The full-page ads are back. So are the stories in some parts of the media where “experts” are advising you to take advantage of the low interest rates and bargain basement prices to invest in real estate. The real estate corporate brokers are pushing the narrative of aisa mauka phir kahan milega (when will you get this opportunity again). You could be an entry-level buyer wanting to “settle down” with a roof over your head. You could be an ultra HNI who has exhausted his allocation into equity, debt, gold and dollars, now has a chunk left for real estate and are looking for distress deals to soak up the cash. Or, you could be a Greater Noida survivor who is beginning to forget that nightmare and is again sniffing the wind for the next boomtown story that is unfolding next to the metro line and airport. Whatever your situation, do the math before you take the leap to the other side, away from financial assets. And if you are the average Mr X investor who plans to leverage to invest—beware! There are three categories of buyers out there—which one is you?
One, the own-home buyer. Home loan rates are indeed very low starting at 6.9%. Blend in the tax break and the effective rate drops down further (exact drop depends on tax slab, interest amount and other factors). For a person looking to buy a home to live in, who does not have the money to buy the house outright and is planning to live in the city for many years, the argument holds ground. If you are going to be buying anyway, now is a good time with rates so low and property prices still very bearish. But you need to remember to keep the EMI at 30% of your take home or less. And this will mean a larger down payment than what is possible on home loans. Also remember that these are floater rates, and if inflation rates were to go up, these will go right back up. Fixing yourself down into a fixed rate loan (if available) is a good idea but these are already in the range of 8-12% and are subject to revision if you look at the fine print of the deal.
As you pass through a beautiful museum at an airport on the way to your flight, you would stop to admire the sculptures, the paintings, the wall art and murals that make for such compelling beauty and atmosphere. But a former Airports Authority head once stopped me midway in my appreciation of this wonder to burst the beauty bubble. When project costs are mapped closely, art is a great way to inflate costs. Who knows how to value art, he said succinctly. Then it is a matter of connecting dots to figure out what he really said. The cost of expensive infrastructure is paid by the users finally in different ways. One way is the “user development” fees, which ranges from a few hundred to a few thousand over the past years. The latest rates are here.
We know intuitively that we pay for corruption in many ways, but the cost of graft in anything linked to real estate has the potential to cost not just a few hundred rupees to those who have the capacity to afford a flight, but far more. The worst hit is the roof-over-the-head-seeking homeowner who gets priced out of the market or thrown to distant suburbs with poor amenities. The story of residential real estate can be summed up in three words: stuffed or starving. In the premium segment, there is an oversupply, and in the affordable housing segment, there is a demand overhang estimated to be about 10 million units in 2019 and a supply overhang of about 13 million units in the premium and luxury market. What people want they don’t build. What they build, people don’t want. The key to the story is the price.
Policymakers have long bemoaned the “non-optimal” Indian household that holds “unproductive” gold and land rather than financial assets. The same policymakers have sat on defined-benefit pension plans, medical treatment for life, other perks and have had very little idea about markets, how they work and how ordinary people deal with on-ground issues. They also forget to look at supply-side market failure before blaming the household. That household whose rupee finally makes the whole story hold together through taxes, consumption and savings. But very little work goes into working through why a household behaves the way it does when it makes its investing choices and even when there is work, it is ignored and not implemented.
It is difficult to run into somebody in Delhi you know and not have them confess that they too are caught with their money stuck in stalled real estate projects in the suburbs of Noida and Gurugram. The bankruptcy process in the Jaypee Infratech Ltd case got the headlines, but the number of large developers in jail is not small. It includes companies such as Unitech, SRS Group and DB Reality, showing how deep the rot in real estate goes because rich people in India seldom go to jail for breaking the law.
Stuck in the still-to-be-Italian-marbled buildings are the savings of the urban mass affluent Indian who thought she was investing smartly in the property boom. Investors bought into the good deals offered by builders who offered to pay their first few EMIs (equated monthly instalments), who offered post dated cheques for those EMIs, who offered a free car if you booked a flat above a certain value. Real estate investors who bit the bait allowed themselves to believe deals too good to be true, to be true. They refused to listen to sane counsel of friends and newspaper articles that warned them against such deals.