No jobs, no sales: Everything is going wrong with real estate

Aug 28, 2015

- By Vivek Kaul

Vivek Kaul
After a brief break, I am back to writing on by favourite topic of real estate. In The Daily Reckoning edition published on January 22, 2015, I had discussed the job creating potential of real estate.

The construction sector benefits tremendously if the real estate sector is doing well and creates a huge number of semi-skilled jobs. This works the other way round as well. When the real estate sector is not doing well, there are not enough jobs going around in the construction sector.

And this is precisely what seems to be happening. A Reuters news-report points out that "more than half a million workers let go from sites around India's capital in the last 18 months." In fact, many labourers who work on construction sites in Delhi are migrant labourers who essentially come from the poorer states of Uttar Pradesh, Bihar and Jharkhand.

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As the Reuters reports: "In Patna, the state capital, eight out of 20 labourers contacted by Reuters had this year made the 1,000 kilometre (600 mile) trip back from Delhi because they could not find work - pressuring salaries in a region where wages are already low."

What is happening here? The real estate consultant Knight Frank in a recent research report had pointed out that there were around 7 lakh unsold homes in eight cities (Delhi-NCR, Mumbai Metropolitan Region, Bengaluru, Pune, Kolkata, Chennai, Hyderabad and Ahmedabad).

"Current unsold inventory levels stand at over 7 lakh units; would take over 3 years to exhaust," the report pointed out. Liases Foras, another property consultant, puts the inventory in the major cities as of the end of June 2015, a little higher at 41 months, up 24% from last year.

Given the fact that homes are not selling, new launches have declined by 40% to 95,400 units during the first six months of 2015.

And this possibly explains why there is a job crisis in the construction sector. When real estate companies are not able to sell what they have already built, there is no point in continuing to build new homes. With new homes not being built at the same rate as they were in the past, the total amount of construction has come down dramatically, leading to a job crisis in the sector.

How can this disconnect be corrected? How can jobs be created in the construction industry that services the real estate sector? For this to happen new homes need to be built, only then can construction jobs come back in the real estate industry.

For new homes to be built, the unsold homes in the eight big cities and all over the remaining part of the country need to be first sold. And for that to happen prices need to come down so that homes become affordable. A major reason why homes are not selling right now is because they are exorbitantly priced and way beyond what most people can afford.

The real estate companies are not willing to accept this and cut prices. In a recent press release, the real estate lobby, the Confederation of Real Estate Developers Association of India (CREDAI) said: "it would be prudent to say that from the developers side a substantial reduction in prices has already happened across the country and any further decrease in sale prices would be a deterrent for the growth of a sector that contributes so much to the economy and employment at large."

The real estate lobby feels that home prices cannot be cut because input prices have risen over the last few years. CREDAI President Geetamber Anand told PTI that "housing prices have gone down by 15-20 per cent on an average in last two years across India, while input costs have risen by 15-20 per cent."

A similar feeling was echoed by Knight Frank Chairman Shishir Baijal who told the Business Standard that: "Input costs, including that of land, have gone up over the past few years. There is no scope for a serious correction in prices."

Input costs may have risen, but is that a good enough reason for not cutting prices? The real estate companies may as well continue building homes at prices, which no one will buy. At the end of the day any product has to be priced at a level which the end consumer is willing to pay. This is a basic way in which any business works.

This logic did not apply to the real estate sector up until now because there was massive investor demand. This included people who had black money to park as well as others who were taking on home loans to invest in second and third homes. With returns from real estate more or less remaining flat over the last couple of years, the number of buyers in this category has come down dramatically. The Reuters story referred to earlier points out: "A law to clamp down on "black money" flows that fund as much as a third of real estate deals is further squeezing demand."

I really don’t know where Reuters got hold of the one-third ratio, but there is enough anecdotal evidence to suggest that investor money coming into the sector has come down dramatically. The real estate consultants have also made this point. Given this, the only prospective buyers left in the market are those who want a home to live-in and they are in no position to pay the kind of money the real estate industry wants them to.

So, as I keep saying, the real estate sector is not going to revive without a massive price cut. Having said that, the CREDAI had an intelligent suggestion to make for once as well. The real estate lobby said in a press release that: "The onus is now upon the state government to rationalise taxes, ready reckoner rates and streamline the approval process to bring down property prices and provide relief to home buyers."

In many parts of the country real estate transactions are not happening simply because the circle rates are higher than the prevailing market price of real estate. And this has led to the transactions in the real estate market coming to a complete standstill. People are not buying and selling homes because of this.

The area where real estate is bought or sold has a circle rate decided by the state government. The circle rate is the minimum value at which the actual transfer of a property between a seller and a buyer should take place. Hence, the buyer of the property pays stamp duty to the state government on the circle rate.

This is something that the state governments can correct by bringing down circle rates. But the question is will they do that? And if yes, how quickly?

Publisher's Note: Vivek Kaul, the India Editor of the Daily Reckoning, just made a bold call - Real Estate prices are headed for a fall. Well, if you are someone who is looking to buy real estate, or is just interested in the space, I recommend you read Vivek's detailed views in his just published report "The (In)Complete Guide To Real Estate". To claim your copy of this Free Report, just reconfirm your Free subscription to the Daily Reckoning...

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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12 Responses to "No jobs, no sales: Everything is going wrong with real estate"

ATUL SHAH

Oct 23, 2015

Dear Sanjay,
This would have been ideal situation if the cost info is being given.. But in any business, how many products are being given to mention their cost index.. Let us take the example of Car..
Does auto companies will give the details of its raw material cost?
for simple products or day to day use product also, can a shop keeper will give his cost of purchase and then will sell you at the margin..
so this will not happen.. only solution is create more and more supply of Developable land with Higher FAR( so increase the Supply of Developable Land)which can only bring down the land price and so the Home's prices..

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SANJAY PATEL

Sep 19, 2015

On the issue of exorbitant Real Estate prices & CREDAI's claim to the contrary - I believe that if a representative cost build up matrix is made public starting from purchase price of a plot of land, cost of building foundation including steel, cement, labour etc. etc. up to the last floor and the interiors - the jugglery that developers do in the carpet area and the Super-built square area and the ultimate price per square feet the buyer pays - this will go a long way in calling the bluff of CREDAI.

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Atul Shah

Sep 14, 2015

Looking to the current scenario and coming from the Professional Real Estate developers firm: There are solution to the high prices of the Real estate:If Governments comes out with following changes in the regulations:
1)No documents of the Flat's agreements can be registered without the Building Completion Certificates.
Benefit to customers: delay in project will be avoided and No more consumer court cases for the possession and amenities.
Builders will concentrate only on completion of the existing project compare to keep on launching the new projects.and not finishing it.
After few years there will be only ready to move in flats in the market and it will balance the Demand and supply very well.
2) Remove the clause of Adverse Possession of the Land and property: Because of this clause, Lots of Land parcels and Properties are being stuck up in the Legal disputes, which artificially escalates the Land cost and supply of the properties are being choked up.
So many ready flats are not being given on the rent or Lease, because if Tenants succeed in retaining of the possession of the Plots or properties for more Then 12 years, tenants names gets registered as other owner of the plot, which indirectly escalates the legal cost of the land owner and increases the cost of the land parcel. and Land is the only and only major Raw material for any Builders or developer, without that his business can not survive at all.
3) Remove the criteria of FAR or FSI.
This is the tool Politicians try to control the market prices. whenever there is Elections, the Far or FSI ratios are being increased.so that Election fund can be generated.
But if there is only one criteria of giving more FAR or FSI w.r.t the OPen space and infrastructure related to the plot size, then there will be lots of Land parcels will be available and more projects will be available in the market, in short: supply will be more so the prices will come down drastically.
4) Remove multiple permissions processes..Since each permissions costs a lot.. which ultimately escalates the final product price.
5) Government should increase the boundary of the Metro's Municipal corporation every year by certain percentage, so that the urbanisation of the city happens in a systematic way, so that new stocks of the properties keeps on introducing in the market which balances the demand and supply so that the prices remains in check.
There are still more points remains, which can really reduce the cost and price of the real estate..

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G S Apte

Aug 29, 2015

Many such reports about unsold inventory are being discussed in various forums since year 2008. In-spite of that, real estate prices in India and also in Mumbai have moved up by almost 100% in past 7 years. In north west suburbs of Mumbai, which are far away from central Mumbai, prices were about Rs. 8000 psf, whereas today the prices are in the range of Rs. 14000-16000 psf.

There is hardly any transparency in calculations of super built up area. It is different in Pune and different in Mumbai. There is no process or rule established to arrive at super built up area from carpet area. Without any rules, I am not sure how prices would come down automatically?

There are various schemes being advertised now-a-days, such as, 15:75:10, which are difficult to understand. Also, I am not sure how such schemes are allowed by various authorities. These schemes should be monitored closely and should be controlled, to bring prices at more affordable rates. If the salary of people is hardly rising in past 4-5 years, I am not sure how real estate prices keep moving up.

So, overall, lot of things are required to curb unrealistic prices of real estate in India, and it would take ages for that to happen.

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Usha

Aug 29, 2015

Vivek's views are logical. But i see a over sell of his views that market will crash or i gets a sense that his bias is for market to crash.

Those who have purchased for last few years would not sell at lower price. In fact 10% inflation keeps adding to existing prices YOY.

Hence it may be unfair for new buyers to expect real estate market crash as it will value destruct.

At worst it may be a time correction... However would be happy for all if rates come down.

Like (1)

Parimal Shah

Aug 28, 2015

In fact the circle rate gives discretionary power to people who may not exercise it judiciously. To make the process objective and transparent the rate should be uniform all over the city and charged per sq foot of built up or super-built up area as per the approved plan and should also include all the levies -taxes and blah blah.
In fact the builders cheat in terms of measurements - in plan the carpet area shown is real and to the customers a different formula is shown to calculate the carpet area.
Today I notice some realtors quote one price per sq foot or sq metr and also additional charges as other services. The result is the whole mechanics of calculation is made opaque and buyer is fleeced by both the seller and the authority.
So for construction cost of 1 sq foot that costs about INR 3000 to 5000, my friend in that line shared this with me, they charge anywhere from 10000 per sq foot on the pretext that cost of land is high. In a high rise building with hundreds of flats how can the cost of land that was acquired at prices prevailing decades back be so high? The fact is neither the authorities nor the developer bothered about the buyer - they are all very greedy.

Like (1)

Pankaj Varma

Aug 28, 2015

In my view the Government has been scared that any attempt to control the real estate sector will result in a fall in real estate prices which might create an economic crisis of a large magnitude. The way they are going ahead is to introduce regulation slowly so that prices don't fall but, as a result, prices don't go up either. That has reduced the speculation interest and leaves only the genuine buyer in the market. The market won't take off unless all the regulation required is introduced and demand stimulated - and that still seems a distant dream.

Like (1)

Shamal Parab

Aug 28, 2015

Reality is the Builders have already made enough money by selling the flats at huge premium and now they can afford to sit tight on the inventory. It is the new comers or less popular builders who are selling the units at reasonable rates to avoid having huge inventory on their heads. The movement a builder becomes popular, he starts adding premium to the price, although, the quality of the construction remain more or less same. In some cases, builder promises huge open space in the project to attract the customers and built-in the cost in the pricing for the customer. Later, the builder starts using the open space promised earlier for building new units. In fact, the open space cost was already recovered from the existing customers. Another issue is this particular industry is not regulated at all. The labours have no say of the payments which are not made reasonably and within the time.

Like (1)

SMP

Aug 28, 2015

Why is it that new product launches see huge rush for booking even at exorbitant prices?

Like (1)

VIJAY ARULDAS

Aug 28, 2015

You have said: "In many parts of the country real estate transactions are not happening simply because the circle rates are higher than the prevailing market price of real estate" I don't believe that in the urban/per-urban areas of Delhi NCR, Bangalore, Mumbai, Pune (where the inventory buildup is maximum), the circle rates are higher than the market rates. Yes, the rise in circle rates have made real estate purchases less attractive. The whole system has been thriving on falsely lowered stamp rates

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