A frank piece
on Property in India.
Why property is the biggest con-job on investors
A real estate exhibition underway right now
in Mumbai dubs itself as “India’s biggest property expo” and promises
“properties across all budgets”. It will flop, as many of the previous ones
did, for the reality is that property in Mumbai has completely detached itself
from the fundamentals of affordability and economic value.
People will come to gawk at the pictures
and brochures on display and then swallow hard when they see the extortionate
prices mentioned for property situated at non-commutable distances and which
will anyway be delivered years later. The ones who actually end up booking or
buying will often do so for the wrong reasons.
And what is true for Mumbai is equally true
for Delhi, Bangalore, Hyderabad, Chennai or even tier-2 cities and towns.
Indian property
is a bubble waiting to burst, and the only reason why it has not burst already
is the artificial constriction on its supply by the politician-builder-criminal
nexus.
Prices are high not because of demand, but
because our netas and babus and businessmen do not want to let the supply of
cheap land rise for fear of destroying the value of their own benami assets.
If you are not convinced,
ask yourself: why is it that when property price s are so high, their shares have performed so poorly?
Every politician, from
the highest to the lowest, is invested in land and property for some reason or
the other – usually personal gain. We know Sonia Gandhi and her son got possession
of a Rs 1,600 crore Herald House in Delhi through a trust they personally
control. They even used the Congress party to fund it. We know Sonia’s son-in-law Robert Vadra is a big
property speculator. We know why BS Yeddyurappa had
to lose his job in Karnataka – for dubious property deals and for letting the
mining lobby run riot. We know why Nitin Gadkari had to give up the BJP’s
presidentship.
We know that politicians
such as Sharad Pawar and Jagan Reddy of YSR Congress are neckdeep in
property deals. The buzz in Hyderabad is that Telangana is not happening
because several Andhra politicians have bought benami
land in and around Hyderabad – which will be the capital of Telangana, when
created. If the state is created before they can encash the land, politicians
in Telangana will have the upper hand on pricing.
The short point is this: politicians have a
vested interest in keeping property prices high. This is why they want interest
rates lower, so that more people can buy property; this is why they want to
allow FDI in retai l, so that more Wal-Marts can buy land in urban areas; this
is why they want a Land Acquisition Bill that will artificially boost rural
land prices four times, and land near urban areas by two times current market
prices. This is why the rural development ministry is talking of a right to
homesteads – which sounds like a pro-aam aadmi move, but will end up pushing
land prices unaffordably high even in rural areas.
If you don’t believe me, ask yourself: what
stops city municipal corporations from raising the floor space index (FSI)?
Urban land may be limited, but construction can surely be vertical. In
Singapore, they construct not only up but down: they build several stories
underground and not just overground. If the normal FSI is 1, raising it to two
would double the available land. If we raise it to five or 10, land available
in urban areas would rise five-fold or 10-fold, and prices would drop like a stone.
So it is a myth to believe that property
prices will keep rising in urban areas just because land is scarce. Land is not
scarce, it is made artificially scarce.
When every other resource involved in
constructing property – limestone, cement, glass or steel – is subject to the
laws of demand and supply, only land has been artificially inflated by
politicians and builders becaus e that is where their wealth lies.
This is why they try to foster the myth
that property prices can only rise. If we stop believing this, we won’t buy
houses we don’t need, and pay prices we can’t afford.
Here are the usual reasons we trot out to
ourselves while buying a home:
#1: Property prices in the city are una
ffordable – so let me buy something somewhere, even if I never intend to live
there. When the price appreciates, maybe I can sell it and buy something more
livable. This is why Bangalore’s techies buy land near the airport 33 km away –
as a form of investment.
#2: I already have a home. So let me in
vest in something that looks cheap today, even if it is 50 km away from my
workplace. I may keep it vacant, but surely I will make a neat profit when the
price appreciates. This is why Mumbai’s propertied classes buy second homes in
hill areas of the state, or even in deep suburbs. This is why Delhi’s middle
classes invest in property along the Yamuna Expressway though they know it is
an extraordinarily long commute if they even went to live there.
#3: I already own a small home in the city.
If I flip it and buy a larger home half way to Mahabalipuram from Chennai, I
can stay there when I retire some time in the distant future, grow potted
plants, play golf and live the good life. This logic entices many people, even
though they know there is no water s upply, or good infrastructure where they
are buying property.
#4: When interest rates fall, my EMIs will
become more affordable. So let me grit my teeth and buy something I simply
cannot afford right now. This is a super-flawed argument: interest rates are
not your main cost; the price of the property is. When I bought my flat,
interest rates were a high 14-15 percent. But low prices were what enabled me
to buy.
#5: Living in a rented property is never a
viable proposition. I have to buy a house at any cost. When rentals are 1-2
percent of property costs, it makes better sense to rent than buy. Your EMIs
will usually be two to three times the rent.
Assuming you are not rolling in money or
are an expert realtor who knows when to buy or sell property, I would like to
suggest that many of the above arguments just don’t wash.
The only good reasons to buy property are
these: you want to live in it, and have the necessary income to pay the loan
bills every month. If you buy for any other reason, you are indirectly
supporting the politician-builder nexus.
If you are still not convinced, let me bust
the implicit assumption that property prices can never fall. The truth is
property prices have both risen and fallen in all countries which run a free
market. Even in India they have fallen, but we don’t want to believe the
evidence.
Take Mumbai’s southern tip of Nariman
Point. At one stage a decade or two ago, prices for commercial space were
upwards of Rs 40,000 per square foot. Today’s average is Rs 25,000 – though the
actual price may vary from building to building, from Rs 20,000 to Rs 35,000
per sq ft.
This is not only a steep 37 percent fall,
but adjusted for inflation, the fall would be more than 70 percent from the
peak.
But, you may point out, residential prices
are not following the same trend. Possibly true. The reason why this trend is
more apparent in commercial property than residential is simple: commercial
property is bought and sold without emotion by beady-eyed finance professionals
who weigh the opportunity cost of the money they invest; residential properties
are often bought for emotional reasons (“I need somewhere to say ”) and pure
greed (“Let’s buy a second home and make money from the appreciation.”)
To be sure, even residential prices do
fall, but we tend not to notice it. I remember I had bought a home in Thane (a
satellite city of Mumbai) in 1997, and for the next few years not only did the
price not rise, it actually fell 20 percent. It was only after six to eight
years that the price stabilised and started rising consistently.
If I had bought the property just for
appreciation, I would have lost money in the initial years. Even a bank fixed
deposit would have doubled my money in those six to eight years.
The point I wish to make is this: don’t buy
property in the belief that it will keep rising. Buy it only if you want to
stay in it, unless you are a specialist speculator and know the ins and outs of
property buying. The fact that property has risen for the last 10 years – first
on the basis of real demand and later on artificial steroids – is no guarantee
that it will rise for the next 10. Sooner or later, the laws of demand and
supply will catch up with the reality of unaffordability.
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