Gauging the economic mood | Value Research An economic indicator on the lines of the housing-starts number in the US will be useful in many ways
Generally Speaking

Gauging the economic mood

An economic indicator on the lines of the housing-starts number in the US will be useful in many ways

Gauging the economic mood

The Real Estate (Regulation and Development) Act, 2016, RERA, came into force on May 1, 2017. The situation up until now suggests that various state governments have been busy diluting the Act. This isn't surprising, given that at the state level, there is a huge nexus between builders and politicians. In fact, the situation in some states has reached a stage where builders are politicians and politicians are builders. Given that RERA hits state-level politicians where it hurts the most, they want to limit the damage it can cause. Nevertheless, this point has been extensively analysed in the media. Hence, in this column I would like to analyse a totally different point.

One impact of RERA will be that every commercial as well as residential real-estate project needs to be compulsorily registered with the real-estate regulator of the state the project is being built in. Up until now, a builder wanting to start a project could have just advertised about the project in a newspaper or on the local FM radio and started it, irrespective of the fact whether the permissions to build the project from the government agencies were in place or not. It was as easy as that.

Also, 70 per cent of the amount collected for the project by the builder needs to be maintained in a separate bank account. This account is "to be maintained in a scheduled bank to cover the cost of construction and the land cost and shall be used only for that purpose." Unlike earlier, the RERA makes it difficult for builders to raise money for one project and use it for an earlier project or to pay off existing debt and then launch another project to raise money for the current one.

But more than that, the fact that builders need to register every new project can lead to some excellent collection of regular data on real estate, something that is currently missing.

In the United States, 'housing starts' is an economic indicator which points out the number of privately owned new homes on which construction has started during a particular month. This is a very important economic indicator, given that a home is perhaps the costliest thing that most individuals purchase during the course of their lives. Hence, if the housing-starts number starts picking up, you can be rest assured that the overall economy will soon start doing well.

This is primarily because when people are confident about committing towards something as costly as a home, they are generally confident about their economic future. They are confident about the fact that they will be able to repay the home loan they have taken on to buy the home that is being built. They are also confident that they have the money to pay for whatever it will take to make the home liveable.

With builders having to compulsorily file the details of every new project, India is now in a position to declare a similar economic indicator. All it needs is a declaration from the builder whether the construction on the project has started.

Given that next to no data are currently available on real estate, this will be a really healthy development. Of course, what helps is the fact that builders need to file everything online. Hence, all the indicator needs is that some central-government agency should agglomerate the state-level data to the national level. In fact, the government can even outsource this compilation and publishing of data to a rating agency. The rating agency will only be happy to do this because of the kind of publicity these numbers are likely to receive once they start getting published.

Housing starts can then become a very good economic indicator. Real-estate consultants currently come up with such data, but their data are largely limited to certain big cities. Also, there is no way of making sure if they are taking all projects into account or not.

Another factor that makes housing starts a very important economic indicator is the fact that it has many forward and backward linkages. The real-estate sector has forward and backward linkages with 250 ancillary industries. This basically means that when the real-estate sector does well, many other sectors, right from steel and cement to furnishings, paints, etc., do well. The multiplier effect is huge.

Hence, a pick-up in housing starts can be a good indicator of an overall pick-up in the economy. Further, unlike theoretical constructs, like the gross domestic product, housing starts are real numbers.

Also, a pick-up in housing starts would indicate the creation of low-skill and semi-skill jobs, something that India badly needs. And creation of jobs is the best way of ensuring that economic gains trickle down to workers as well.

As Thomas Sowell writes in Controversial Essays: "Those who imagine that profits first benefit business owners-and that benefits only belatedly trickle down to workers-have the sequence completely backwards. When an investment is made, the first money is spent hiring people to do work. Without that, nothing happens. Money goes out first to pay expenses and then comes back as profits later-if at all."

Further, the housing starts number, if at all it starts to come out, will take more than a few years to become relevant. During the initial few months (or even years for that matter) we won't have anything to compare the number with. Only over a period of time, when there is a data series available running into more than five years, will this data become relevant and can be analysed properly.

Also, in the earlier years housing starts may simply mean builders launching projects, irrespective of whether the buyers are buying them or not. But over a period of time, this is likely to be normalised because builders cannot just keep building without the buyers buying. Hence, to become relevant the housing-starts data will need time. Given this, it is important that the government set up a system for the collection of this data as soon as possible. India has operated without a semblance of country-level real-estate data for way too long and it is time that this anomaly is corrected.

Other Categories