One idea that real estate companies want to borrow from Gulzar

Sep 8, 2015

- By Vivek Kaul

Vivek Kaul
In the film Ek Thi Dayan,lyricist Gulzar wrote a song, which had the following line: "koi khabar aayi na pasand to end badal denge [if we don't like some bit of news, we will change the end.]" In the recent past, the real estate companies do not seem to have liked the bad news that has been read out to them. And to tackle that they plan to create their own news. Or at least that is what a recent development suggests.

The Confederation of Real Estate Developers Association of India (CREDAI), a lobby of real estate companies, which has about 10,000 members, now plans to collect its own data on the industry.

As President of CREDAI Geetamber Anand told Business Standard: "The need to come up with its own set of data cropped up after varying figures from real estate consultants including Knight Frank, JLL India, Liases Foras and others, which at times create panic amongst the buyers fraternity."

A spate of research reports brought out by real estate consultants in the recent past has suggested that real estate developers in large cities are not able to sell homes that they have built. A recent research report by Knight Frank suggested that over 7 lakh homes were unsold in the top eight cities of the country. The report also estimated that it would take more than three years to sell homes that have piled up.

Other real estate consultants have come up with similar reports with similar numbers. This is something which has not gone down well with the real estate lobby, which now wants to put out its own data. How can someone else tell them that all is not well with them?

Advertisement
  The "Crash Score" Report  
  Is there a way to predict a stock price crash? A way you could've seen the collapse of Satyam...

BEFORE it actually happened!

Well, our research team has just released our Latest Special Report that reveals a way to calculate the "Crash Score".

A simple calculation that allows you to find out, and avoid investing in, high-risk stocks which are likely to crash in near future.

In fact, it also contains a list of 20 stocks which rank high on this Crash Score right now!

So, don't delay and Click here to instantly download your FREE copy of The "Crash Score" Report...

 

What has also not gone down well with them is a recent comment by the Reserve Bank of India governor Raghuram Rajan, asking them to bring down prices. As Rajan said: "It would be a "great help" if realty developers sitting on unsold stock bring down prices...Once the prices stabilise, more people will be keen to buy houses...I think we need the market to clear."

The CREDAI responded to Rajan with the following statement: "While we respect the RBI governors concern for kick starting the real estate sector, it would be prudent to say that from the developers side a substantial reduction in prices has already happened across the country [italics are mine] 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."

CREDAI President 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." The good bit here is that here is a top real estate lobbyist admitting that prices have fallen. It is tough to get them to admit even this much. Nevertheless, if the reduction in prices has already happened, why there is an inventory of 7 lakh unsold homes across top 8 cities? Also, the total number of unsold homes all across the country would be much higher than 7 lakh, but no such data is complied.

The real estate companies need to go back and learn some basic economics. One of the most basic laws in economics is the law of demand. The law essentially states that there is an inverse relationship between the price of a product and the quantity demand by consumers. If the price of the product goes up, demand falls and if the price of a product falls, the demand goes up.

In case of the real estate sector in India what the law of demand tells us is that if prices had fallen enough, people would have bought homes to live in and the unsold inventory would have cleared out. Nobody likes to let go of a good deal. But that hasn't happened.

Why? Some simple Maths should explain this. In the National Capital Territory (Delhi and other smaller cities around it) an average flat costs around Rs 75 lakh (most research reports agree on this number). Assuming 20% of the price has to be paid in black (and I am being extremely conservative here), the official price of the flat is Rs 60 lakh (80% of Rs 75 lakh). A bank or a housing finance company gives a loan against this price.

The Housing Finance Company (HDFC) has a loan to value ratio of 65%. This means it gives 65% of the value of a home as a loan on an average. This would mean that HDFC would give a loan of Rs 39 lakh. The buyer would have make Rs 21 lakh as a down-payment. He also needs to raise another Rs 15 lakh to be paid in black.

Hence, the buyer would need to raise Rs 36 lakh (Rs 21 lakh down-payment and Rs 15 lakh black) on his own. How many people have that capacity even in a city like Delhi? And I am not even taking into account the cost of furnishing the house, the cost of moving into it, other expenses like stamp duty etc.

The same maths works for all other big cities as well. What this clearly tells us is that home prices are way beyond what most people can afford. They are in a bubble zone. The sooner the real estate companies understand this, the better it will be for all of us.

They may want a different end, but that isn't going to happen. The longer they hold on to prices, the longer they will have to hold on to all the inventory that has piled up.

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.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

We Rode Out... Unarmed October 17, 2017
Money is the tape measure for the carpenter economy.
The Delusional Optimism of India's Real Estate Companies October 16, 2017
This is a sector which hasn't gone anywhere in nearly six years, but those who run it continue to remain optimistic.
The New Ranch House Is Ruined October 14, 2017
Bill talks, not about the markets falling today or the economy collapsing, but about his ranch house caving in...
Is Trump a Genius? October 13, 2017
No. He's probably not a moron either. But here's what he really is...

Equitymaster requests your view! Post a comment on "One idea that real estate companies want to borrow from Gulzar". Click here!

10 Responses to "One idea that real estate companies want to borrow from Gulzar"

RM Muthiah

Sep 8, 2015

prize rice n guideline value insecurities fr the invester ex(moulivakkam building f Chennai)High material cost builder cannot compromise with prize

Like 

drsurendra

Sep 8, 2015

there are plenty of medicines in the country but people can not afford them. So the problem of plenty with poverty is inbuilt in the system. Real estate is tied up with black money and corruption. The change if at all must start with politicians.

Like 

Shankar S

Sep 8, 2015

The laws of economics will work, if the builders are in any compulsion to sell off the property. that is if the goods are going to decay, or that the builders have not realized the cost.

But then there is another parallel work going on. The developer has already taken 100% of the cost of the project he has completed. the big figure of unsold flats is not that any single builder has a whole project unsold. Part of the project remains unsold.

Now here is the reason. these are flats given against bulk booking on each project as investor, they remain in the name of the builder, so no stamp duty or transfer. Payment of these are also in black money and bribe money. of govt employees police and of course the mafia, who all have a cash surplus and there is dearth of income for these categories. It is a one way flow.

This economy works well. Builder is in no hurry to sell it as long as the investor does not need money and this will continue as along as politicians want it.

To stop it, they have to put a Retention tax on the builder equal to 20% of the value annually. then the builder will be forced to sell, because in 5 years he may have to shell out 100% of the cost.

But this will not happen. So

Like 

rightman2014

Sep 8, 2015

Mr. Vivek kaul you have rightly said about the dealings. I would like to add that the Agents/Brokers will never allow a prospective buyer to get the market price and the real owner in re sale is subjected to reduction in price by the middle man. Even Banks procedures and the evaluator asks 3% to 5% for hassle free and immediate release of Funds from the Bank which is un official money.

Most of the time the amount invested by developer is a black money by Benami partner and hence they dont mind waiting for 1-3 years time.

Like 

Pradeep Kumar Nair

Sep 8, 2015

Till the Knight Frank's and JLL"s were giving positive reviews on the real estate sector, their numbers were fine, now their numbers cannot be trusted and it is causing panic. Why should not they behave like this, when the governmment (does not matter who runs it), behaves the same. Oh how foolish we citizens are!

Like 

rightman

Sep 8, 2015

Mr. Vivek Kaul congratulation for your fair opinion abot the housing its prices and buying and selling business. I would like to add few relevant points:

1 It is always middle man /broker/agent is benefitted. Market rate is shown something and the owner will be informed that he cannot sell at the market price because it is difficult to find a buyer compel him to reqduce the price by 10% to 25%.

For buying owner will be informed that at least 10% more is required to pay otherwise it will be difficult to buy.

So if there is direct buying and selling without agents then the buyer and seller both will be benefited. To get sanction of loan from the Bank, the property has to be assesed by Technical Evaluator and he charges 2% to 6% for recommending it with the promise that he has to pay 2% to 3% to Bank employees and to have hasle free paper work done. And it is true also because Bank employees prefer indirect bribe thro middle man. This is aprt from the deal for paying cash in black

Like 

Jayant Mehta

Sep 8, 2015

This article is a voice of all readers, pl arrange to send the same to Mr.Anand to read

Like 

sashikumar

Sep 8, 2015

MR.Vivek, you should blame the lax monetary policy followed
during UPA1. Instead of reducing the interest rates gradually RBI aggressively reduced interest rates. If i remember correctly, it was 5.5% in 2005 AND economic times carried headlines like this "if you have money spend it".
Thanks to Y.V. Reddy who did not succumb to the pressures of the then FM P.Chidambaram to bring it down furthur. Low interest rates chased all asset classes- stocks, real estates,commodities etc.
attracted by Quick and huge profits many new players and corporates entered the real estate sector leading to major expansion and over supply. 2008 Financial crisis exposed the limitations and faults of liquidity driven economic growth. Almost all sectors barring a few are in rough weather now which is reflected in the job market now. Many are not sure of job safety and are not willing to enter in to long term loan commitments. I would squarely blame the lax monetary policy of UPA 1 for this mess. They just copied American monetary policy and pasted here.

Like 

krishna

Sep 8, 2015

This payment problems have existed always.but earning opportunities have decreased. Biggest factor is people are not sure of career. IT career has become uncertain. People working abroad are not interested in buying in india as returning Indians are becoming less. people in manufacturing industry are in small cities and would not have any opportunities in metro. This leaves only financial and media jobs in metros.

Like 

allen

Sep 8, 2015

Developers know their market well. They are waiting for OROP and 7th pay commission money to get into the buyers hands. Buying a big house and bulky gold ornments are a must for many Indians.

Like 
  
Equitymaster requests your view! Post a comment on "One idea that real estate companies want to borrow from Gulzar". Click here!