economy driven world perfectly demonstrates is the axiom that the one thing we learn from history is that we do not learn from history. The US economy then took up the challenge to test the hypothesis that the only way the land prices in their country will go is up. We all know how well it worked out for them and the rest of the world.

Now a lot of stories are doing round today that the real estate market in India is either in the middle of a bubble, or heading towards one, but all seem to agree on one point that some near to medium term correction in real estate prices is definitely on the cards.

There is one very strong feature of the Indian real estate market, in my opinion, that may not be as prevalent in the more developed markets, is that a large number of high end buyers in the country are either speculative buyers or they buy their property as an investment. I believe that a big reason for this is that being such an opaque market, there may be a lot of avenues for high earners to either stash their dirty money, or money that they otherwise would have paid as tax, into apartments and villas and then put it in the name of their wife or son or mother or uncle or whoever.

Now what speculative/investment buying of property does is that in places such as Mumbai or posh parts of the other cities where the land is already scarce and heavily, heavily protected and bargained for, it reduces the already small market of homes available for the genuine buyer who wants to settle down with his/her family. Politicians are big users of this policy actually, and have benefited a great deal from the opacity of the market. An adarsh scam here and there really does nothing to slow down these reckless renegades from seeking out the riches of the real estate market which is into crores and crores of rupees. Add to that the politics and economics of urban slums, and we have this situation where there seems to be absolutely no way forward without one section of the stakeholders not opposing it vehemently.

Nothing is substantiated by proof but there are many stories out there that say that Sharad Pawar, Praful Patel and other politicians purchased huge tracts of land for cheap in the Panvel region of Navi Mumbai in the anticipation that land prices will skyrocket once the new international airport is sanctioned to be built in that area. Then the new airport was sanctioned and the prices did go up by a few times. Its quite true actually, that real estate is a great refuge for a politician's hard earned money.

Coming back to the question of India's real estate sector being a bubble - I believe that whether its a bubble or not a bubble, dirty money will always continue to flow into the sector as long as the laws are not clear and the markets not under scrutiny. But again, it would be wrong for me to say that this side of the sector drives it. I think its still the common man/woman, or the business house that drives the market with their demand for homes and office space. In my opinion, I've been waiting for such a bubble to form, or burst, and see this 15-20% correction in prices for myself. I am not quite sure that happened even during the American shenanigans of 2008, so I am actually a skeptic when it comes to believing in such a bubble.

However, at the same time, its quite possible that the economy and the stakeholders were probably woken up from their "real prices can only go up" dream by the global economic downturn. With rising inflation and prices, and absolutely no fiscal policy so to speak of the government of India to contain it, once again the nation relies on the good old monetary policy by tinkering with the rates. So the interest rates are high, thus taking the cost of a home loan higher and effectively reducing the purchasing power of many a hopeful home owners.

Real estate companies across the country were scaling up on construction by taking a huge amount of debt to build new projects, buy new land and pouring all of it into high-end housing. Then comes all the economic upheavals and at least in my eyes, a lot of demand just shrunk simply on weak global cues. Then came the recovery and the high inflation with it, thus taking the home loans out of reach of many people, and so, a lot of the real estate companies are saddled with a huge amount of debt and a lot of high-end property that apparently not a lot of people are buying. So now a host of companies, including one of the biggest ones in the country - DLF, are selling assets and land to shed this debt. At the same time, they are reaching out to PE firms, which I think may again make them more prudent in their decisions, considering PE firms may be firmer in their terms and conditions and stricter on meeting milestones.

However, this does not really answer the basic question whether such sales will actually bring prices of developed properties down. The interest rates are high, so ideally the prices should come down to stimulate demand. Its so ironic that when I write this, there is a shortage of 24 million low income and lower middle income homes in this country! No real estate company wants to touch this sector in a big way, and only come up with a few projects here and there and tom tom it as their contribution to the society. The UPeeA Govern"mint", well, wants to get rid of slums in the Indian cities so they do what they do best - announce a big scheme named after a member of the Gandhi family. I am still to see how the government proposes to take over the land in such cases. If India manages to provide all families in this country with a home, that'll be a true step forward in our development, but unfortunately, our priorities seem to lie everywhere other than the most basic development indicators such as primary education, housing and healthcare.