Only this can lower property prices by 20%... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Only this can lower property prices by 20%... 

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In this issue:
» What is cooking at Infosys?
» US to have a better 2014?
» Royalties paid to parent MNCs have risen alarmingly
» How PSUs can rescue the government...
» ...and more!

High and unrealistic property prices have been the bane of the average man in India for quite some time now. Indeed, more often than not, real estate prices defy the basic principle of economics. Thus, at a time when the economy slows and demand wanes, logic suggests that property prices should also cool off. But that has hardly been the case.

The problem with the property market in India is that there is too much murkiness. Unholy alliances between politicians and builders mean that prices are kept artificially high. Politicians have too much vested interests as a result of which corruption reigns. The existence of corruption in this sector is something that even HDFC Chairman Deepak Parekh laments. As per an article in the Economic Times, Mr Parekh opines that rooting out corruption could help lower home prices by as much as 20%. He has left no stone unturned in blaming errant bureaucrats and faulty policies as the main reasons for higher house prices. Indeed, there are too many approvals required and the more the number of processes and middlemen, the greater is the chance for corruption to seep in.

The other issue is the lack of a sense of accountability among builders. Mr Parekh believes that there needs to be a real estate regulator so that any wrongdoing can be penalized. A proper regulation would also ensure a better approach and coordination between government bodies. Towards this, the government had introduced the Real Estate Bill 2013 which is expected to get cleared in the next session of Parliament. Whether that actually happens remains to be seen.

Property developers have also been guilty of not giving affordable housing projects their due importance. Indeed, there is considerable latent demand for these homes, but exuberant prices are keeping genuine buyers on the sidelines. Meanwhile, real estate players seem to be in no mood to learn from their mistakes. Most of them have been grappling with lower sales and bloated debt on their balance sheets. The latter especially has rung alarm bells in the banking sector, which has now begun to trim its exposure to the real estate sector.

Ideally speaking, this should prompt property players to reduce prices so that inventories get cleared quickly. But they may not do so as they rely on some last minute trick pulled out by politicians that ensures that prices remain high. One wonders for how long such a scenario can continue. But it is obvious that unless corruption is weeded out from the sector, affordable prices will continue to elude the genuine buyer.

Do you think that property prices will come down only when corruption from the real estate sector is eliminated? Let us know your comments or post them on our Facebook page / Google+ page.

01:26  Chart of the day
Despite considerable hopes pinned on monsoons to cool things off, consumer prices in India refuse to relent. Indeed, for the month of November 2013, consumer prices were in double digits and were way ahead than that of its peers in both the developed and developing world. RBI has done its bit in terms of raising interest rates but this has not really helped much. Moreover, it has only made the central bank's job tougher as GDP growth has slowed down. The real problem is finding real solutions for various supply side issues for which the government needs to take initiative. But this is not likely to happen before the general elections in 2014, after which all eyes will be on the new government and how it resolves this.

High consumer prices* continue to haunt Indians
*in November 2013

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So, Infosys witnesses another high profile exit with the resignation of its director V Balakrishnan. Firstpost puts this as the eighth top level exit at the firm in the last six months. There's a joke doing the rounds that at the rate at which exits are happening, one wonders whether Infosys is a corporate entity or the house of the famous reality show Big Boss! Jokes apart, it is really difficult to get a proper grip on what's really brewing inside the IT sector bellwether. Those who support Murthy are of the view that the exits are the result of radical overhaul of the old way of doing things. And it is the process through which a brand new platform will be laid to propel the company's next phase of growth. Those against him however, argue that the fresh set of ideas that Murthy has brought in, has not really gone down well with the senior management. Consequently, they are exiting in large numbers, leaving behind a huge leadership vacuum. We for one aren't all that worried as of now. For one, the IT industry still has a huge tailwind in its favour and hence the company will have to really mess up big time not to take advantage of it. Secondly, it is hard to believe a company of the size of Infosys does not have the processes in place to counter the threat from top level exits. And lastly, it has Narayana Murthy, a proven performer, firmly at the saddle. Thus, our benefit of doubt, for the time being at least, will be given to Murthy and his team.

Indian subsidiaries of foreign MNCs are generally obliged to remit royalty payments to the latter for use of brands, technology, technical know-how, trademark licenses, etc. While earlier the Indian government had imposed a cap on the payment of such royalties, the cap was removed in December 2009. Following this move, the royalty payments to parent firms have been rising at a rapid pace. And the companies that are known to remit huge royalty payments includes big names such as Maruti Suzuki, Hindustan Unilever, Nestle India, to name a few.

The rising royalty payments have now alarmed the Indian government as this has resulted in outflow of crores of rupees out of the country. In fact, during the financial year 2012-13, royalty payments were 18% of the foreign direct investment (FDI) inflows as against 13% in FY10. This is indeed a worrying trend. It is a big drain on the country's resources. Moreover, it also eats into the profits of the Indian subsidiaries and impacts the dividends to minority shareholders.

The RBI's status quo on interest rates may have come as a shock to many. But the governor is leaving no stone unturned to dismiss doubts about this approach towards inflation control. In an interview to Business Standard, Dr Rajan clarified why monetary policy action needs to be very careful and should take into account long term trends in growth and inflation. No rate hike on December 18, was in no way indicative of an easy monetary policy stance. On the contrary, the RBI was keen to read the numbers carefully before acting. The central bank desires to have a more calibrated approach to rate hikes. As the previous rate hikes have yet to complete the tenure of 6-9 months during which their impact will be evident, the RBI has chosen to wait for the outcome. This is particularly taking into account the historically low growth period the economy is passing through. If the better crop harvest coupled with higher rates fails to tame food inflation over the next few months, further rise in interest rates cannot be ruled out.

The US economy seems to be gaining lot of confidence these days. The GDP growth number seems better. The unemployment rate is coming down. The budget deal on spending has been approved. Last but not the least; finally the US has decided to taper.

But will this really boost the investment and lead to job creation? As per Pimco CEO Mohamed El-Erian, the coming year is likely to be better in terms of growth. Mr. Erian remains cautiously optimistic and has forecasted GDP expansion in the range of 2.25% to 2.75%. Not bad at all considering the mess the economy has been into in last few years. However, nothing significant can happen unless the basic issues like clear tax policies, public infrastructure investment etc are taken care of. Hence, while positive signs are likely to continue, it remains highly debatable if 2014 would be the economy's breakout year.

Rising fiscal worries have been a cause of concern for government. Till October 2013, the Centre's fiscal deficit has already reached 84.4% of its budget estimate. Thus, there is a possibility that current year's deficit may overshoot the target of 4.8%. Disinvestment is one mechanism through which a part of the deficit can be taken care of. However, considering the muted market conditions it is highly unlikely that the government will meet its disinvestment targets. In such a scenario, rating agency CRISIL feels that PSUs can come to the rescue of the government.

As per the rating agency, government can cut its fiscal deficit by Rs 200 bn by milking the cash reserves of top 20 PSUs. These 20 PSUs are expected to have huge cash corpus of about Rs 1,600 bn in FY14. Asking them to pay a special dividend can help Government bridge the deficit without impacting the growth plans of these PSUs. While this may bridge the deficit for the time being we feel it is only a temporary solution. In order to keep the fiscal deficit under control government will have to tighten its noose on populist measures. Such measures win vote banks but result in huge subsidy burden. Food bill is a prime example to that. This burdens fiscal finances. In fact, subsidies, be it fuel, food or fertilizer are the primary reason for widening fiscal deficit. Unless the government turns realistic, and adopts a pragmatic approach to managing finances the fiscal burden will continue to rise.

In the meanwhile Indian equity markets have extended their losses and are trading at day's low. At the time of writing, the benchmark BSE-Sensex was down by 51 points (-0.24%). Metal and banking stocks were the biggest losers. All the Asian stocks were trading strong led by Japan and Hong Kong. The European markets opened on a positive note.

04:56  Today's investing mantra
"The stock market is filled with individuals who know the price of everything, but the value of nothing." - Philip Fisher
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12 Responses to "Only this can lower property prices by 20%..."


Dec 29, 2013

It is once in a life time purchase. so we say kushi se de dho - but no body gives kushi se it corruption se and it is no less even jindagi ke baad bi - to keep a dead body in the morgue the officials demand kushi se - jindagi ke saat bi , jindagi ke baad bi corruption ki kushiya


Xavier Dmello

Dec 29, 2013

Surely if corruption is rooted out then prices can come down. Prices of propert souuld sync with common ppls purchase power, else this sector will stagnate. Builders have to bribe politicians, officers @ protection agents so prices are inflated by 40%. This in turn increases the land prices which is a cyclical effect. This artificial bubble will burst soon like it happened in the USA. The ultimate losers will be banks and ordinary depositers.


Ramachandran S

Dec 27, 2013

Real estate inventories are piled up.Real market consisting of middle class buyers are eager to see prices correct to reasonable limits, say 30% less or to face a bubble burst to crash by about 50 % of existing levels.It is true politicians and builders are trying to postpone the corrections and may face the tsunami due to this!


R Tayal

Dec 25, 2013

You are mistaken when you say that property prices have hardly cooled off. In most places in India including metro cities, prices have corrected by at least 20% over the last 1 year.


Raghuveer Singh Rathore

Dec 25, 2013

I dont think there is any likelihood of real estate property prices coming down at all. We can lament alright but cannot change the mindset of politicians whose interests are involved in this sector. Grousing & snipping around will hardly affect the mindset of the politicians who hardly think of checking the ever-rising prices of properties. Also, there does not seem any inculcation or urge for doing so. Hence, other than wait & watch, it is no good excercising & agonising the brains. Buying of a house for a normal man is turning to be a dream of all time.


Rameshwar Gagrani

Dec 25, 2013

The reason property prices are not lowering is the guidelines rates fixed by the authorities for registration and taxation. The rate fixed are imaginary and quite high. If there is any honesty instead of guideline rates they should declare MSP (Minimum support price for the lands and properties as declared in case of formers). Government should be ready to purchase the property at MSP. The property may be sold to others if it is salable at higher rates.



Dec 25, 2013

Property business is one of the largest contributor to black money and corruption. We have to correct the root causes to overcome this problem which will reduce the prices to realistic values.



Dec 24, 2013

I agree that property price will definite come down substantially. The corruption starts right from regn of land, plan approval, water and electrical connection, property tax assessment after construction. The corruption is awful in this country and none can move without wetting the hands of local body officials and other govt deptts. A shame which no govt whether BJP or Congress could correct this.


Vartak k.g.

Dec 24, 2013

it is fashan to blam every time to politician .all these learned brurocrates,corporate world, & wealthy bussinessmen r only responsible .the residential property is purchased by only corrupt people at large with their black money.we all r selfish only blaming others.these high rated home finance companies provide loans to those people only,for genuine home seeker will never get loan with their appraisal u thing there is no corruption in these companies? They follow different type of bribing.
We await for Radia tape details.
I am very sorry.Stop all these hi fi technology of housing construction,only low cost construction work should allowed,though limitation on land availably.push population out of cities with work generating business/companies to villages.


H K Prakash

Dec 24, 2013

As long as black money plays a part, corruption is inevitable! Mr X an idealistic young man of 30 joined hands with neighbors in Y area of a southern Metro to fight against their builder who refused to give certificates showing work completion while handing over flats.
In a few days, the (friendly) neighborhood police station cop met him and said you better cool it! "The builder is a Grade A "m-c" and has filed a rape and violence suit against you using one of his workers. The boss knows you are innocent but ....."

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