For the last few years, before the start of the festival season (around August-September) and at the start of the new year, positive statements about real estate start appearing in the media. Most of these statements essentially try and tell the average Indian that a turnaround in real estate is just around the corner, and, given this, now is the right time to buy a home. These statements are made despite the fact that sales as well as new launches of homes have fallen dramatically over the years.
In the last few years you would have been better off letting your money sit idle in a bank fixed deposit and made more money in the process without any of the big headaches which come with owning real estate.
As Yuval Noah Harari writes in Sapiens: A Brief History of Humankind, "Private investors, unencumbered by political considerations will invest their money where they can get the most profit." Real estate has been one such area for investors, where good returns have been made over the years. But that hasn't happened over the last few years. This realisation has gradually started to creep in and people have stayed away from buying new under-construction homes.
This has taken time, given that there is almost no data available on returns that investors have made by investing in real estate over the years. Low returns have not been the only issue with real estate. There have been many instances of builders taking money from people wanting to buy homes and disappearing. In many cases, banks have continued to insist on EMIs being made, even though the builder has disappeared.
Over and above this, many builders haven't completed projects on time, leaving buyers in a lurch. There have been several such cases in metropolitan cities, though not on the same scale as in areas in and around Delhi. Many buyers have had to pay their EMIs as well as their rents at the same time, leaving them in a poor state financially.
As Harari writes, "The most important economic resource is trust in the future, and this resource is constantly threatened by thieves and charlatans. Markets by themselves offer no protection against fraud, theft and violence. It is the job of political systems to ensure trust by legislating actions against cheats and to establish and support police forces, courts and jails which will enforce the law. When kings fail to do their jobs and regulate the markets properly, it leads to loss of trust... and economic depression."
In the Indian case, the kings (i.e. the central and the state governments) have failed to do their job when it comes to real estate. The builders who have defaulted on delivery or disappeared have essentially broken the trust that is necessary for any system to operate. The lack of trust has also been a reason for dwindling real-estate sales.
The decision to buy a home is the biggest financial decision most people make in their lives. And it is surprising that the real-estate sector up until now hasn't had a regulator. The real-estate bill stuck in the parliament has proposed a real-estate regulator in every state. As Harari writes: "In its extreme form, belief in the free market is as naïve as belief in Santa Claus. There simply is such thing as a market free of all political bias."
Political parties at state levels are way too dependent on builders for their political funding, and given this real-estate regulators will not be very effective. Unless the nexus between state-level politicians and real-estate builders is tackled, consumers will continue to be at the receiving end of real-estate companies in India.
Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected].
This column appeared in the February 2016 Issue of Wealth Insight.
This article was originally published on February 12, 2016.
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