RERA: There’s no way home prices will go up anytime soon

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The Real Estate (Regulation and Development) Act, 2016 (RERA), came into force on May 1, 2017. After this those who make their living in the real estate industry have been suggesting that real estate prices will go up in the days to come.

The logic being offered is that this will be because of compliance costs of RERA which the buyers will ultimately have to pay for.

Given that India does not have any data which agglomerates real estate prices at the country level, those connected with the real estate industry can get away with such statements, because no one else has any idea anyway.

Data from PropEquity Research shows that unsold home inventories stood at close to 4.72 lakh units in the top eight cities across India, as on March 31, 2017. These are homes that have been built but not been sold.

During the period January to March 2017, the inventory of unsold homes came down by 3.12 per cent. Despite this fall, the unsold inventory overhang continues to be huge, across the country. Data from PropEquity suggests that overhang is 60 months in Noida, 43 months in Mumbai, 38 months in Chennai and 30 months in Bengaluru.

If this unsold inventory has to be sold, the home-prices cannot go up from where they are, RERA notwithstanding. The fact that so much inventory has accumulated in the first place tells us very clearly that people are not buying homes to begin with. The only reason for this is that homes across urban India are fairly expensive in comparison to the capacity of people to pay.

This is obvious from the rental yield (annual rent divided by the market price of the home). Typically, the rental yield currently varies between 1.5-2 per cent. This basically means that in order to buy a home right now, one has to pay 50 to 67 times the annual rent. This tells us very clearly that it makes more sense to rent a home and at the same time that home-prices are very expensive. Of course, rental housing comes with its own set of issues in India, with insecure landlords being the biggest one.

Data from PropEquity suggests that property prices fell by 1.7 per cent for January to March 2017. This is clearly not enough. If this inventory overhang has to clear, prices need to fall further. What will force the builder’s hand further is that with RERA in place, new launches to raise finance for previously delayed projects or to pay off debt, will not so be easy, anymore.

A careful look at home loan data of 2016-2017 also suggests that home-prices have fallen.

In 2015-2016, only 16.8 per cent of the home loans given by banks were given to the priority sector. A housing loan of up to Rs 28 lakh in a city with a population of 10 lakh or more, which finances the purchase of a home with a price of up to Rs 35 lakh, is categorised as a priority sector housing loan.

In 2016-2017, 23 per cent of the home loans given by banks were given to the priority sector. This basically means that banks are giving out more sub Rs 28 lakh home loans for financing more homes worth less than Rs 35 lakh, than they were in the past.

This basically means that home-prices have either come down or builders are building more of sub Rs 35 lakh homes. Either ways, this is a good trend. It is not so obvious given that no agency agglomerates real estate prices in India at a national level. But the home loan data from banks clearly suggests this.

Last week, Keki Mistry, the bossman at HDFC, the largest housing finance company in the country suggested that given the low interest rates and the time correction of prices that has happened, it is a good time to buy a house.

Of course, for a home loan lender, it is always a good time to buy a house. What does Mistry mean by time correction of prices? He basically means that even though home-prices haven’t fallen much in absolute terms, they have fallen once we adjust for inflation.

It is worth re-stating here that if the builders have to sell off their unsold inventory of homes, they need to cut prices. Even if they manage to hold on to the current prices, they will not be in a position to increase prices, over the next few years. Hence, the time correction of prices is likely to continue. Given this, those who want a home to live-in and are in a position to continue to wait, should do that.

As far as interest rates are concerned, what Mistry forgot to mention is that home loans have a floating rate of interest, which keeps changing. Hence, over the 15-20 year term of a home loan, interest rates can and will vary. And given this, low interest rates initially, does not make much of a difference in the overall scheme of things. What is needed are lower home-prices.

The column originally appeared on business-standard.com  on May 9, 2017

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No jobs, no sales: Everything is going wrong with real estate

India-Real-Estate-Market
After a brief break, I am back to writing on by favourite topic of real estate. In The Daily Reckoning edition published on January 22, 2015, I had discussed the job creating potential of real estate.

The construction sector benefits tremendously if the real estate sector is doing well and creates a huge number of semi-skilled jobs. This works the other way round as well. When the real estate sector is not doing well, there are not enough jobs going around in the construction sector.

And this is precisely what seems to be happening. A Reuters news-report points out that “more than half a million workers let go from sites around India’s capital in the last 18 months.” In fact, many labourers who work on construction sites in Delhi are migrant labourers who essentially come from the poorer states of Uttar Pradesh, Bihar and Jharkhand.

As the Reuters reports: “In Patna, the state capital, eight out of 20 labourers contacted by Reuters had this year made the 1,000 kilometre (600 mile) trip back from Delhi because they could not find work – pressuring salaries in a region where wages are already low.”

What is happening here? The real estate consultant Knight Frank in a recent research report had pointed out that there were around 7 lakh unsold homes in eight cities (Delhi-NCR, Mumbai Metropolitan Region, Bengaluru, Pune, Kolkata, Chennai, Hyderabad and Ahmedabad).

“Current unsold inventory levels stand at over 7 lakh units; would take over 3 years to exhaust,” the report pointed out. Liases Foras, another property consultant, puts the inventory in the major cities as of the end of June 2015, a little higher at 41 months, up 24% from last year.

Given the fact that homes are not selling, new launches have declined by 40% to 95,400 units during the first six months of 2015.
And this possibly explains why there is a job crisis in the construction sector. When real estate companies are not able to sell what they have already built, there is no point in continuing to build new homes. With new homes not being built at the same rate as they were in the past, the total amount of construction has come down dramatically, leading to a job crisis in the sector.

How can this disconnect be corrected? How can jobs be created in the construction industry that services the real estate sector? For this to happen new homes need to be built, only then can construction jobs come back in the real estate industry.

For new homes to be built, the unsold homes in the eight big cities and all over the remaining part of the country need to be first sold. And for that to happen prices need to come down so that homes become affordable. A major reason why homes are not selling right now is because they are exorbitantly priced and way beyond what most people can afford.

The real estate companies are not willing to accept this and cut prices. In a recent press release, the real estate lobby, the Confederation of Real Estate Developers Association of India (CREDAI) said: “it would be prudent to say that from the developers side a substantial reduction in prices has already happened across the country and any further decrease in sale prices would be a deterrent for the growth of a sector that contributes so much to the economy and employment at large.”

The real estate lobby feels that home prices cannot be cut because input prices have risen over the last few years. CREDAI President Geetamber Anand told PTI that “housing prices have gone down by 15-20 per cent on an average in last two years across India, while input costs have risen by 15-20 per cent.”

A similar feeling was echoed by Knight Frank Chairman Shishir Baijal who told the Business Standard that: “Input costs, including that of land, have gone up over the past few years. There is no scope for a serious correction in prices.”

Input costs may have risen, but is that a good enough reason for not cutting prices? The real estate companies may as well continue building homes at prices, which no one will buy. At the end of the day any product has to be priced at a level which the end consumer is willing to pay. This is a basic way in which any business works.

This logic did not apply to the real estate sector up until now because there was massive investor demand. This included people who had black money to park as well as others who were taking on home loans to invest in second and third homes. With returns from real estate more or less remaining flat over the last couple of years, the number of buyers in this category has come down dramatically. The Reuters story referred to earlier points out: “A law to clamp down on “black money” flows that fund as much as a third of real estate deals is further squeezing demand.”

I really don’t know where Reuters got hold of the one-third ratio, but there is enough anecdotal evidence to suggest that investor money coming into the sector has come down dramatically. The real estate consultants have also made this point. Given this, the only prospective buyers left in the market are those who want a home to live-in and they are in no position to pay the kind of money the real estate industry wants them to.

So, as I keep saying, the real estate sector is not going to revive without a massive price cut. Having said that, the CREDAI had an intelligent suggestion to make for once as well. The real estate lobby said in a press release that: “The onus is now upon the state government to rationalise taxes, ready reckoner rates and streamline the approval process to bring down property prices and provide relief to home buyers.”

In many parts of the country real estate transactions are not happening simply because the circle rates are higher than the prevailing market price of real estate. And this has led to the transactions in the real estate market coming to a complete standstill. People are not buying and selling homes because of this.

The area where real estate is bought or sold has a circle rate decided by the state government. The circle rate is the minimum value at which the actual transfer of a property between a seller and a buyer should take place. Hence, the buyer of the property pays stamp duty to the state government on the circle rate.

This is something that the state governments can correct by bringing down circle rates. But the question is will they do that? And if yes, how quickly?

The column originally appeared on The Daily Reckoning on Aug 28, 2015

Despite rising number of unsold homes, real estate prices continue to rise

The Confederation of real estate developers association of India (CREDAI) a real estate lobby, has written to the government to provide relief to the real estate sector in the upcoming budget which is scheduled towards the end of this month.
“We want infrastructure status for real estate apart from that there should be exemption from the tax and less formalities to obtain home loans for the buyers,” 
a CREDAI official told the Times News Network.
These moves, the lobby believes, will provide the sector some “cheer”.
Before this, CREDAI had constantly been talking about the need for the Reserve Bank of India(RBI) to cut the repo rate or the rate at which it lends to banks. Raj Modi, president of CREDAI in the National Capital Region had said in January 2015 : “We have been raising the concerns of developers over higher rates from the government. We are happy that RBI has taken a step by cutting the rates. We expect that this will encourage banks to ease their home loan rates…This will help developers to expedite their projects which were otherwise facing fund crunch. Home buyers’ dreams of owning a home would also get a boost as we expect an accelerated purchase cycle.”
This comment came after the RBI decided to cut the repo rate by 25 basis points to 7.75%:
The position taken by CREDAI till date seems to be that people are not buying homes because interest rates are high. If RBI starts cutting the repo rate it will lead to banks cutting the interest rate they charge on their home loans. People will borrow and buy homes. And everybody will live happily ever after. 

Only if things were as straightforward as that. 
I have explained in the past that the major reason why Indians are not buying as many homes as they were in the past is because prices are too high in comparison to the income of people. Further, despite slowing sales, most real estate companies and builders have not budged and refused to cut prices.
This becomes clear through the research report titled 
India Residential Market Preview for the period October to December 2014, released by Liases Foras, a real estate research and rating company. The research report provides data for six cities (Mumbai Metropolitan Region, National Capital Region, Chennai, Bangalore, Hyderabad and Pune).
The report clearly shows that sales continue to remain slow as the total number of unsold homes pile up. “The unsold stock rose 17% from 709 mn SqL in Dec 13 (Oct to Dec 2013) to 832 mn SqL in Dec 14 (Oct to Dec 2014),” the report points out. Yearly sales across the six cities that the report covers declined by 1.1%.
Despite huge number of unsold homes and falling sales, home prices continued to rise, though not at the same pace as they have in the past (as can be seen from the accompanying table). 

City

Weighted Average Price of a Flat in Oct to Dec 2013

Weighted Average Price of a Flat in Oct to Dec 2014

% increase in price

Months of unsold inventory as on Dec 2014

Months of unsold inventory as on Dec 2013

Mumbai Metropolitan Region

Rs 1.23 crore

Rs1.32 crore

6.62%

40

48

National Capital Region

Rs 73.09 lakh

Rs 74.79 lakh

2.33%

40

56

Bangalore

Rs 85.21 lakh

Rs 85.55 lakh

0.40%

17

35

Chennai

Rs 61.57 lakh

Rs 63.37 lakh

2.92%

22

41

Pune

Rs 55.84 lakh

Rs 56.94 lakh

1.96%

21

15

Hyderabad

Rs 70.51 lakh

Rs 74.77 lakh

6.05%

31

24

Source: Liases Foras


A glance through the column in the table which lists the weighted average price of a flat across various cities, makes it clear how homes have become totally unaffordable across the length and breadth of India. And this is where the problem lies. 
Other data also clearly shows this unaffordability of homes across India. Take a look at the following table from the National Housing Bank. It shows the breakdown of home loans given by housing finance companies for buying old homes. 

Source: National Housing Bank

As is clear from the above table more than half of the total loans given by housing finance companies have been given to homes worth more than Rs 25 lakh. The data for 2014 is not available. Nevertheless, there is not much reason to believe that the situation would have changed much from what it was in 2013. 
The following table shows a breakdown of home loans given by housing finance companies towards the buying of homes (both old and new). 

Source: National Housing Bank


The above table shows that more than 47% of all home loans given by housing finance companies were for homes above Rs 25 lakh. This number has jumped dramatically since 2012, when it was at 43%. It also needs to be pointed out that at Rs 25 lakh it would be next to impossible to buy anything half decent in the six cities that Liases Foras tracks. It would be interesting to know, what portion of the total home loans is made of home loans over Rs 50 lakh. 
Hence, homes are so expensive that it has led to a situation where the share of housing as a proportion of the Indian GDP is very small. As can be seen from the following table, the only countries that are behind us when it comes to housing are Bangladesh, Sri Lanka and Pakistan. 

Source: National Housing Bank


Hence, affordability is the major issue when it comes to real estate. As the Report on Trend and Progress of Housing in India 2013 points out: “This phenomenon[i.e. affordability] has the potential to exclude a large segment of the society as they get priced out of the formal housing finance market…It continues to remain the most critical aspect of housing for a vast segment of the population.” 
Interestingly, the Technical Group of Housing Shortage estimates that the housing shortage in urban India was at 18.78 million in 2012. In rural India the number was at 43.9 million. 
What this clearly tells us is that India’s real estate companies and builders have been building homes for only a a very small segment of the population. And even this segment is now not in a position to buy the homes that are being build, given the price that they are being sold at. 
It is time the real estate sector woke up to this opportunity. The government also needs to address this, by rapidly addressing supply side issues like archaic building bye-laws, delays in project approvals etc. At the same time it also needs to figure out how to drive down high land costs. And on top of everything, it needs to figure out how to tackle the massive amount of black money that the sector attracts

The column originally appeared on www.equitymaster.com as a part of The Daily Reckoning on February 9, 2015

Mr Jaitley here is why Indians can’t buy a home to live in

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010
Politicians and intellectuals who rarely venture out of their homes in Delhi, seem to have a table top theory to explain everything that is wrong with this country. A favourite theory doing the rounds these days is that India is not progressing because interest rates are too high. And given that, the Reserve Bank of India needs to cut interest rates. Once it does that people will buy homes, cars and what not, and high economic growth will return again. QED.
But is that really the case? Recent data released by the real estate research firm Liases Foras clearly shows that homes in Indian cities are terribly expensive.

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The weighted average price of a flat in Mumbai is Rs 1.34 crore. For Bangalore this stands at Rs 88 lakh and for the National Capital Region at Rs 75 lakh. Nevertheless, this table does not tell us how bad the situation really is. In order to understand that we need to take the per capita income of these cities into account.

The state level economic surveys give out the per capita income of various cities. The only trouble here is that the latest numbers are not available. Hence, in order to account for that I have adjusted these incomes by assuming an average increase in per capita income of 10% per year. (Further, I couldn’t find the average income of Chennai, and hence haven’t taken it into account for making this calculation. Also, for the Mumbai Metropolitan Region I have used the average of the per capita incomes of Mumbai and Thane, respectively. For the National Capital Region, I have used the per capita income of Delhi, and hence the calculation is a little understated to that extent.)

The following table gives the per capita income of five cities in 2014-2015. In order to show how

high the real estate prices are we will basically divide the entries in the first table by the entries in the second table. Hence, we will end up calculating that how many years of current income is needed to buy a flat in a particular city. And the results are very interesting.
It takes 68 years of current income to buy a flat in the Mumbai Metropolitan Region. For Bangalore the number is at an even higher 81.5 years. This seems on the higher side. And there is a reason for it. I have used the per capita income of Bangalore division (which is what I could find in the

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Karnataka Economic Survey of 2013-2014). And Bangalore division includes not just Bangalore but also other places like Kolar, Shimoga, Tumkur etc., where per capita incomes are lower than that in Bangalore.
Even if we assume that per capita income in Bangalore is double the per capita income in Bangalore division, it will take around 40 years of current income to buy a home in Bangalore.
Of the five cities, Pune is the cheapest to buy a home in. But even there is takes close to 32 years of current annual income to buy a home.
Further, home prices continue to remain despite the fact that there is a huge inventory of unsold homes, as the following table from Liases Foras shows us.

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National Capital Region has an inventory of 83 months. What this means is that if the current number of unsold homes is to be sold, it would need nearly 83 months or around seven years for that to happen. One reason for the unsold inventory is that most builders are not interested in developing affordable homes. Everyone wants to cater only to the richer segment of the population.
Also, the tables clearly prove that high interest rates are really not why people are not buying homes. They are not buying homes because homes are very expensive. Fresh home loans can be got these days at anywhere between 10-11 percent. Assuming this interest rate where to fall in the days to come, how much difference would it make? Would people buy homes?
Let’s understand this through an example of an individual who wants to buy a home in Hyderabad. As mentioned earlier the average price of a home in Hyderabad is Rs 75 lakhs. The individual puts in a downpayment of Rs 15 lakh (20% of the value of the home) and takes a home loan of Rs 60 lakh at 10 percent to repaid over 20 years. On this the EMI would work out to around Rs 57,900.
If the interest rates were to fall to 9 percent, the EMI would fall to around Rs 54,000. So, would the individual now buy a home just because the EMI will be around Rs 4,000 per month lower? Unless, home prices fall and builders start concentrating a little more on affordable housing, lower EMIs are not going to help.
This is something that Jaitley and others of his ilk operating out of Delhi, need to realize. To conclude, if Jaitley, the quintessential dilli-wallah, had asked one of his IIT educated babus to do some basic number crunching, he wouldn’t be saying the silly thing that he did.

The article was originally published on Nov 6, 2014 on http://www.FirstBiz.com 

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek

Properties shouldn’t get expensive: Real estate consultants are just rigging home prices

India-Real-Estate-Market

Vivek Kaul

The American author Upton Sinclair once said that “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
This seems to be true about the “so called” real estate consultants who operate in this country. Their main job it seems is to bring out a research report every few months, where the conclusion is that “real estate prices will continue to go up”.
This despite the fact when their own data contradicts this conclusion. Let’s take the case of a recent research report titled
India Real Estate Outlook brought out by Knight Frank. The report takes a look at the real estate scenario prevailing across some of the biggest cities in India.
In the case of Mumbai, the report points out that there is a huge demand-supply gap. The unsold inventory of residential apartments in the city stands at 2,13,742 units. In June 2014, the quarters-to-sell ratio stood at 12.
“Quarters-to-sell(QTS) can be explained as the number of
quarters required to exhaust the existing unsold inventory in the market. The existing unsold inventory is divided by the average sales velocity of the preceding eight quarters in order to arrive at the QTS number for that particular quarter,” the report points out.
What this means is that it will take close to three years to exhaust the existing number of unsold residential apartments in Mumbai, if people continue to buy homes at the rate they have been in the preceding two years. What is interesting is that the unsold inventory has gone up dramatically over the last few years. In December 2011 the number had stood at five, the report points out. This means that in December 2011, it would have taken around one year and three months to dispose of the inventory of unsold residential apartments in Mumbai. By June 2014, the number had increased to three years.
What this tells us is that the supply of residential apartments in Mumbai is substantially more than their demand. And anyone who understands basic economics will know that in order to clear this inventory the real estate companies need to cut prices, so that people come out and buy these unsold apartments.
Nevertheless, the
Knight Frank report goes around to conclude that “On the residential price front…the forecasted increase for the entire year (2014) is 10.1%.” It goes on to explain the reasons for this forecast. “This period [the first six months of 2014] has seen significant completion of transit infrastructure that has the potential to alter the dynamics of the region’s property market,” the report points out. The Versova-Ghatkpoar Metro, the Eastern Freeway and the Santacruz-Chembur Link Road are some of these projects.
The report writers forget(or rather ignore) a rather fundamental point here about how markets operate. Markets start factoring in information well in advance. They don’t wait for a particular development to be completed before factoring in that information into the price. An excellent example of this are the real estate prices in parts of Navi Mumbai, which are close to the proposed new airport. The airport is nowhere in the picture, but prices have been driven up for years, around this story.
Hence, the infrastructure that the report points out to, has already been there in the minds of people for a while now. And if they had been so impressed by it, they would be buying homes, and the quarters-to-sell ratio would have come down. Now that as the report points out, hasn’t happened, making the point irrelevant. Another reason, which is a favourite with most research report writers these days, has also been offered. Now that Narendra Modi is in power, things will improve and people will buy more homes.
As mathematician John Allen Paulos writes A Mathematician Plays the Stock Market “Because so much information is available…something insightful sounding can always be said.” But what sounds insightful need not be correct.
The question that the research report does not answer is: why have the real estate prices in Mumbai going up, despite the fact that people haven’t been buying residential apartments. The Residex Index of National Housing Bank points out that real estate prices in Mumbai have risen by 18.7% between the end of December 2011 and March 2014. This despite the fact that the inventory of unsold residential homes has been growing dramatically. In this scenario, where people are not buying as many homes as are being produced, prices should have been falling and not going up.
The reason for this is straightforward. The real estate market in India is rigged in favour of real estate companies and politicians who are the real owners of these companies.
There is no free market in real estate. Most real estate companies are fronts for politicians. What makes this very clear is the fact that even though there are thousands of real estate companies operating across India, there is not a single pan India real estate company.
And these politicians and their real estate companies have an incentive in holding the prices to be high. They operate as a cartel to do that. Of course, no real estate consultant can “afford” to talk about these reasons given that they make their money from real estate companies. And real estate companies would want its consultants to keep constantly mouthing the lines that “prices will continue to go up”. The research reports brought out by these real estate consultants play precisely that role. They help in managing the price expectations in the minds of prospective buyers.
Whenever such a report is released, its splashed all over the media. The media, in turn, because it depends on advertising from real estate companies, tends to highlight the price escalation and the sales will increase part (or they just don’t bother to read beyond the press release). They don’t bother to ask the most fundamental question: If there is so much inventory, why are prices going up? Take the case of South Mumbai. As the report points out “the
inventory level in the South Mumbai market will take the maximum time of 18 quarters (4.5 years) to sell. The age of inventory, calculated as the time elapsed since launch, is also the longest, at 15 quarters.” So why are prices still rising is something that no one has bothered to ask?
This is how real estate consultants help real estate companies manage price expectations in the minds of prospective consumers. So, the next time you read a report saying real estate prices will go up, check for the source. If a real estate consultant is saying so, the information needs to be taken with a pinch of salt. As Guy Sorman writes in 
An Optimist’s Diary “Economic actors don’t all have the same information at their disposal. Without institutions to improve transparency, insiders can easily manipulate markets.” This is precisely what is happening in India—the insiders have managed to take all of us for a ride.

The article originally appeared on www.Firstbiz.com on Aug 30, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)