Mr Jaitley, here is why Indians cannot afford to buy a house

Politicians and intellectuals who rarely venture out of their homes in Delhi, seem to have a table top theory to explain everything that is wrong with this country. A favourite theory doing the rounds these days is that India is not progressing because interest rates are too high. And given that, the Reserve Bank of India needs to cut interest rates. Once it does that people will buy homes, cars and what not, and high economic growth will return again. QED. [caption id=“attachment_107452” align=“alignleft” width=“380”]  Union Finance Minister Arun Jaitley. Image courtesy PIB[/caption] Leading the charge on this front is the finance minister Arun Jaitley. He has taken over the reigns of this theory from former finance minister P Chidambaram. In fact, Jaitley recently told The Times of India in an interview that “expansion in real estate will take place significantly only if the interest rates come down a little.” But is that really the case? Recent data released by the real estate research firm Liases Foras clearly shows that homes in Indian cities are terribly expensive.  The weighted average price of a flat in Mumbai is Rs 1.34 crore. For Bangalore this stands at Rs 88 lakh and for the National Capital Region at Rs 75 lakh. Nevertheless, this table does not tell us how bad the situation really is. In order to understand that we need to take the per capita income of these cities into account. The state level economic surveys give out the per capita income of various cities. The only trouble here is that the latest numbers are not available. Hence, in order to account for that I have adjusted these incomes by assuming an average increase in per capita income of 10% per year. (Further, I couldn’t find the average income of Chennai, and hence haven’t taken it into account for making this calculation. Also, for the Mumbai Metropolitan Region I have used the average of the per capita incomes of Mumbai and Thane, respectively. For the National Capital Region, I have used the per capita income of Delhi, and hence the calculation is a little understated to that extent.) The following table gives the per capita income of five cities in 2014-2015. In order to show how  high the real estate prices are we will basically divide the entries in the first table by the entries in the second table. Hence, we will end up calculating that how many years of current income is needed to buy a flat in a particular city. And the results are very interesting. It takes 68 years of current income to buy a flat in the Mumbai Metropolitan Region. For Bangalore the number is at an even higher 81.5 years. This seems on the higher side. And there is a reason for it. I have used the per capita income of Bangalore division (which is what I could find in the  Karnataka Economic Survey of 2013-2014). And Bangalore division includes not just Bangalore but also other places like Kolar, Shimoga, Tumkur etc., where per capita incomes are lower than that in Bangalore. Even if we assume that per capita income in Bangalore is double the per capita income in Bangalore division, it will take around 40 years of current income to buy a home in Bangalore. Of the five cities, Pune is the cheapest to buy a home in. But even there is takes close to 32 years of current annual income to buy a home. Further, home prices continue to remain despite the fact that there is a huge inventory of unsold homes, as the following table from Liases Foras shows us.  National Capital Region has an inventory of 83 months. What this means is that if the current number of unsold homes is to be sold, it would need nearly 83 months or around seven years for that to happen. One reason for the unsold inventory is that most builders are not interested in developing affordable homes. Everyone wants to cater only to the richer segment of the population. Also, the tables clearly prove that high interest rates are really not why people are not buying homes. They are not buying homes because homes are very expensive. Fresh home loans can be got these days at anywhere between 10-11 percent. Assuming this interest rate where to fall in the days to come, how much difference would it make? Would people buy homes? Let’s understand this through an example of an individual who wants to buy a home in Hyderabad. As mentioned earlier the average price of a home in Hyderabad is Rs 75 lakhs. The individual puts in a downpayment of Rs 15 lakh (20% of the value of the home) and takes a home loan of Rs 60 lakh at 10 percent to repaid over 20 years. On this the EMI would work out to around Rs 57,900. If the interest rates were to fall to 9 percent, the EMI would fall to around Rs 54,000. So, would the individual now buy a home just because the EMI will be around Rs 4,000 per month lower? Unless, home prices fall and builders start concentrating a little more on affordable housing, lower EMIs are not going to help. This is something that Jaitley and others of his ilk operating out of Delhi, need to realize. To conclude, if Jaitley, the quintessential dilli-wallah, had asked one of his IIT educated babus to do some basic number crunching, he wouldn’t be saying the silly thing that he did. (Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)