Despite the Indian economy plunging into a downward spiral with most sectors under stress and asset prices taking a knock, real estate prices have remained rock solid with hardly any signs of slowing down. Defying gravity, prices just keep going up. The Reserve Bank of India (RBI) in its Financial Stability Report for June, has also flagged rising house prices in most metros as a deep concern. This is despite its hawkish monetary policy stance. Also, bank credit to housing, has fallen, but developers are in no mood to relent and cut prices.
The share of credit to the housing sector fell to 9.5 per cent as at end March 2013 from 13.3 per cent at end April 2007. However, the latest report of Knight Frank India reveals that Mumbai continues to be the most expensive property market in India, with 29% of the city’s total under-construction units priced above Rs 1 crore, compared with 11% in the national capital region (NCR) and 5% in Bangalore.
India is among the few countries where property prices have actually risen after the recession of 2008 while major economies such as the US, UK and even China have seen an absolute reduction in property prices.
This explosive growth in housing prices despite the gloomy macro-economic scenario is fuelled by key factors like severe scarcity of low-cost housing and rising disposable income leading to high-income people cornering bulk of the housing supply in upcoming and central locations. Lack of affordable housing and the paucity of innovative financing schemes for housing have also led to profileration of urban slums.
In that case, are housing prices beyond fundamentals?
Despite falling sales, leveraged balance sheets and high interest rates, developers have been able to resist price cuts. Deepak Parekh, an industry veteran and someone who knows about housing better than many of our policymakers, believes that home prices are highly inflated in the country, including in smaller cities. He adds that increasing supply is the only way to bring home prices down.
Last year, Finance Minister P Chidambaram had also asked banks to pressurise builders to lower prices of apartments that are ready for possession but not getting sold. Developers are sitting on high inventories despite rising costs.
There is little justification for property prices to be among the world’s highest when infrastructure facilities are pathetic.
As per an estimation of the Task Force on Housing Requirements in Urban Areas during the Twelfth Five Year Plan Period (2012-17), the housing requirement in urban areas is 18.7 million units of which 18.5 million are for the Economically Weaker Section (EWS) and Lower Income Group (LIG) segment. As per a McKinsey Report, the demand for affordable housing will be 38 million by 2030.
Amidst such robust demand, there is a pressing need to put in place a fair and transparent market place. It is for this reason that the Real Estate (Regulation and Development) Bill 2013, approved by the Cabinet that allows for the creation of a regulator in the real estate sector had been keenly awaited.
The Bill will ensure that construction is not only completed in a time-bound manner but that the buyer gets the property as per the specifications promised. Developers also need to clearly mention the approvals they have obtained and cannot sell homes unless the necessary approvals are in place. This would ensure greater transparency in project marketing and execution. However, the bill is silent on fixing prices. If price control measures are not introduced, the property market would continue to be at the mercy of speculators and cartels.
The steep housing prices clearly mirrors the country’s wealth imbalance. The centre should step in to address this imbalance by stifling price growth and encourage affordable housing.
While changing urban landscape has also contributed to higher housing prices, the main factor has been the high circulation of black money. The cash component involved in all transactions, up to 30% in some cases, is forcing the emerging middle class from buying a house.
When you have the drug regulator fixing prices of essential medicines to keep it within the reach of the common man and if stock markets can have circuit filters to regulate stock prices, why not have a price control in place for the realty sector that has linkages to more than 250 sub-sectors of the economy?