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It would be an understatement to say that the real estate sector in India is going through a turbulent phase. On one hand, we have home, commercial property prices at all time highs, and on the other hand, there are not that many buyers in the market. What explains this contradiction is that vast sums of money (foreign, domestic, and black money) have been invested into the real estate sector thereby keeping the prices high and at the same time depressed demand meaning translating into overbuilt inventory.
Indeed, recent surveys have shown that inventory levels are at peaks of 24-48 months when the healthy signs are when inventory levels are between 12-18 months. This is the reason why many foreign real estate majors are adopting a wait and watch policy and not rushing into investments. With such high inventory levels, it is not surprising that there is overcapacity of homes which is compounded by the paradox of unsold homes and high prices.
Indeed, this paradox wherein there are many homes that are unsold and at the same time, the prices of the homes continue to be high is mainly because of the high levels of money that has been parked in the sector. This means that unless this excess liquidity is flushed out or there is a drastic improvement in the economy, the Indian real estate sector would continue to go through troubled times.
Indeed, even by lowering interest rates, the Indian real estate sector cannot be revived without addressing the above aspects. This is the key challenge that is being faced by the Indian policymakers who are attempting to confront the problems of the real estate sector in the country. As long as prices are high, homes would remain unsold and as long as there is excess inventory, the sector would continue to be stagnant.
If we take each of the factors listed above, we find that over the last decade and half, there was a flood of foreign investment in the real estate sector by global majors that resulted in the property prices going through the roof. The next factor was that real estate was a magnet for all the excess liquidity that was sloshing in the emerging markets thanks to the ultra loose monetary policy followed by the Federal Reserve of the United States.
Added to this was the fact that in the aftermath of the global economic crisis of 2008, the Reserve Bank of India in tandem with the Indian government resorted to stimulus spending and pump priming the economy. The third and the most important aspect is that the black money that was floating around in the economy found its way into the real estate sector.
Turning to what this situation means for first time homebuyers, we find that most of them would be taken aback by the high prices and at the same time building up of excess capacity. This means that they would be surprised by realtors asking for more and at the same time, finding that many homes are left unsold or unoccupied.
Further, they would also find that if they go in for a home loan that would be at high rates of interest thereby compounding their misery. The combination of all these factors is what deters first time homebuyers from actively seeking to invest in their dream home. This is also the reason why many first time homebuyers are putting off purchases as they find that they cannot get the homes at the price they want and at the same time have to borrow through home loans at higher rates of interest.
The solution to fix this gloomy outlook for the real estate sector would lie in making the business practices of the sector transparent and bring in accountability. Already, the Reserve Bank of India is deterring the realtors from demanding upfront payments exceeding twenty percent of the total cost of the project.
The intention behind this move is to ensure that overcapacity does not build up by the realtors demanding a huge part of the cost upfront. Next, the government should move to act against the defaulting realtors and the major real estate majors to ensure that they do not renege on their promises to the homebuyers.
Third, there must be more transparency in real estate transactions which is what the Land Acquisition Bill being proposed aims to bring about. To conclude, the set of measures that the government and the RBI are taking would hopefully lead to the easing of the problems of the first time homebuyers.
The preceding discussion has examined some of the problems in the Indian real estate sector and outlined some solutions. As can be seen from the points made so far, there is a need for overhaul of the real estate sector and this can happen only through a systemic and structural reform program that involves collaboration and cooperation between all the stakeholders.
Having said that, it must also be noted that unless the funding patterns and the business practices are made more transparent, there cannot be any solution to the problems of the real estate sector in India. In conclusion, it is hoped that the policymakers take the much needed and long overdue reform of the real estate sector in India.
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