By Mr. Vivek Kaul
The American author
Mr. Upton Sinclair once said that “It is difficult to get a man to understand
something, when his salary depends on his not understanding it.”
This seems to be true
about the “so called” real estate consultants who operate in India. Their main
job it seems is to bring out a research report every few months, where the
conclusion is that “real estate prices will continue to go up”.
This despite the fact
when their own data contradicts this conclusion. Let's take the case of a
recent research report titled India Real Estate Outlook brought out byKnight Frank.
The report takes a
look at the real estate scenario prevailing across some of the biggest cities
in India.
In the case of Mumbai, the report points out that there is a huge demand-supply gap. The unsold inventory of residential apartments in the city stands at 2,13,742 units. In June 2014, the quarters-to-sell ratio stood at 12.
“Quarters-to-sell
(QTS) can be explained as the number of quarters required to exhaust the
existing unsold inventory in the market. The existing unsold inventory is
divided by the average sales velocity of the preceding eight quarters in order
to arrive at the QTS number for that particular quarter,” the report points
out.
What this means is
that it will take close to three years to exhaust the existing number of unsold
residential apartments in Mumbai, if people continue to buy homes at the rate they
have been in the preceding two years. What is interesting is that the unsold
inventory has gone up dramatically over the last few years.
In December 2011 the
number had stood at five, the report points out. This means that in December
2011, it would have taken around one year and three months to dispose of the
inventory of unsold residential apartments in Mumbai. By June 2014, the number
had increased to three years.
What this tells us is
that the supply of residential apartments in Mumbai is substantially more than
their demand. And anyone who understands basic economics will know that in
order to clear this inventory the real estate companies need to cut prices, so
that people come out and buy these unsold apartments.
Nevertheless, the
Knight Frank report goes around to conclude that “On the residential price
front...the forecasted increase for the entire year (2014) is 10.1 %.” It goes
on to explain the reasons for this forecast. “This period [the first 6 months
of 2014] has seen significant completion of transit infrastructure that has the
potential to alter the dynamics of the region’s property market,” the report
points out. The Versova-Ghatkpoar Metro, the Eastern Freeway and the
Santacruz-Chembur Link Road are some of these projects.
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| Mr. Vivek Kaul |
The report writers
forget(or rather ignore) a rather fundamental point here about how markets
operate. Markets start factoring in information well in advance. They don't
wait for a particular development to be completed before factoring in that
information into the price. An excellent example of this are the real estate
prices in parts of Navi Mumbai, which are close to the proposed new airport.
The airport is nowhere in the picture, but prices have been driven up for
years, around this story.
Hence, the infrastructure
that the report points out to, has already been there in the minds of people
for a while now. And if they had been so impressed by it, they would be buying
homes, and the quarters-to-sell ratio would have come down. Now that as the
report points out, hasn't happened, making the point irrelevant. Another
reason, which is a favourite with most research report writers these days, has
also been offered. Now that Narendra Modi is in power, things will improve and
people will buy more homes.
As mathematician John
Allen Paulos writes A Mathematician Plays the Stock Market “Because so much
information is available...something insightful sounding can always be said.”
But what sounds insightful need not be correct.
The question that the
research report does not answer is: why have the real estate prices in Mumbai
going up, despite the fact that people haven't been buying residential
apartments. The Residex Index of National Housing Bank points out that real
estate prices in Mumbai have risen by 18.7 % between the end of December 2011
and March 2014.
This despite the fact
that the inventory of unsold residential homes has been growing dramatically.
In this scenario, where people are not buying as many homes as are being
produced, prices should have been falling and not going up.
The reason for this
is straightforward. The real estate market in India is rigged in favour of real
estate companies and politicians who are the real owners of these companies.
There is no free market in real estate.
Most real estate
companies are fronts for politicians. What makes this very clear is the fact
that even though there are thousands of real estate companies operating across
India, there is not a single pan India real estate company.
And these politicians
and their real estate companies have an incentive in holding the prices to be
high. They operate as a cartel to do that. Of course, no real estate consultant
can “afford” to talk about these reasons given that they make their money from
real estate companies. And real estate companies would want its consultants to
keep constantly mouthing the lines that “prices will continue to go up”. The
research reports brought out by these real estate consultants play precisely
that role. They help in managing the price expectations in the minds of
prospective buyers.
Whenever such a
report is released, its splashed all over the media. The media, in turn,
because it depends on advertising from real estate companies, tends to
highlight the price escalation and the sales will increase part (or they just
don't bother to read beyond the press release).
They don't bother to
ask the most fundamental question: If there is so much inventory, why are
prices going up? Take the case of South Mumbai. As the report points out “the
inventory level in the South Mumbai market will take the maximum time of 18
quarters (4.5 years) to sell. The age of inventory, calculated as the time
elapsed since launch, is also the longest, at 15 quarters.” So why are prices
still rising is something that no one has bothered to ask?
This is how real
estate consultants help real estate companies manage price expectations in the
minds of prospective consumers. So, the next time you read a report saying real
estate prices will go up, check for the source. If a real estate consultant is
saying so, the information needs to be taken with a pinch of salt.
As Guy Sorman writes
in An Optimist’s Diary “Economic actors don’t all have the same information at
their disposal. Without institutions to improve transparency, insiders can
easily manipulate markets.
” This is precisely
what is happening in India—the insiders have managed to take all of us for a
ride.
About the author..
Mr.Vivek Kaul is a writer and author of "Easy Money : Evolution of Money from Robinson Crusoe to the First World War". He tweets @kaul_vivek
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