Busting a few more real estate myths

India-Real-Estate-MarketVivek Kaul

The last column on real estate which appeared on January 19, 2015, stuck a chord with a lot of readers. Given that, I thought it made sense to dwell a little more on this topic and the “spin” that real estate wallahs try to give it.
One logic that I have heard being given over and over again is that India has too little land and too many people. Given this, real estate prices can never fall. They will only keep going up ad infinitum and hence, you need to invest in real estate and earn a perpetual return. This is the most widely used logic to justify high real estate prices in the country. But a little bit of number crunching basically tells us that there is nothing right about this theory.
Let’s look at India has “too many people” theory first. As per the 2011 census, India has an average of 382 people living per square kilometre. When it comes to density of population India is ranked 33rd in the world. Let’s compare this with Japan. The country has 336 people living per square kilometre and is ranked 39th in the world.
Japan had a huge real estate boom in the 1980s. The boom came to an end towards the end of the 1980s and prices fell big time after that. As George Akerlof and Robert Shiller point out in
Animal Spirits: “Urban land prices…in Japan (where land is every bit as scarce as it is in other countries)…fell 68% in real terms in major Japanese cities from 1991 to 2006.” And if real estate prices could fall in Japan, which has a slightly lower population density than that of India, they can in India as well.
Even in India real estate prices have fallen in the past. It’s just that people don’t rememember about it anymore. As Manish Bhandari of Vallum Capital wrorte in a report titled 
The End game of speculation in Indian Real Estate has begun: “The previous deleveraging cycle in year 1997-2003 witnessed price correction by more than 50% in Mumbai Metro Region (MMR) property.” And this was just a little over a decade back. Bull markets lead to bad memories and theories justifying high prices.
In fact, real estate prices have been falling in some parts of the country.
A December 2014 newsreport in The Economic Times suggested that “secondary market prices of properties in posh South Delhi localities have fallen 25-30 per cent over the last one year as a pileup of inventory and need for money turn many investors into desperate sellers.” “Compared with peak prices, the discount is as much as 40 per cent, say brokers,” the report added.
Another important point here is that the consumer sentiment seems to be turning against real estate. Recently a buyer sentiment survey was carried out by IIM Bangalore and Magicbricks.
A report on the survey in The Economic Times said that: “[The survey] orecasts that the homebuyers expect real estate prices to drop over the next six months. In fact, the aggregate Housing Sentiment Index (HSI), measured across the 10 cities, dropped sharply by 29% in the 3rd quarter of 2014-15 to 81. (An HSI score of 100 suggests the prices would remain static).”
Now compare this with another survey that the business lobby ASSOCHAM had got done in June 2013, which said: “Over 85 per cent of urban working class prefer to invest in real estate saying it is likely to fetch them guaranteed and higher returns.” So, the sentiment clearly seems to be changing. And there is no greater danger to the price of an asset class than changing sentiment of those who want to invest in it.
The second theory offered is that India has very little land to house its huge population. Again a little number crunching tells us that this is not correct. The 
Indian Institute for Human Settlements in a report titled Urban India 2011 esimates that “the top 10 cities are estimated to produce about 15% of the GDP, with 8% of the population and just 0.1% of the land area.”
Economist Ajay Shah in a May 2013 column in
The Economic Times did some number crunching to show that India has enough land to house its millions. As he wrote “A little arithmetic shows this is not the case. If you place 1.2 billion people in four-person homes of 1000 square feet each, and two workers of the family into office/factory space of 400 square feet, this requires roughly 1% of India’s land area assuming an FSI(floor space index) of 1. There is absolutely no shortage of land to house the great Indian population.”
One corollary of this theory is that as cities expand they will take away land from agriculture and that will create a problem as well. Again this is a specious argument.
Data from World Bank shows that around 60.3% of India’s land area is agricultural land. The bank defines agricultural land as “share of land area that is arable, under permanent crops, and under permanent pastures.”
In fact, only the United States has more agriculural land than India. A
s India Brand Equity Foundation, a trust established by the Ministry of Commerce and Industry points out: “At 157.35 million hectares, India holds the second largest agricultural land globally.” Only, the United States has more agricultural land than India. Take the case of China. India has more arable land than China. This, despite the fact its total area is only a little over 34% that of China.
Hence, agricultural land near the cities can easily be diverted towards construction of more housing without it having any signficant impact on agricultural production.
The basic problem lies in the fact that too much black money has gone into real estate and has driven up prices ( as I wrote in the last column) to previously unimaginable levels. This has led to builders and politicians who back these builders to sit on a huge amount of unsold inventory instead of cutting prices to clear it. They have got used to these high prices. Also, so much money has already been made that sitting on inventory till prices start to recover, doesn’t seem like a bad idea at all to them.
As an article in
The Caravan magazine pointed out few years back: “There isn’t a bubble of real homes…If all these apartments were actually built, and built fairly to schedule, I guarantee you that they would find real buyers. The demand is out there. But there is a huge bubble in imaginary homes.”
And this is because the ill-gotten wealth of politicians and their cronies has found its way into the sector through “benami” means over the years. However, there continues to be demand for reasonably priced property even in big cities. Only if there was someone trying to fulfill this unmet consumer demand.
To conclude, it is worth sharing this example that Ruchir Sharma talks about in his book
Breakout Nations: “Lately Indian businessmen have been regaling one another with accounts of a leading politician from Mumbai who is known to have amassed a huge wealth through property deals. At a private screening of a new Bollywood movie, this politician asked the producer to replay a particular song-and-dance number, over and over. When the producer asked if he was taken with the leading lady, the politician said no, he was eyeing the location and wondering where the producer had found such an attractive stretch of open space in Mumbai.”
And this is where the real problem lies. 

The article originally appeared on www.equitymaster.com as a part of The Daily Reckoning on Jan 21, 2015


About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

One Response to Busting a few more real estate myths

  1. Vijay Modi says:

    In the past investment in real estate was made if and when there were spare funds which were not needed immediately either for business or any other investments. Buyer was expected to have the holding capacity i.e. would not need to liquidate the investment at short notice because it would not have been feasible to even recover the principle.

    You are absolutely right in stating that the boom in real estate prices all over India is primarily due to the excess of black money which needs to find a home. If and when the fountain of black money is turned off, prices will plummet like a ton of bricks.

    Obviously there is a huge need for suitable housing not only for the growing population but also due to changed life styles which will have a bearing on prices if the demand is not met by available supply. But the current demand is not need based but investment driven with scores of apartments lying vacant awaiting better returns.

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