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Digging Their Own Graves

Realty companies have brought their current problems upon them by believing illusions they themselves created


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This old article may have references to outdated tax rules and laws. For up-to-date information on taxation of mutual funds, refer to https://www.valueresearchonline.com/tax/

Here's a short synopsis of what has been happening in the real estate industry, specifically in housing. Over the last few years, the variety and quality of options that is available to the Indian house-buyer has improved dramatically. Real estate developers have played a crucial role in this process, by making available a vast variety of housing for buyers to choose from. Easy liquidity, low interest rates, and attractive tax breaks on home-loan repayment have played vital roles in this process. As a result of this very welcome development, first-time home ownership has expanded massively, as has the size of the housing industry.

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Now, all this is under threat because of the sudden drying up of the flow of finance from banks. Without finance, buyers have stopped buying and many developers are in serious distress. The real estate industry is trying to cope with the problem manfully. Recently, their industry association NAREDCO has even gone to the extent of asking members to consider dropping prices by as much as 1 to 10 per cent in order to boost demand. Despite such sacrifices, the industry is likely to go deeper into a depression unless the government does something to rescue it. Without such a rescue, millions of jobs will be lost. Input industries like steel and cement will go into a deep depression.

Here's another, alternative, view of what has been happening. In the last three to four years, the real estate industry, with the implicit collusion of housing finance providers, has indulged in an unprecedented loot of house buyers. The 'demand-supply gap' that supposedly produced the price rise was an illusion. Here's how it was created. Basically, developers kept jacking up prices and since banks kept financing purchases at higher and higher prices, an illusion was created that there was enormous demand, no matter what the price.

The buyers were of two kinds. One, the real end-users who were panicked into buying because they were told that prices would go on rising. These people saw prices rising at the rate of 5 to 10 per cent a month and were desperate to buy before houses became unaffordable forever. The interesting part was that vision of ever-rising prices acted both as carrot and stick. They would have to keep paying enormous EMIs for decades, but they thought could also sell at a huge profit whenever they wanted. The other kind of buyers were the 'investors' who were mostly individuals with large debt raising capacity. This lot thought that they would be paying the EMIs for at most a couple of years before selling the property for a huge, leveraged profit.

Basically, this was a racket for transferring a whole lot of money from the banks to the developers. The repayment, of course, was the problem for a generation of young working Indians who have been rushed into buying over-priced housing. At some point, this debt-fuelled buying binge lulled the developers into believing the illusions they had themselves created. I think they really started believing that there were a huge number of Indians who could pay a crore or two for a 1500 or 2000 square feet flat 20 miles outside the city. Whatever cash they got from sales, they relentlessly leveraged it further in order to keep repeating the cycle, which is why they are all in such deep trouble now.

Any possible solution has to start with a massive price crash which will make houses affordable to real customers paying realistic rates of interest. But the solution that the real estate industry is now asking for is a return to the same cycle of cheap and plentiful money. They hope that this will also return buyer and lenders to the same kind of behaviour as earlier. There is only one way that could happen-NAREDCO will have to write a nice letter to Santa Claus asking for it.



This old article may have references to outdated tax rules and laws. For up-to-date information on taxation of mutual funds, refer to https://www.valueresearchonline.com/tax/

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