Property Prices Waiting to Crash?

R Jagannathan,

source: Forward Mail

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 property 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 genuine 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 prices 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 announced 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 to be lower, so that more people can buy property; this is why they want to allow FDI in retail, 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-fold, and land near the urban periphery two-fold from already high 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 upwards but downwards: they build several stories underground and not just over ground. If the normal FSI is one, raising it to two would double the available land. If we raise it to five or 10, as in parts of New York, the 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 because that is where their wealth lies.

This is why they try to foster the myth that property prices have only one way to go: up. 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 unaffordable 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 property near the airport 33 km away as a form of investment.

#2: I already have a home. So let me invest 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 supply, or good infrastructure in the place where they are buying cheap property. "Cheap" property is not cheap without a reason.

#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 at least 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 per sq ft 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 stay") 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. Now, despite what builders tell us, prices are again levelling off.

If I had bought my small flat 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.

Don’t be fooled.

The writer is editor-in-chief, digital and publishing, Network18 Group


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