Common sense on India's real estate | Value Research Has the basic law of supply and demand been suspended in India's housing sector?
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Common sense on India's real estate

Has the basic law of supply and demand been suspended in India's housing sector?

Last week, RBI Governor Rajan called upon real estate developers to reduce prices so that the salaried class could afford houses. To anyone who's trying to buy a house, this would have sounded like common sense. But to the entire cast of characters who are crying over the slump in housing, this would have sounded like utter nonsense, a recipe to actually deepen the slump. The dichotomy is obvious.

Developers, along with their camp followers, think that the obvious cure for the slump in the industry would be if more and more customers buy its products in larger quantities, preferably at higher prices, just as it would be for a slump in the sales of shoes, or cars, or ice creams. In real estate, the malaise is of a different nature. For most people, a house is by far the largest purchase of their lives, as well as the repository for a major part of their savings and investments. Today, resulting from a combination of high prices and shaky salary increases, we are back in the bad old pre-nineties days, when only businessmen, wealth inheritors and those with 'cash incomes' could afford to buy a house.

What's more, when Rajan asks developers to reduce prices, he must be knowing that he is indulging in mere rhetoric. After all, the basic laws of economics could not possibly have been suspended in India's housing market. Why aren't prices coming down in response to lower demand? Obviously, this is happening because the real supply has shrunk, in the sense that those who are holding the goods have strong hands and they'd rather wait than sell. They can do that because much of the investment is out of black money, either from unpaid taxes or criminal activities like corruption. For all the noise about bringing back black money from abroad, it actually needs to be brought back from real estate.

As for the salaried person who wants to buy a house, you might be better off waiting. That goes against what has been good advice for more than a decade now, but might be better to save money in a high return investment like an equity mutual fund. It might be better to wait for some sanity to return to India's real estate sector.

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