|»5 Minute Wrap Up by Equitymaster|
On This Day - 17 OCTOBER 2012
Will property prices ever fall in Mumbai?
In this issue:
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The obvious solution would be to increase the supply of affordable homes. But therein lies the problem. Delays in regulatory approvals is a given which only adds on to the cost. Builders cite the economic slowdown and debt burden as issues which have compelled them to focus on other projects. But that is not all. Because these homes typically generate low returns, builders have hardly shown much interest in them. Moreover, many a time affordable housing hardly forms a part of the core business of developers. Especially at a time when there is enough demand for luxury homes in the city. Then there is the question whether these homes are bought by genuine buyers who are looking for their first home or investors.
The biggest hurdle of all is the cost of land. This on an average is so high so as to make the whole project of affordable homes unviable. Firstpost states that land prices have risen by 200-300% in just the past four years. Affordable housing requires support from the government, given the high land cost. Without a proper policy or a regulator in place, the role of state agencies in facilitating affordable housing is limited by the sheer pressure from the politician-builder nexus. Indeed, what is affordable to 70% of people living in Mumbai may not be enough to cover even the construction cost for developers. Not just that, typically builders who are in need of cash will have no option but to sell their stock of homes at affordable prices. But because they have ready loans available from banks and hence the much needed 'cash flow', many of them do not display this urgency.
This is where the government can make a difference and undertake the project of affordable housing as seriously as the building of infrastructure. But does it have the will to do so? If the example of the Land Acquisition bill is anything to go by, the results are not very encouraging. This remains pending in Parliament. Thus, unless the connection between politicians and builders is broken, affordable housing will continue to remain a dream.
The Economist has tried to find an answer to this question and it has laid the blame squarely on what is known as cronyism. It argues that the Government insiders and politicians have excelled in the art of looting state resources for their own personal benefits. Besides, poor infrastructure in countries like India acts as a big deterrent for people to move beyond farms and into huge factories. This then restricts the growth in income that industrialization would have otherwise brought.
Thus, while emerging economies are growing at a fast clip, the above mentioned factors are not letting everyone to benefit from it. And the manner in which this problem will be addressed will in fact decide the fate of these nations in the coming decades.
Also, Federal Reserve's quantitative easing program is making conditions ripe for a bull cycle. That's because near zero interest rates in US make investors search for higher yields in other markets. Valuation is another factor. Right now, valuations in some emerging nations are cheaper than in US. This presents excellent buying opportunity. Overall, he feels that the entire emerging markets pack will outperform US. May be we are just at the cusp of another bull cycle.
So what's really going on? An article in Financial Times has an apt answer. It says that Europe's 'muddle along' plan is going to prove dangerous. By now, the actions and reactions of Eurozone policymakers follow a characteristic pattern. At every turn of the crisis, there have been market sell-offs, policy reactions and short term relief. The article points out that this is then followed up by complacency, backtracking until the crisis re-intensifies again. The problem with this is that there is no definite direction. Investors are now seeking clarity. A positive outcome would be that the monetary union moves towards a stronger fiscal union. On the other extreme, there is a possibility of a broad debt restructuring or the breaking up of the Eurozone. Some believe that the euro break-up would not be catastrophic, but beneficial. It will allow for a fresh start. It remains to be seen if the logic appeals to the EU policymakers. Most likely, they will prefer 'muddling along' till the crisis reaches its peak.
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