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In India real estate gets unreal

Govindraj Ethiraj | November 11, 2008

Someone please help me here. How is it that the country's top realtors who could not have, in their wildest dreams, hoped for formal audiences with the country's economic decision-makers even a few years ago are walking in and out demanding, among other things, lower interest rates, ostensibly to protect the interests of 250,000 construction workers?

Let me break this argument up piece by piece, or should I say separate the carpet area from the built up area. Let's begin with an example. Assume I bought property in Mumbai (pre-2004) paying around Rs 30 lakh (Rs 3 million). Today, the same property quotes for anything between Rs 90 lakh (Rs 9 million) and Rs 1 crore (Rs 10 million).

How did this happen? Well, it began in the glorious days of interest rates, with the figure at an all-time low of around 7 per cent. Today one can definitively say it was this very low interest rate regime - I don't care what the supply side guys say now - that triggered, massaged and abetted the mad spiral that resulted in the 300 per cent hike in property prices in the city of Mumbai.

And obviously if it applies to Mumbai, it must apply in similar or identical proportions to property and land across the country, including for industrial land and special economic zones. The same low interest rate regime triggered a housing bust in the United States and a global financial cataclysm, but that's another story.

It also meant that the well-to-do here were buying second, third homes, and trying to flip them around. At 7 to 8 per cent interest rates and rising incomes, the opportunities were almost magical. Browse any major realtor's website (including DLF) and you will see grand, upscale projects which are great for those who can afford them, but hardly deserve the finance minister's intervention if they have to be sold at half the present asking price.

There is an important reality, pun not intended, to reckon with. It is that the stock market party is taking a long breather. Obviously it would be good for all, including this writer's financial assets, if the party resumed. But it looks unlikely to for a while. And promoters would be wise to accept that the markets are not discriminating against any specific industry or company, at least at this point. A look at DLF's stock price versus the Nifty since January 2008 is illustrative. Both have moved almost in tandem.

As have the stock prices of a host of other companies in diverse sectors. So why then is the fate of the real estate industry more perilous than anyone else's, is the question I would like to pose. Surely not for building more diesel genset-powered malls or lakeside apartments and chalets. As I see it, every business house in the country is struggling to match capacity to demand, which is falling. Tata Motors [Get Quote] has shut plants to manage inventory, so have a host of other auto companies. And they, quite naturally, want auto loans to be made cheaper.

And for all the prime minister's pleas, every industry I know of is rationalising its workforce. Thanks to Naresh Goyal and Jet Airways [Get Quote], no one will, let me assure you, put 400 youngsters out on the streets overnight. But they will cut back and they have little choice but to do so, particularly in industries where out-of-control factors like sky-high oil prices have wreaked terminal damage.

One newspaper report quotes a prominent developer (apparently trying to convince the UPA government to ease up things for homeowners) saying, "The impact of the depressed market will not only be felt on our share values, but also on jobs and overall economic growth." What he mostly means is that the depressed market has severely hampered his ability to raise funds in the last nine months or so. Too bad but he is not alone.

If I were to go by one report, DLF's K P Singh is asking for interest rates in the range of 8-9 per cent. Which is about 1 per cent higher than when the mess began piling up. Brilliant. And would that assume that real estate prices remain where they are or ideally head up another 300 per cent? The industry also wants easing of bank lending norms. Nothing could be more disastrous at this point, I would hazard. So should the real estate industry (it insists it wants to be called one) be abandoned? Not at all, treat them well by all means, but do not by any stretch create special dispensations. For the simple reason that their expansionist ambitions were linked to capital markets and the absence of the latter does not mean monetary or fiscal measures are called for.

Now what is our Joe the Plumber saying? I have an idea. Which is that it has nothing to do with how much supply there is in the system, at least in real estate. It is to do with prices. And till they come down sharply, there is no hope of demand picking up again.

Think at least a 100 to 200 per cent reduction. Sure we could do with lower interest rates but I am of the opinion that higher interest rates (not 17 per cent!) are not a bad deal for this economy.

I have a thought that I would love to open up for debate which is that the excesses of low interest rate regimes outweigh the pain caused by high interest rate ones. That's another story as well.

For now, it's best to leave the real estate sector alone and focus government time and money on real low-cost, rental housing. Like China is.



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