Friday, December 23, 2011

Property Prices - Part II

(This is the concluding part of a two-part series on property prices. The first part is available here. We continue from where we left off……)

The Central Government has proposed to set up a Real Estate sector Regulator ‘to ensure transparency and ensure fair practices’ (see here). The draft Real Estate (Regulation & Development Bill, 2011) proposes steps such as compulsory registration of projects with the Regulator, deposit of money collected from home buyers into an Escrow account to avoid diversion, setting up of an Appellate Authority to address complaints and grievances and stiff penalties including jail terms for guilty developers. Though the provisions of the Bill are welcome, the Bill will do nothing to increase supply and bring down prices.

Can the demand come down? In a country like ours, it seems impossible unless we are talking about a calamity of such massive proportions that buying property will be the last thing on anyone’s mind at that time.

My belief is that normal economic cycles such as an industrial slowdown and high interest rates are just not enough to cause a sustainable price correction in property prices. What are needed are sweeping legal reforms with far reaching implications. Some suggestions that come to mind: 

1. Eviction of an uncooperative tenant needs to be made easier. Then a big chunk of supply (click here) currently locked up empty will come into the market. The ‘stay order’ culture has to end. 

2. Transaction costs are just too high. Stamp duty, registration, service tax, VAT etc. add to almost 10% of the cost of the flat for the buyer. What the seller sells for Rs.50 lacs costs the buyer Rs.55 lacs. Atleast the first flat for every buyer should be made tax free. Getting a decent place to stay is a basic necessity of life, a Right as much as Right to Education or Food or Freedom of Speech. 

3. Stamp duty based on the value of the agreement provides a strong incentive to under report the transaction value. Today, it is almost impossible to complete a transaction without the ‘cash’ component. This reduces government revenues, which ultimately is compensated by higher taxes from those who pay. Stamp duty should be made payable based on the area of the flat or the ‘ready reckoner’ rate alone, not on the value of the transaction. 

4. Technological solutions that allow mass production of houses in some kind of CKD (Completely Knocked Down) form should be promoted. Such technologies exist, such as pre-fabricated buildings (click here) but need to gain wider acceptability. The governments have to drive this. This is the only way supply can be increased dramatically.

It is too much to expect innovative solutions that genuinely help the people from our present crop of politicians, who are actually beneficiaries of high property prices. A large chunk of their legitimate and illegitimate wealth is invested in property. From time to time, populist announcements such as increase in FSI or redevelopment of old buildings or mill land are made to pacify a gullible population. But such steps can never change the demand – supply imbalance and bring down prices. The batch of college students who is passing out today is not going to ever be able to buy a decent house in Mumbai.

In the long run, this will feed into social unrest. Social unrest can manifest itself in any manner, not necessarily into a demand for cheaper homes. One day, a benevolent dictator may decide that legislative fiat is the only way to alter the situation and dictate ‘all tenants become owners from tomorrow’ (or something similar). Such instances are not unknown to history.  This may seem far fetched today, perhaps it is, but we are heading in that direction only.

Until that happens, do not expect a correction in property prices. Getting a decent accommodation in the city of work will remain a pipe dream for a major part of the Mumbai’s population. “Affordable housing” is just a slogan, unless you believe that staying in Boisar and working in Mumbai is a life.

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