When it comes to reviving real estate, Jaitley needs to look beyond RBI

Sep 23, 2015

- By Vivek Kaul

Vivek Kaul
Arun Jaitley is at it again. On Sunday (September 20, 2015) the finance minister said in Hong Kong: "RBI historically has been a very responsible institution. Now, as somebody who wants India's economy to grow and who wants domestic demand to grow, I will want the rates to come down...Real estate, for example, can give a big push to India's growth and this is a sector which is impacted by high policy rates. Therefore, if the policy rates come down over the next year or so, certainly this is one sector which has a huge potential to grow."

This is not the first time Jaitley has said something like this. In December 2014 he had said: "Now time has come with moderate inflation to bring down the rates. If you bring down the rates, people will start borrowing from banks to pay for their flats and houses. The EMIs will go down."

As I have often said in The Daily Reckoning in the past, homes are not selling because prices are high. It has got nothing to do with high EMIs. A fall in interest rates will not make such a huge difference in EMIs so as to get people all excited about buying homes to live in.

The finance minister has regularly talked about high interest rates and the fact that the Reserve Bank of India (RBI) needs to cut interest rates, so that people start buying homes again. Given that he talks to the media almost every week, why can't the finance minister also talk about high real estate prices? Why doesn't he talk about the real estate companies sitting on a huge amount of inventory and still not cutting prices?

Further, public sector banks can be encouraged to go after real estate companies which owe them money. Such real estate companies should be forced to liquidate the inventory of unsold homes they are sitting on. If this is happening, the finance minister needs to talk about it, instead of just asking the RBI to cut interest rates.

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Real estate prices can also be brought down if the stamp duty charged by state governments on real estate sales is brought down. The Bhartiya Janata Party (BJP) is in power in many big states, and these governments can be encouraged to bring down the stamp duty. The chances are that as home prices fall, with a lower stamp duty, home sales will pick up, and the total amount of stamp duty collected by the government will go up or at least remain the same.

Media reports suggest that in a few states the market price of homes is lower than the circle rate. This has brought the transactions to a complete stand still. Why can't this anomaly be corrected? I agree this is something that the state governments need to do, but the finance minister, given that he talks so much, can set the agenda by talking about this as well.

Along similar lines, why can't the finance minister and other senior BJP leaders encourage the states where the BJP is in power, to have better and more transparent FSI laws? The way these laws are currently structured, they allow the nexus between the builders and the politicians to flourish. I am no expert on this, but what is stopping the central government from coming up with a model FSI law, which states can follow, with their own tweaks.

Further, Jaitley can also perhaps explain to us why is his government opposing the move to bring political parties under the ambit of the Right to Information (RTI) Act? In an affidavit submitted to the Supreme Court in August 2015, the government said: "If political parties are held to be public authorities under RTI Act, it would hamper their smooth internal working, which is not the objective of the RTI Act and was not envisaged by Parliament. Further, it is apprehended that political rivals might file RTI applications with malicious intentions, adversely affecting their political functioning."

If the political parties are brought under the ambit of RTI they will have to function in a much more transparent way in comparison to what they do now. This would mean keeping proper records of where the funds to finance them are coming from. Real estate companies are major financiers of political parties, at least at the state level.

If the political parties are brought under the ambit of RTI, the nexus between politicians and builders will come under proper scrutiny. And this is something that no political party can afford. This, perhaps explains why the Narendra Modi government does not want political parties to be brought under the ambit of RTI.

Nevertheless, if this were to happen, it would go a long way in ensuring that real estate prices in India at any point of time are a reflection of the underlying demand and supply of homes.

Also, as any builder will tell you off the record, the construction cost is only a small part of getting a real estate project going. Fees to politicians and bureaucrats form a major cost of a project, and are passed on to the buyer. The finance minister Arun Jaitley cannot do much about this, but at least he can talk about it. The first step in tackling a problem is acknowledging that it exists.

Finally, Jaitley can also explain to us why the Real Estate (Regulation and Development) Bill, which promises to bring some regulation to what has been a totally unregulated sector, up until now, has more or less been put on the backburner?

The government has shown a lot of aggression when it came to bills pertaining to land acquisition and goods and services tax. The same aggression has been missing when it came to the Real Estate bill. The bill provides for penalties to be paid by the builder, if a project is not delivered within a time bound period. It also stops builders from making arbitrary changes to project plans without the consent of home-buyers. It also has a provision for state level real estate regulators.

Long story short - why doesn't Jaitley talk about all these factors as well. What is the point in blaming the RBI over and over again for a slowdown in the real estate sector?

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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14 Responses to "When it comes to reviving real estate, Jaitley needs to look beyond RBI"

Ragini Ghanekar

Oct 5, 2015

Construction cost is small part of the total cost, but land cost in metros and around metros is quite high. It probably forms 50% of the cost. Though bureaucrats' and politicians' cost is absolutely valid point. But it is Probably valid, unfotunately, in all aspects of business transactions in India.

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Prathaap A

Sep 24, 2015

This article of Mr. Vivek Kaul is the a rightly pointed. But the truth is all the black money of all political parties, Politicians, Industrialists and other top govt officials & employes are hidden through benamy construction, developers and corporates. How can any one expect to talk about bringing down the property values among these groups, will they not loose their so called hard (looted) earned money. So, How can any one expect for real estate price corrections. Truly, if the SC monitored SIT on Black money, goes through the all Mega Devolopers accounts, the truth will blow open. But, public view is on the agony on election promises by the leadership. Let this factor open all the hidden factors to limelight soon.

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Prasad

Sep 24, 2015

Our FM has done wrong diagnosis of real estate problem and economic problems. He hasn't learnt from western countries that it is purchasing power that drives the demand and not the interest rates. I'm afraid if he continues to analyze incorrectly, he won't be able to improve the economy.

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Kamal Jiwrajka

Sep 24, 2015

In order to bring down the prices of real estate, simply introduce a law that no house or commercial property should remain unoccupied for more than 60 days in a year. If it remains so, Govt should acquire it and give it on rent out of which 70% will be paid to the owner and balance 30% will be retained by Govt as service charges/tax.
I guarantee that the prices will come down overnight and even the rentals will fall down.
Kamal Jiwrajka

Like (1)

abhay dixit

Sep 23, 2015

I think most of our problems are because of laws
-- pertaining to closing business

-- taking over of assets of defaulting companies

-- punishing criminals.

Real estate is just one affected sector.

Like (1)

Jagadeesh

Sep 23, 2015

I am paying EMI for the past 4 years with floating rate option.
Intereset rate increased once but it never decreased. And I feel there is no sign of decrease.

Like (1)

Adnan

Sep 23, 2015

It's true.
Our finance minister and our Pm can do a lot of improving in policies if they will so.

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Nandan

Sep 23, 2015

The one of most important reason for high property is the permissions, delays and resulting corruption. I have experienced it while selling my small land at Pune. It took 3 years and 100 visits to get the documentation. They took 3 months to measure the 2000 sq feet land under talkal (paid Rs 46000 official charge for this great service) Obviously the costs go up. Our money stuck in Dynamic India Fund and IndREIT funds. As NRI we did not get even 50% priciple that was invested in 2005 as half the projects are still in various approval stage!

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AB Pereira

Sep 23, 2015

Wow, absolutely spot on, Mr Vivek Kaul. Every point mentioned here is extremely valid. If it was not for RBI's strong stance, the financiers of the 2014 LS election would have made merry - be it in the real estate sector or others.
When the government does not appear to be ethical, we cannot expect them to bring any reforms that benefit the masses - it only helps with policy decisions that help the cronies. We have seen in states with the BJP government in the past - in Karnataka for example. We have known about significant land grab instances in the last 15 years of rule of Cong, JDS and BJP, with which they looted the tax payers (government) wealth.
On the rate cut, even if it is reduced by 1-2%, I wont borrow and buy a property at such high prices. As you have rightly pointed out, the property prices have to be slashed by 20-25% to make them attractive. But that wont happen, since the financiers have to recover their 'donations' to the two large political parties.

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RP

Sep 23, 2015

Hi, Read your article and has opened my eyes. Very well said why is Mr. Jaitley always behind RBI if there are action which the government can take to rectify the high prices of the house. I think we all should raise our voice, the Builder Politicians nexus has to be broken to bring the price under control. And yes the government should come up with a skeleton rules for the state government to follow. I hope Mr. MODI is not keeping his eyes and years closed for his ministers whom he trust.

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