The RBI cannot revive Indian real estate

Jan 19, 2015

- By Vivek Kaul

Vivek Kaul
Raghuram Rajan took over as the governor of the Reserve Bank of India (RBI) in September 2013. Since then, real estate companies and associations that represent these companies have been asking (i.e. putting it politely) for a repo rate cut. The repo rate is the interest rate at which RBI lends to banks and acts as a benchmark for the interest rate at which banks borrow money and in turn, the interest rate at which they lend.

Every time Rajan did not cut the repo rate, real estate companies and associations representing them, put out statements in the media saying how high interest rates were hurting the sector and were the main reason why people were not buying homes that were being built.

Hence, when the
RBI decided to cut the repo rate last week, the real estate companies had a reason to rejoice. Take a look at this statement made by Rohit Raj Modi, President of the Confederation of Real Estate Developers' Associations of India (CREDAI) in the National Capital Region: "We have been raising the concerns of developers over higher rates from the government. We are happy that RBI has taken a step by cutting the rates. We expect that this will encourage banks to ease their home loan rates...This will help developers to expedite their projects which were otherwise facing fund crunch. Home buyers' dreams of owning a home would also get a boost as we expect an accelerated purchase cycle(The emphasis is mine)."

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The most important part of the statement is the last sentence which I have italicized. Modi, who represents the real estate developers in and around Delhi feels that a 25 basis cut in the repo rate by the RBI will lead to more people buying homes.

This is a sentiment echoed by Rajiv Talwar, DLF group executive director. As Talwar told the PTI: "The move would definitely encourage buyers now to invest in new homes." [interestingly, Talwar uses the word invest and not buy].

City Weighted Average Price of a Flat Per Capita Income Years Inventory
Mumbai Metropolitan Region Rs 1.34 crore Rs 1.97 lakh 68 years 50 months
National Capital Region Rs 75 lakh Rs 2.31 lakh 32.5 years 83 months
Bangalore Rs 88 lakh Rs 1.08 lakh 81.5 years 41 months
Pune Rs 58 lakh Rs 1.83 lakh 31.7 years 23 months
Hyderabad Rs 75 lakh Rs 1.46 lakh 51.4 years 38 months

I wonder where this confidence comes from. The real estate story has gone beyond interest rates and EMIs for a while now. People are not buying real estate simply because it is too expensive. It has been priced way beyond what they can afford.

Take a look at the following table. The weighted average price of a flat in Mumbai is Rs 1.34 crore. The average per capita income of a Mumbaikar is Rs 1.97 lakh. This means that it takes 68 years of average per capita income to buy a flat in the Mumbai Metropolitan Region. For Bangalore, the number is at 81.5 years. This is a little difficult to believe. The average income of Bangalore is Rs 1.08 lakh. The number is very low in comparison to the average income of other cities considered in the table. The reason for it is that I have used the per capita income of Bangalore division (which is what I could find in the Karnataka Economic Survey of 2013-2014) and Bangalore division includes not just Bangalore but also other places like Kolar, Shimoga, Tumkur etc., where per capita incomes are lower than that in Bangalore and hence, drag down the overall number.

What this table clearly tells us is that Indians are not buying homes to live in primarily because homes are priced way beyond what is affordable. This becomes clear at the massive inventory numbers being reported (as can be seen from the table). "Months inventory denotes the months required to clear the stock at the existing absorption pace. A healthy market maintains 8 months of inventory," points out Liases Foras, a real estate rating and research firm in a report.

The following table shows very clearly that the months inventory across major cities is way over the healthy level of eight months and high price is the only possible explanation for it.

City Inventory Number of times healthy inventory of 8 months
Mumbai Metropolitan Region 50 months 6.25
National Capital Region 83 months 10.375
Bangalore 41 months 5.125
Pune 23 months 2.875
Hyderabad 38 months 4.75

One criticism of this piece of analysis which I can immediately see coming is that the average income of a city hides all kinds of variations. So, for a city like Mumbai it would also take into account the incomes of people who live in slums. And these people should not be considered because they cannot afford the flats being built. The point is that no one stays in a slum by choice. People stay in a slum because they cannot afford proper housing.

Another point that I would like to make here is that when such analysis is carried out in developed countries they consider the ratio of weighted average price of a home and disposable income. I had to make do with average income primarily because I could not find any disposable income data for Indian cities (I would be grateful to anyone who could lead me to such data, if it exists).

Nevertheless we can make an assumption that around 40% of income is disposable income (I guess that is on the higher side, but let's just go with it and see how the numbers work out. Also, I am leaving Bangalore out of the calculation for reasons already explained). The following table shows how crazy the situation actually is.

City Weighted Average Price of a Flat Per Capita Income Disposable Income Years
Mumbai Metropolitan Region Rs 1.34 crore Rs 1.97 lakh Rs 78,800 170
National Capital Region Rs 75 lakh Rs 2.31 lakh Rs 92,400 81.2
Pune Rs 58 lakh Rs 1.83 lakh Rs 73,200 79.2
Hyderabad Rs 75 lakh Rs 1.46 lakh Rs 58,400 128.4

Assuming that disposable income is 40% of average income it would take 170 years of disposable income to buy a flat in Mumbai. Hyderabad comes in second at 128.4 years. In fact, in a recent article in the Business Standard columnist Bhupesh Bhandari made a similar point when he wrote: "According to one study, it will take an Indian with the average per capita income 580 years to buy a top-end property in Mumbai, compared to 65 years in Hong Kong, 62 years in Paris and 47 years in New York."

So, the real estate companies and media reports may keep blaming high interest rates for people not buying homes, but that isn't really the case. Edelweiss Capital expects the RBI to cut the repo rate by further 100-125 basis points by March 2016. I can say this with confidence that unless real estate prices fall, even with such a massive cut in the repo rate (which is likely to lead to lower home loan rates) home sales won't pick up. I can also say with confidence that the real estate companies will continue blaming the RBI. But RBI clearly does not have a solution to this problem.

Comments on this edition of The Daily Reckoning: Post a comment | Read comments

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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21 Responses to "The RBI cannot revive Indian real estate"


Oct 7, 2015

For senior citizens RBI rate cut slapped heaviky.
Their old age savings put into FDRs savings does not provide good returns because of lower interest.

For senior citizens there are homeloans at cheeper rate?

The government has failed to prioritise the concerns of senior citizens Looking at the looming fiscal crisis among the elderly and the limited government resources available,


Harry Willson

Jul 3, 2015

That's really strange.


Shane Lee

Jun 27, 2015

Good concept about real estate...
I appreciate this website.



May 23, 2015

the real estate companies and media reports may keep blaming high interest rates for people not buying property in their areas.


Prashanth Unnikrishnan

Jan 25, 2015

The real estate sector has become a "safe place" to park untaxed income. Prices moveD up as investors thought that someone else will pay more for their "investment". The real reason for the steep rise in prices is not a demand and supply issue, it is a structual issue where too much capital was allocated to the sector in the previous few years, while several infrastructure projects failed to take off. Any asset has an investment value and a speculative value. An asset that is purchased below its investment value is able to generate a rate of return (appreciation + cash flows in form of rentals less interest and maintenance costs) at a rate higher than the risk-free rate. The common man (salaried class) should try and put their real estate asset up for sale for a reality check of what return if would fetch. That is a fair price of their asset. The market price is the price quoted by the builder and there is no discovery element in it. No asset can sustain a steady growth of 20%-25% p.a without a correction. There are only the following options now -
1. An end user can buy at these prices and mortgage not only their houses but also their lives with the lender.
2. Live on rent and live free and invest your surpluses in several asset classes - equity, debt and liquid instruments and wait for a correction and an affordable price
WE have to choose whether to "LIVE FREE OR DIE HARD"

Like (3)


Jan 22, 2015

Excellent piece. Well its been a while since everyone is predicting bust of real estate bubble - only issue is the timing..
A culmination of 3 things can expedite the timing though -
1. Improvement in alternative investment options for retail investors - Gold, Stock Market (doing well and retail investors have started coming back).
2. Tab on black money (inc. land deals)- Lot of work still required on this front.
3. Commodity prices glut - which will pull down incremental cost of construction.

Like (3)


Jan 21, 2015

Great Artical, Mr. Vivek. The data matches exactly to the US when the bubble started bursting around June 2005 and aftermath was felt in 2008-2009, now called as Great Recession!! During 2001 to June 2005, prices of US homes used to be up 5k every single week and then collapse happened. Seems same situation exists in India except the time taken for appreciation..

Like (1)

yogendra pal singh

Jan 20, 2015

I call every body's attention to the interview of Nissim.. TALEB , IN Economic Times. It is eye opener to every body. Please do read it.

Like (2)

yogendra pal singh

Jan 20, 2015

Article hits the nail on the head of real estate Indusry. World over, sector is responsible to ,absorb black money, generate black money & make National economy totally Black. I COMMEND THE VERY logical deductions, ailing the Indian real state industry.

Like (1)


Jan 20, 2015

Dear sir,
I think the real estate industry is caught in the vicious circle of its own making-the circle of high prices-high land cost-high interest rates-high cost of approvals again leading to high prices.This is compounded by the fact that more than 50% of high cost apartments are sold to investors and the builders are under compulsion to see that they make a decent profit on exit. I think the support the banks give to builder lobby should be controlled and the speculative buying should be discouraged through some regulatory intervention so that the financially lower classes of society get their dream of having their houses fulfilled.

Like (2)
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