Comment

Among all the asset markets in India, real estate one is the only one that doesn’t work.

Consider: it takes weeks or even months to buy or sell a property; the real price of the property and the stamp duty paid on it have no connection with each other (both are fictitious numbers); large segments of the sector work on the basis of cash; illegal documents abound and criminal gangs often play a role in transactions.

Consider the contrasts with the stock market. Share prices may have crashed, but they are alive. Not real estate. It’s dead. People are not buying because builders are mulishly sticking to a price that has no relevance to ground reality. In the stock market, if there weren’t enough people to buy a share, prices would fall. In the real estate market, if there aren’t enough buyers, realtors pretend that the last quoted price is the real one.

In Mumbai, the old cartel of builders which refuses to reduce prices formally appears to be holding. If I were the government, I would raid all of them and check who their benami backers are. How can they hold on to prices when there are no buyers for a year or more? I am sure prices will tumble if the government cracks down on them. And without a price cut, nothing will move. A recent Napean Sea property was sold as soon as the seller offered a 30 per cent cut. This suggests that the officially quoted prices for property are phony.

How can a cartel hold in the face of severe economic pressures to sell? The answer lies in the peculiar nexus between politicians, criminal gangs, builders and bureaucrats — where the consensus is to hold prices to preserve benami wealth. Politicians and criminal gangs are often the real investors in high-priced property, especially land in urban areas. As the facilitators of illegal deals and the bending of building laws, bureaucrats are hidden beneficiaries. Builders need politicians, bureaucrats and criminal gangs to obtain land through extra-legal means. All of them thus have a vested interest in keeping property prices high.

If you are wondering why government is so eager to lower interest rates when property prices are being artificially propped up, the answer is obvious: they are hoping that more people will buy due to lower interest rates. This will indirectly hold up prices.

Of course, it is not going to work. No sensible person will buy houses at inflated prices — at least not in this recessionary scenario. And till this scenario changes, the only way to get people to buy is to cut property prices. If Mumbai’s builders can cut list prices by 30-40per cent at one stroke, buyers would start returning to the market.

In the long term, the only way to get builders to follow economic logic is to free the real estate market and appoint a regulator. The problem: since land laws are a state subject, the reforms will be slow in coming. But it will take only a couple of bold decisions by one or two major states to set the ball rolling, forcing others to follow.

The first reform really has to be on the supply side. Land is in artificially short supply in the major urban areas because of outdated building laws, coastal regulation zone restrictions, rental laws, high stamp duties, and undependable titles. The land mafia is able to hold prices high precisely because each of these levers can be used with the help of a corrupt bureaucracy and political support to artificially restrict land supplies.

But all this can change if even one or two states take courage into their hands and go for real change. For example, let’s assume a forward-looking state like Gujarat abolishes stamp duty on real estate sales. As investors rush in, can Maharashtra hold out? The share market took off vertically only when stamp duties were abolished.
Time to dish out the same treatment to real estate.
Email: r_jagannathan@dnaindia.net