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Welcome to the IVM Podcast Network.
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One day a physicist, a philosopher and an economist walk into a bar, they down a few
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pegs and then decide to play a game.
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The philosopher has an idea, he says let's ask each other the most difficult unanswerable
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question from our respective fields.
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Whoever asks the toughest question gets the rest of his drinks free.
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The other two men agree, both of them seem confident.
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The physicist is the first to go, he asks what was there before the beginning of time?
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The other two men nod thoughtfully and go bottoms up with their tequila shots.
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Then it's the philosopher's turn, he asks what is the meaning of life?
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This surely has to be the winner, what could be tougher than this, what is the meaning
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All three men look very sad.
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Then finally the economist has his turn, his question is this, why don't real estate prices
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in Mumbai crash when demand has gone down so much?
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The physicist and the philosopher look at each other in bewilderment and disappointment,
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they know the game is over, the economist gets free drinks all the rest of that evening.
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Welcome to the Seen and the Unseen, our weekly podcast on economics, politics and behavioral
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Please welcome your host Amit Bhatma.
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Welcome to the Seen and the Unseen.
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On this episode I intend to ponder the question why don't Mumbai's real estate prices fall?
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This is one of the most expensive cities in the world and usually prices are a function
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If demand falls, prices should fall.
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Now demand certainly has fallen here over the last few years, less and less people are
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buying flats, inventory is lying empty and yet the prices just won't fall.
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There's no straightforward answer for this, it's clearly the unseen effect of something.
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In today's episode we are going to try and solve this mystery by working backwards from
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this unseen effect and the economic detective who is going to help me do this is my good
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friend Vivek Kaul, a columnist at Equity Master and the author of four very fine books.
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Vivek, welcome to the show.
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Thanks for having me, Amit.
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So Vivek, one of the subjects in which you've written about repeatedly over the years is
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real estate and it's something that baffles me.
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I have a lot of sort of newbie questions on it which I'm hoping you can shed some enlightenment.
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Now real estate prices in our cities especially in Bombay where I live have just shot up over
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the last decade and a half and the interesting thing that's happening over the last couple
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of years is that even though the economy isn't doing that great per se and a lot of inventory
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is not selling, now you would imagine that when inventory doesn't sell the prices come
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down at some point, but that's not happening and real estate in Bombay essentially remains
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out of reach for middle class people like me.
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So I mean you know it's not just real estate in Bombay which remains out of reach, I mean
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real estate in a lot of other cities, I mean even you know the towns in Uttar Pradesh like
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Kanpur or the city that I grew up in Rajshri, real estate prices are you know have reached
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When you compare it to the income in that particular city, you know I mean I remember
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a few years back I had done this very basic calculation around the weighted average price
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of a flat in a given city divided by the average income that an individual was making in that
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city and I got some crazy numbers.
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So I think for Bombay it was some 70 years income which was required.
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Wow and put that in perspective what should it be, what is it in like say New York, London?
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Probably I mean New York and London are I mean would be high because they're financial
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But they wouldn't be so high I mean, but on an average in the West they say that around
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five to six years income should be good enough to buy a house.
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Wow in Bombay it was 70 years.
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So I mean I remember the average weighted average price of a flat was around 1.34 crore
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and the per capita income as per the state GDP numbers came to around 1.97 lakh or something
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So it was crazy I mean.
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I'll need a drink after the show.
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And in fact interestingly for Bangalore I got an even higher number of some 81 years
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which I had to discard because I found it a little unbelievable that you know the ratio
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could be greater in Bangalore than in Bombay.
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Well lot more expats coming back with more money to spend.
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Basically the per capita income was a lot lower which was the yes because see Bangalore
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also I guess what happens is a lot of the smaller towns around Bangalore got counted
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into you know calculating the average income of Bangalore and their incomes were not as
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So that's not exactly a reliable figure.
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But why is it so high like Bombay at 70 while Western cities are at five or six.
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How why how is it possible?
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I mean the simple answer is that one is that the supply is not at the right prices and
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even though the sales have collapsed I mean if you look at the last I mean there was one
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survey which was done recently which took the data for around 42 Indian cities into
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account and they said that the home sales had fallen by around 41 percent but prices
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Now recently the National Housing Bank released the ResiDex index.
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I mean it's a real estate index which they've had for some time but they sort of updated
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And now it has a lot more data than it had in the past and that threw up some very interesting
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Now between March 2016 and March 2017 the median return on real estate in 49 Indian
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cities was 2.8 percent.
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If you took out there was one city Vizag which had given a return of 24 percent in the last
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So if you took that out the median return was 2.55 percent.
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What that tells you is actually I would like to highlight another point here.
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So the data in this index starts from June 2013.
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So if you look at the median return per year between June 2013 and March 2017 on investing
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in real estate in India across 49 cities it was 4.3 percent.
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So demystify this for me.
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What is the median return and what should it be and why does it not be?
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Median return is essentially you know if you have a long series of data it's the middle
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It's not the average wherein you add it and divide it.
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So this is the middle point of the data.
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So 4.3 percent per year return over a four year period which isn't huge.
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So what that tells you is that even though the real estate prices are not falling they
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haven't risen at the same rate as they were in the past and also you know this also tells
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you that you know the notion that people have in their head that real estate will always
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go up isn't really correct.
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In fact if you look at prices over the last one year in 13 out of the 49 cities prices
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have actually gone down.
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Also you know at 4.3 percent return or 2.55 percent return I mean it's not worth investing
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It's a waste of capital.
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It's a waste of because there are so many other you know costs attached to it.
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I mean you have to pay maintenance charges.
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I mean building maintenance charges these days are absolutely crazy.
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Then you have to pay property tax every year.
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If you bought a home on a loan you have to pay interest on it when obviously you get
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The rental yields are you know a percent.
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I mean so if you were to sort of use a ballpark figure investing in real estate makes sense
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if the returns are at least 10 percent per year.
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And in the sample that you know in the data for 49 cities that NHB put out only three
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cities over the last four years have given returns of greater than 10 percent.
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So I think one was Vizag and I don't remember the other two.
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One was Vizag, Meerut I think and there's a third one.
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I think I'm going to relocate to Vizag and start a podcast called the Vizag bulletin
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and you will always be welcome as a guest.
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So this is what I can't wrap my head around like while ago you said that one of the problems
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is that supply hasn't reached its real price and its real price as we all know is whatever
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supply and demand it should be.
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So if demand falls by say 42 percent like a figure you mentioned in one of the context
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you would expect the prices to therefore adjust accordingly.
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And that simply isn't happening and I can't wrap my head around it.
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There are multiple reasons for it I mean one is obviously you know the builders don't want
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to sell at a lower price and so if they don't want to sell at a lower price.
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But they're effectively selling at zero then because they're not selling at all for the
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Yes but then see the entire game is now you know they're basically waiting for the market
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Now what has also happened is that you know liquidity in the form of private equity money
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from abroad has come in.
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So what they typically they tend to do is that when they do a deal with a private equity
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investor they cut prices specifically for him okay.
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So this guy buys let's say a portion of the project at a lower price and he's happy to
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sit on it for prices to go up you know in four five six years time or whatever his investor
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And at the end of it he if you know whatever the prices are he would be you know he would
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So a liquidity in that form has come in.
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The second thing so sorry for interrupt but just to clarify that so what that basically
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means is that the cost that the builder invests in building a particular property acquiring
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the land etc etc he recoups that through these early sales and therefore the pressure on
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him to sell the rest of the apartments and so on is not high he can just afford to wait.
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Yes the other thing that you know needs to be sort of taken into account here is and
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I mean I've been writing this for many years now is that India's income tax laws up until
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February 1st 2017 when Arun Jaitley made his latest budget speech essentially encouraged
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people to speculate in real estate.
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Now what happens is when you buy your first home which is and you live in it in which
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in income tax terms is called a self occupied house the deduction that you get on your taxable
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income for paying home loan interest is limited to rupees 2 lakhs or rather was limited to
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Whereas if you buy a second third fourth fifth sixth tenth whatever x number of home and
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you finance it using a home loan the entire interest that you paid on that home loan was
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available as a deduction against your taxable income to the condition that you added a notional
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rent to your taxable income if you were not renting that house out.
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Now you would know that the rental yields are like abysmal you know 1 2 percent whereas
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EMIs are huge so that essentially ensured that a lot of corporate crowd you know senior
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level corporate crowd essentially brought down their you know taxable income and paid
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very little tax by investing in real estate and at the same time they created an asset
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Now in this budget Arun Jaitley made a very you know sensible sort of change and wherein
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he limited the tax deduction to rupees 2 lakhs across all home loans.
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So this essentially takes the speculation that was happening at the corporate level
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in order to avoid tax out of the window.
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Now what happened was for a lot of these guys you know who have a second third home it just
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did not make they were not bothered about the fact where the prices went up or not they
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were just bothered about the fact that the taxable income was coming down dramatically
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and they were paying very low tax.
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So in a sense it was a glitch in the system which helped the rich who already had houses
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and could afford more houses at the expense of the poor and the middle class who might
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have been saving up to buy a house but hey the prices never came down.
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So a lot of these you know if you go to I mean I mean I talked to my MBA batch mates
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and a lot of them you know have two three homes they don't require it is just that you
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know it was essentially a tax dodge that was on for a very long time.
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And this is now over so was this a big enough factor that you expect this to happen?
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It wasn't a very big factor but it was a factor nonetheless.
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You know the bigger factor is essentially you know people have this huge belief that
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real estate prices don't go down I mean that is a very big factor.
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Then there is black money I mean for a very long time black money a lot of black money
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found its way into real estate and the way it works is very very interesting.
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You know what happens is you sort of buy you know you get some black money from somewhere
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Now when you sell that house you get a bigger amount of black money back right so then what
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When you go looking for you know a cheaper location where you can buy let's say you
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had bought one you know house with that black money now you go buy two homes with that black
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money right in a cheaper location.
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So black money essentially leads to the multiplication of black money in real estate and this is a
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chain which is very difficult to break.
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And what has also happened is I mean you know to answer your specific question as to why
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sales have fallen and prices haven't.
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Now you know look at a guy who's already you know invested you know who probably has three
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four homes or whatever and he's invested a lot of his black money in it.
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Now even if let's say he were to sell those homes right now he decides to sell them and
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he sells them at whatever the market price is and I mean whatever the buyer is willing
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to pay even if you know he's even willing to take a loss okay.
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Loss as in he's willing to take a price which is lower than what he expected in the past
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Now he gets the money back a lot of it is black money now what will he do with that
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Now he can go buy you know more real estate but that isn't giving him the kind of returns
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that it was in the past.
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So for him the best decision is to stay put.
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So if you know he doesn't sell so if there are no distress sales the prices will not
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come down I mean there need to be an enough number of distress sales wherein people need
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So in a sense when people have large amounts of black money A they get trapped into real
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estate because that is practically the only efficient vehicle for their black money and
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B because black money within real estate tends to increase in the way that you pointed out
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it becomes a spiral and this prevents demand from going down as much as it otherwise might.
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Now regardless of that overall demand has sort of gone down and prices haven't gone
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down and the reason you gave for that of course is that builders having recouped their initial
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investment are willing to wait it out and they're just going to.
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See it's also another factor that you need to take into account is the fact that every
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builder is essentially not every builder but most big builders are essentially fronts for
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So that's what I was getting to so my question there was that I can imagine this being a
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good rationale for one builder or two builders or whatever but in a competitive marketplace
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some builder or the other will say that no I will sell it and then that turns the whole
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market but does a competitive marketplace exist?
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There is no competitive market because if you look at it there are way too many builders
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but there are hardly any pan India builders forget pan India builders there are no builders
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who work across a particular state or even a particular city I mean if you look at the
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city of Mumbai it is clearly divided among builders you know you have one builder who
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is you know who operates in only in Goregaon or you have one builder who operates only
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So explain this to me why is this so?
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This is primarily because the rules and regulations that govern real estate are so complicated
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that you essentially as a builder cannot operate if you do not have a politician you know blessing
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you and a politician's influence cannot go all across India so he has an influence in
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a certain place and which is where the builder thrives.
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So every local politician who is big in a certain area will give his patronage to a
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local builder and it will be a symbiotic relationship between them power and money.
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Which is how it is I mean you if you look at I mean this is I mean probably not true
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everywhere but it is true at a lot of places.
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So tell me this when you have a situation like this where the price isn't coming down
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despite demand falling so much as they say something's got to give some time.
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So that's the million dollar question you know I have been writing for five years six
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years now that prices will fall prices will fall.
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The music's going on it's nothing like that's happened I mean even though in fact I mean
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one thing that I would like to state here is that I mean on one count I've been right
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as to that investment in real estate hasn't made sense for the last five six years and
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I mean I have been totally right on that count now obviously prices haven't fallen and people
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who actually need homes to live in have been unable to buy homes I mean that is also a
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factor that needs to be considered here and that's a very you know that's a major factor
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because you know what typically happens is people become desperate to buy a home when
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the child starts to go to school because till then it is easy you know you can probably
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you move from flat to flat and it's not as difficult but the moment you get a child you
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know you obviously want a stable school life for him you want him to have friends right.
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That is and you know it's and then people become desperate and that desperation essentially
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then manifests you know itself into situations where builders are not ready to cut prices
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and I mean then there are a lot of other factors from you know FSI and FSI rent control I mean
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there are various things all that's also there and the fact that you know the government
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owns a lot of land in a lot of Indian cities bang in the middle of a lot of Indian cities
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and so that sort of creates a I mean even though land is really not an issue because
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India is a huge big country and we can always keep expanding I mean if you look at the city
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of Delhi the way it is expanded on all sides is unbelievable so if anyone says that there's
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no land and all I mean that's basically bullshit.
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It's true for Mumbai and in Mumbai there is artificial shortage also because of low FSI
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and the fact that the entire eastern front of the city is not one thing that's unique
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to Indian cities for example is that the army offer often has a lot of land even in the
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middle of bang in the middle of cities like the Pune can tournament and Bangalore over
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here Bangalore and this is really not the case with any other country and I mean this
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is probably needed when you know the British ruled India and all that but now it's not
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and all that land is a huge opportunity cost and if A if you free up that land B if you
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increase FSI like to give a sense of that FSI and bomb you know in our big cities is
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between one and four and like in New York it's 15 in Shanghai it's 13 in fact when
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the Empire State Building was built I believe it was 25 and there's no reason why FSI can't
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be much more that a lot of those government.
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So what happens if you increase FSI then you know how do state level politicians make money?
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That's an interesting political economic question in fact then there is there is also the case
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of change in land usage wherein you know what happens is that a farmer cannot sell his land
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to an industrialist and industrialist cannot buy land from a farmer so you need the government
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in between the government is the politician in fact a few episodes ago we did an episode
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on the right to property with Shruti Rajgopalan and she brought exactly this out that one
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of the reasons Robert Wadra made so much money was by using the you know the change he managed
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to acquire land at very cheap as agricultural land and then he immediately the value shoots
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up I mean he also made a lot of money because he got finance from DLF exactly for all this
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so it was almost like he got I mean he got an interest free loan so I have a feeling
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that he has no issues finding a place to stay in this country Vivek thanks so much it was
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great having you on the show I learnt a lot thanks for having me Amit so
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To follow Vivek on Twitter do go over to at call underscore Vivek you can follow me at
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Amit Verma A-M-I-T-V-A-R-M-A all my writings are archived at India uncut dot com if you
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