Busting a few more real estate myths

Jan 21, 2015

- By Vivek Kaul

Vivek Kaul
The last column on real estate which appeared on January 19, 2015, stuck a chord with a lot of readers. Given that, I thought it made sense to dwell a little more on this topic and the "spin" that real estate wallahs try to give it.

One logic that I have heard being given over and over again is that India has too little land and too many people. Given this, real estate prices can never fall. They will only keep going up ad infinitum and hence, you need to invest in real estate and earn a perpetual return. This is the most widely used logic to justify high real estate prices in the country. But a little bit of number crunching basically tells us that there is nothing right about this theory.

Let's look at India has "too many people" theory first. As per the 2011 census, India has an average of 382 people living per square kilometre. When it comes to density of population India is ranked 33rd in the world. Let's compare this with Japan. The country has 336 people living per square kilometre and is ranked 39th in the world.

Japan had a huge real estate boom in the 1980s. The boom came to an end towards the end of the 1980s and prices fell big time after that. As George Akerlof and Robert Shiller point out in Animal Spirits: "Urban land prices...in Japan (where land is every bit as scarce as it is in other countries)...fell 68% in real terms in major Japanese cities from 1991 to 2006." And if real estate prices could fall in Japan, which has a slightly lower population density than that of India, they can in India as well.

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Even in India real estate prices have fallen in the past. It's just that people don't rememember about it anymore. As Manish Bhandari of Vallum Capital wrorte in a report titled The End game of speculation in Indian Real Estate has begun: "The previous deleveraging cycle in year 1997-2003 witnessed price correction by more than 50% in Mumbai Metro Region (MMR) property." And this was just a little over a decade back. Bull markets lead to bad memories and theories justifying high prices.

In fact, real estate prices have been falling in some parts of the country. A December 2014 newsreport in The Economic Times suggested that "secondary market prices of properties in posh South Delhi localities have fallen 25-30 per cent over the last one year as a pileup of inventory and need for money turn many investors into desperate sellers." "Compared with peak prices, the discount is as much as 40 per cent, say brokers," the report added.

Another important point here is that the consumer sentiment seems to be turning against real estate. Recently a buyer sentiment survey was carried out by IIM Bangalore and Magicbricks. A report on the survey in The Economic Times said that: "[The survey] orecasts that the homebuyers expect real estate prices to drop over the next six months. In fact, the aggregate Housing Sentiment Index (HSI), measured across the 10 cities, dropped sharply by 29% in the 3rd quarter of 2014-15 to 81. (An HSI score of 100 suggests the prices would remain static)."

Now compare this with another survey that the business lobby ASSOCHAM had got done in June 2013, which said: "Over 85 per cent of urban working class prefer to invest in real estate saying it is likely to fetch them guaranteed and higher returns." So, the sentiment clearly seems to be changing. And there is no greater danger to the price of an asset class than changing sentiment of those who want to invest in it.

The second theory offered is that India has very little land to house its huge population. Again a little number crunching tells us that this is not correct. The Indian Institute for Human Settlements in a report titled Urban India 2011 esimates that "the top 10 cities are estimated to produce about 15% of the GDP, with 8% of the population and just 0.1% of the land area."

Economist Ajay Shah in a May 2013 column in The Economic Times did some number crunching to show that India has enough land to house its millions. As he wrote "A little arithmetic shows this is not the case. If you place 1.2 billion people in four-person homes of 1000 square feet each, and two workers of the family into office/factory space of 400 square feet, this requires roughly 1% of India's land area assuming an FSI(floor space index) of 1. There is absolutely no shortage of land to house the great Indian population."

One corollary of this theory is that as cities expand they will take away land from agriculture and that will create a problem as well. Again this is a specious argument. Data from World Bank shows that around 60.3% of India's land area is agricultural land. The bank defines agricultural land as "share of land area that is arable, under permanent crops, and under permanent pastures."

In fact, only the United States has more agriculural land than India. As India Brand Equity Foundation, a trust established by the Ministry of Commerce and Industry points out: "At 157.35 million hectares, India holds the second largest agricultural land globally." Only, the United States has more agricultural land than India. Take the case of China. India has more arable land than China. This, despite the fact its total area is only a little over 34% that of China.

Hence, agricultural land near the cities can easily be diverted towards construction of more housing without it having any signficant impact on agricultural production.

The basic problem lies in the fact that too much black money has gone into real estate, and has driven up prices (as I wrote in the last column) to previously unimaginable levels. This has led to builders and politicians who back these builders to sit on a huge amount of unsold inventory instead of cutting prices to clear it. They have got used to these high prices. Also, so much money has already been made that sitting on inventory till prices start to recover, doesn't seem like a bad idea at all to them.

As an article in The Caravan magazine pointed out few years back: "There isn't a bubble of real homes...If all these apartments were actually built, and built fairly to schedule, I guarantee you that they would find real buyers. The demand is out there. But there is a huge bubble in imaginary homes."

And this is because the ill-gotten wealth of politicians and their cronies has found its way into the sector through "benami" means over the years. However, there continues to be demand for reasonably priced property even in big cities. Only if there was someone trying to fulfill this unmet consumer demand.

To conclude, it is worth sharing this example that Ruchir Sharma talks about in his book Breakout Nations: "Lately Indian businessmen have been regaling one another with accounts of a leading politician from Mumbai who is known to have amassed a huge wealth through property deals. At a private screening of a new Bollywood movie, this politician asked the producer to replay a particular song-and-dance number, over and over. When the producer asked if he was taken with the leading lady, the politician said no, he was eyeing the location and wondering where the producer had found such an attractive stretch of open space in Mumbai."

And this is where the real problem lies.

Are real estate prices falling in your city? Post your comments or share your views in the Equitymaster Club.

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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20 Responses to "Busting a few more real estate myths"

Jaydip Desai

Sep 20, 2016

Dear All,

I think Mr. Vivek is correct.

If Real Endusers of India would be able to buy the houses at current price than india will of course be in the line of Developed Country. Because the houses prices are nearly similar to developed country House Price. but the Income of Enduser in india is not similar to the income of enduser in developed country.

In India there are 1.2 Billion People. Can any one say how much majority of the people will earn per month. the pay scale is too law to buy this house at the current rate. the situation is that if you sell your agriculture land then you can buy house as investment. If your father and or grandfather left too much cash for you then you can buy the house. But the struggling Employee who are exist in majority in India is not even able to live on the rent in the city with such Pay Scale.

Government of India must impose MHP ( Maximum Housing Price) in India where millions of people are living without their own home with lower income and very few people are having the multiple houses in their own name.

Only Investors are able to buy the houses with Black Money or with fore father cash or by selling Agriculture land in village or by winning million dollar lotery. One more thing is one investor is selling the house to other investor. so only investor are playing with each other by selling and buying the home. But everything has saturation. this will be one point when the new builders and architect has to come and build the houses for real end user. and ofcourse real end users are not earning that much. Yes if Government make rule that even the worker on petrol pump must earn atleast 50K / month then it can be possible to purchase the small house. but as of now Even 75% Experienced Employee is earning average 25k/ Month most probably. Do you think that indian can buy the house with thie low income. and if they take bank loan for 30 years at the rate of 9.5 % the price of the house will be double in 20 years. whats the point then.

Completely not logical. it is hyped price. Even Small city is selling 800 sq house in 30 lac rupees. even in Luton-UK the flats are available in 60 Lac where individual with minimum qualification earning minimum 1100 GBP.

Government has to take step for that. Where Millions of people are living on the road, the prices of the house is this high is completely illogical. it is bubble nothing else. The prices of house in India are nearly similar with other developed countries house prices BUT the income of national are not similar to each other.

Even here who are opposing that the prices will not get down, there will be possibility that either they are builder or they have invested their lots of money in real estate and do not want to get the prices down. But they must realise that the price are already its on over pick.

Even For genuine example, In Surat the flats are being sold at down prices. My Friend purhcased the house in 36 Lac which was been claimed to be sold at 46 lac last year. Majority of the flats are empty in Surat. they are waiting for investor not for enduser.

The Current Prices are for Investor not for End User. Because End Users if India are not that rich to buy this houses. if so india would be in the line of Developed Country.

People be patience to buy the houses.

I think Government should Impose the rule of MHP ( Maximum Housing Price) in the country like india where millions of people live without home.


Like (2)

Sachin chavan

Jan 11, 2016

How much Property market can go low?

Sihagadh institute of management (Pune)
Holding back lecturer's salary for many months and have issued notice to them saying if they buy house in residential complex they suggest then they will pay you arrears and give advance salary as well.
This is the front page news from a popular regional news Paper (loksatta 9th jan)
I post the link for those who can read Marathi


Like (2)


Jul 30, 2015

I don't think real estate prices it will going to come down in India. well said by Mr Vivek that India is the country having tittle land and too many people to stay. I think this could be the reason why the prices of real estate is not coming down. I was checking a few of the sites of real estate like Ektaworld, Wadha, but as compared to whether I think ektatripolis is a much better option for buying the flats.

Like (2)


Jul 21, 2015

Current Socio Economic equation has created New Definition of Wealth... One can portry himself wealthy buy purchasing more expensive cars and investing in real estate, and extending the analogy, getting into the business of real estate., It has spoil the culture of understating buyers requirement, maintaining quality, hike in related products and services like building materials, furniture, plumbing services etc., which has resulted cost of real estate UNREAL... as a country we are consuming lot of natural resources for the futuristic houses in which no one is staying and not in comparable quality of what 25 years back we used to build... end of the 10 years EVERY ONE will Loose, except Builder who could sold and had smart exit.

There has to be government guidelines & regulation on building a real estate property as well as should discourage investment on real estate.... Should encourage investment on those means where invested capital can be used for working capital or cyclical manner.

Like (2)

r d medane

Apr 26, 2015

govt should discourage speculation in residential property holdind one flat for one person so the family can have two flatsminimum. second flat will have 10% stamp duty third flat will have 15% stamp duty so that will be discouragment for hording by speculators who has black money nri moneywith cheap rate of interst .govt should declare one persone one house policy , moratorim period for i year.

Like (3)

Ajay Gupta

Feb 10, 2015

As there is builders lobby , is there any house buyers lobby.

Like (4)


Jan 31, 2015

For the last many years many analysts have predicted the real estate crash but it is not happening. Migration to cities for better prospects for their children and the desire to own a home for most Indians will be important factors. Prices may correct but not to 50 percent. Last week Oberoi Builders saw very good response to their 880 sq feet Rs 2 crore budget flat.Thus there is demand for real estate in Mumbai.

Like (4)


Jan 30, 2015

If there is bubble in real estate then there should be leverage in the system. How much percentage of real estate is financed by banks?

It is true that real estate fell in 2001. If you are tracking real estate then you might know that it also fell in 1984 and 1991.

Like (4)

Inderjeer Bhatnagar

Jan 23, 2015

It would be more prudent to compare the real estate boom in India to the tulip mania. Only in this case the Politician-Builder nexus has persuaded the general population that urbanization is a fact and with time, more & more people will migrate to cities.

Like (4)

S Subbaiah www.adeptassets.com

Jan 23, 2015

well written Mr Vivek! India has low per capita income, per capita GDP. But we rank very very high in terms of real estate prices, much higher than those in rich , developed countries. We have huge land parcels( raw material)and cheap labor, which should result in cheaper homes. But the prices are astonishingly high, throwing the basics economics out of the window.Huge deliberate bottlenecks in the system!

Like (4)
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