Will home sales surge post the elections?

Apr 22, 2014

In this issue:
» Has weak industrial activity bottomed out?
» Is the US Fed's approach meaningful?
» Should the new government expect low interest rates?
» How should insider trading be tackled in India?
» ...and more!

The general elections this year have put individuals and companies alike in a state of limbo. Given that the economy has slowed down and the current government is afflicted by policy paralysis and corruption, all hopes are now pinned on the new government and what it chooses to do in terms of growth and development. Nobody wants to make any move till the political environment is certain because only a stable government can begin taking the necessary steps towards rejuvenating the Indian economy.

Real estate developers also figure among those adopting a wait and watch policy. Indeed, they are hoping that once the dust settles down post the election, home sales will once again pick up. As reported in the Economic Times, there is almost a dearth of property sales happening right now. Indeed, homes sales have been quite slow in the country for the past 12 to 18 months. A slowing economy, inflation, firm interest rates and weak job prospects have combined to keep buyers on the sidelines.

As per the article, unsold inventory levels have risen from 650,000 apartments in the quarter through December to 700,000 at the end of March. Not just that around 700 new project launches have been made in the country's top 8 cities. Ideally, this would mean that it is a buyers' market where they can command better prices but not many are willing to take the plunge yet.

One of the reasons could be attributed to the current state of uncertainty before the elections. But the fact remains because of poor disclosures, lack of corporate governance, opaqueness and builder-politician nexus, property prices have been artificially propped up. And thus even if discounts are offered, the overall price is most likely to remain out of the ordinary buyer's ambit. Especially when prices were already very high to begin with.

A lot of work still needs to be done to make the sector very transparent. Thus, it would be too much for real estate developers to expect sales to just zoom post the conclusion of elections. Right now, real estate developers appear to be offering discounts to offload inventory. Thus, it will be interesting to see what they choose to do when a new government is at the helm. Will the sector continue to offer discounts? The laws of economics certainly suggest so given that supply has been increasing and buyers are not willing to buy at current prices. Sadly, the functioning of the real estate sector has always defied logic and we wonder if it will be any different this time around.

What do you think are the main reasons why real estate sales have slowed down? Do you think that sales will pick up once the elections are over? Let us know in the Equitymaster Club or share your comments below.

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 Chart of the day
Weak industrial activity continues to haunt the Indian economy. What more, the country fared quite poor when compared to its peers who managed to post better growth even as their economies also slowed down. Ineffectiveness of the current government has been one of the major factors. That is why all hopes are now pinned on the general elections and the new government that will come into power. There are considerable hopes that this slowdown is bottoming out. And that the new government will begin putting in place roadmaps to accelerate growth and clear projects that have been stalled for now. However, it would be too much to expect results quickly. Indeed, once the green signal is given for various projects, implementation of the same will remain quite critical we believe.

India needs to spur industrial production fast
*Data for Feb 2014 except China which is for Mar 2014

He has been quite vocal about the US Fed's failure to demonstrate the impact of QE on unemployment and economic growth. But the former chief of Pimco is not just worried about the US economy's growth. The impact that the sluggishness will have on global economy is also of critical importance to him. In an article on Bloomberg, Mohamed El-Erian has prodded economists to come to a logical conclusion on the Keynesian economic theories employed by the US Fed. Such conclusions will at least help governments decide if the US Fed's approach is meaningful. More importantly it will facilitate decision making amongst central banks and policy makers. The fact that the US is showing signs of witnessing Japan like lost decades is something that is worrying Erian. And the insufficient understanding of the problems of growth and unemployment in the US seem to have had little attention. We believe that it is time central banks globally question Fed's policies. Something that RBI governor Dr Rajan has already taken the lead in. Only once the futility of Fed's policies is established can corrective measures be taken.

The grant of bank licenses from the Reserve Bank of India (RBI) has been watched with bated breath. Earlier this month, RBI had given approval to IDFC and Bandhan to set up banks in the private sector. However, it seems that the other corporate groups who are vying for banking license may have to wait longer. That's because the existing banking supervisory system is being restructured. And unless this process is complete, the business groups may have to wait. Also a new set of guidelines are being framed for the second round of evaluation of applications for bank licenses. This could possibly delay the fulfillment of dreams of many corporate houses to enter the banking space. Not just that! With the new government to take the reins next month, the delay can get longer. Consultation of new government and policy framework may also obstruct the licensing process. That the corporate houses would be allowed a banking foray is certain. However, the cautious approach and the stringent guidelines put forth by the RBI will decide the winners.

Insider trading, in simple words, means trading based on information that is privy and not available to public. If the information is valuable, people who are in the know of such information can rake in huge profits at the expense of other shareholders. The menace of insider trading came to lime light in India during the Harshad Mehta days. And even after decades, the on ground situation has hardly improved. Very little has been done to curb insider trading. And SEBI has been labeled as a toothless tiger. True, that it is not easy to track insider trading. The reason being it is difficult to differentiate between genuine privy information and a market rumor. However, this does not absolve the regulator of its responsibility. Very recently SEBI was given powers to access phone records in order to detect mischievous trading activities. But in order to ensure fair trading more powers must be given to SEBI. And the penalty for violation for breach of regulation must be made severe. Currently, one of the reasons for rampant prevalence of insider trading in India is lack of fear amongst market participants. Traders know they can get away easily. Stricter regulations will create fear and inhibit such practices.

Perhaps, Indian regulators should learn from their US counterparts on how to deal with such issues. Remember, the Raj Rajaratnam episode. Not only was he fined heavily but also sentenced to rigorous imprisonment for insider trading charges.

The incoming government may not be on the same page with RBI regarding their approach to tame high inflation. RBI has been criticized for keeping the interest rates high even when it is believed that inflation is largely supply side driven. Due to increase in disposable income, demand for higher value food items (fruits, vegetables, meat) have increased which is not being met by the supply side constraints such as lack of production and poor infrastructure. However, as per the recent article in economic times, RBI officials have a different take on the issue. While they agree improvement on the supply side can certainly help to tackle high inflation; inflation menace goes beyond food. India currently has the highest inflation and the highest fiscal deficit, next to only Argentina, among the world's major economies.

Thus, the incoming government is unlikely to have the benefit of lower interest rates. Lower interest, though, can spur production; it cannot be a permanent solution to inflation woes. In the long run, it may lead to decline in capital inflows and adversely impact the government reforms. Therefore, the new government will have to work on bringing in structural changes such as building infrastructure in terms of transport and electricity, various employment schemes to push productivity.

Another area where the RBI wants the government to focus on is financial sector reforms in order to contain fiscal deficit. RBI's wish list includes providing funds for capitalising public sector banks, taking an axe to subsidies etc.

The Indian stock markets pared gains and were trading slightly above the dotted line. At the time of writing, the benchmark BSE-Sensex was up by 3 points. Majority of the sectoral indices were trading in the red with metal and FMCG stocks being the major losers. However, capital goods and oil and gas stocks were trading strong. Majority of the Asian stock markets were trading positive with Singapore and China leading the gains. But the Japanese and Malaysian indices were trading weak. Most of the European markets opened the day on a firm note.

 Today's investing mantra
"It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent." - Charlie Munger

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4 Responses to "Will home sales surge post the elections?"

P K Chawla

Apr 26, 2014

Main reason of the down of the sale is not full filling the commitment made by the builder to the people.
Builder sold the flats to public and they failed to deliver the same even after lapse of period of Two Years.
Their is no any Regulatory authority for builders, just like the SEBI.
The companies grooms up in market they collect the money and do not full fill the promises made by them.


Nag arajan

Apr 23, 2014

Prices are more due to black money and unaccounted money looted by political dynasties and their cronies government servants and beaurocrats taking bribes from public for approvals and doing their jobs.
Property and related taxes are the least in the world compared to the market prices..
All and sundry are allowed to own any number of residential and commercial units.
No meaningful regulation in any states.


Ravi Kumar

Apr 22, 2014

It is our fondest hope that whichever party may come to power, the issue of a Regulator for the real estate sector and the associated laws for the creation of it is taken up with some urgency and not put away. Also, not all regulators so far have displayed true commitment to 'consumer interest'. A good example, or should I say disappointment is the way the IRDA allowed the insurance companies to loot innocent customers through the sale of ULIPs, that was aptly described as one of the most caustic financial products. The worst is that this daylight robbery took place with the full blessings of UPA I and II. They just threw savings of millions of hard working people to the wolves and had 'fun' seeing them loose.

Sincerely hope that does not happen here by allowing the builder - regulator nexus to flourish like was done in the insurance sector.

Ravi Kumar


Piyush Srivastava

Apr 22, 2014

The home sales will go up in future if the interest rates go down. However, this will depend on the economic growth, inflation, etc. There is also a good chance that real state players will have to start borrowing from banks and financial institutions because of the new norms being imposed by RBI. The real states companies are able to hold out despite high debt mainly because of dubious financing because of polititical nexus and inflow of black money in real state. More policy level decisions will have to be taken by the new Government to make real state companies financing and accounting practice more transparent. If this is done, it is certain that prices will fall in line with supply demand and sales will go up.

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