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The last throw of the dice

Is some real estate package from the government imminent? What shape should it NOT take?

The last throw of the dice

The central government is said to be preparing a set of reform measures related to the real estate sector. In all the news stories on this issue that I have read over the last few days, only that much is certain. The rest of it, which is about the actual actions that the government will take, and the precise problems it will solve, are just speculation since this government always keeps its cards close to its chest. What has appeared seems to be a wishlist of the real estate operators of one sort or another. In fact, the wishfulness of the gifts they want from the government more resembles a child's letter to Santa Claus than practical ideas from serious people who are running actual businesses.

Basically, almost all of it boils down to a simple wish that someone should somehow give them money, a lot of money, so that 'stalled projects' can be finished and the nation's economic progress can resume and India's glory be restored. Or something like that. According to real estate people, the entire problem has arisen because of demonetisation and GST. Of course, the moment anyone says that the real estate business got ruined completely and permanently by demonetisation and GST, they are basically saying that they were actually in the money-laundering business, but then that's nothing new, everyone already knows that. It's interesting that while wishing for money, they don't actually call it 'money'. Instead, they call it 'liquidity'. This is an attempt to make it sound like some technical matter of high finance and not what it actually is, which is basically a begging bowl.

The basic reality of India's real estate business is that for the most part, it was funded by 'liquidity' from customers. Developers used to start the whole cycle by simply announcing some project, and getting people to give them 'liquidity'. Some or the most part of this liquidity would then be diverted to future projects, and then from those future projects to future-future projects and so on. Netting everything out, it's a transfer of liquidity from customers to a lot of other people. In the heyday of the real estate boom, many of the customers were 'investors' who were hoping to use rising real estate prices to convert their black liquidity to white liquidity. In the mix were also those who were actual buyers and had often taken loans and one day hoped to live in the resulting apartments.

At some point the party ended, which happened long before demonetisation and GST. Why did that happen? To my mind, there were two reasons. The biggest was that there was a severe mismatch between the actual market and what the developers thought was the market. I mean this in terms of the cost and the kind of houses that were being built. Essentially, everyone was trying to get hold of as rich a customer as was possible. Because much of the initial boom was driven by the black liquidity launderers, who kept selling prospective houses to each other at ever higher prices, there was a general illusion that there was a huge market for the more expensive kind of apartments.

This is still the case. There is a huge market for low cost housing in this country. It's just common sense that the Indian market for low-cost (and medium cost) housing is an order or two of magnitude larger than that of houses for the rich. It appears to be a difficult market compared to the premium one from the point of view of developers. However, it has the advantage that it actually exists at scale, unlike the premium one.

Demonetisation and GST have triggered a cleanup in real estate that hardly seemed possible earlier. The transition from the shady real estate industry of the past to one which is actually needed will be a long and difficult process. The solutions that the industry wants would basically amount to turning the clock back. The government should not give in to it.