Real estate sector mess: Realtors desperately seeking govt aid, but are paying price for holding rates too high, too long
Real estate prices dramatically increased since 2000 through the boom years but over the last half a decade or so, there had been hardly any meaningful appreciation in prices.
Buyers do not see much sense in taking up a big liability on something where the cost of acquisition is too high
Investors do not gain much with a meager return on money locked in for a considerably long period
What the government has done is an attempt to boost sentiment in real estate sector by offering a distressed fund
Realtors are of the view that the special fund of Rs 10,000 crore announced by Union Finance Minister Nirmala Sitharaman at her Saturday presser would do little to solve the problems of the sector. Their point of contention seems to be that this measure will benefit only affordable, mid-level buyers not the luxury class, hence not enough.
What the realtors must understand is the fact that it is not the government’s job to market high-end projects to large investors as much as aiding the affordable housing segment where the idea is to give a shelter for a first time homebuyer at a reasonable price. Given that this is what government’s push intends to achieve there is no logic in seeking relaxation for the luxury segment.
Secondly, the crisis faced by the residential real estate sector is partially own making. Real estate prices dramatically increased since 2000 through the boom years but over the last half a decade or so, there had been hardly any meaningful appreciation in prices.
Buyers do not see much sense in taking up a big liability on something where the cost of acquisition is too high and the return on investment (RoI) is too low. This is true for appreciation on a residential real estate property or rental yields. For instance, in Mumbai which is one of the biggest markets for high-end real estate inventory, prices haven’t appreciated much in the last 5-6 years. Investors do not gain much with a meager return on money locked in for a considerably long period where the rental yields are less too (2-3 percent post-tax).
The general economic sentiment and the uncertainty surrounding it have taken the confidence element away from the potential homebuyers. People fear job losses and do not want to commit to a big liability. Cash exchange has slowed since demonetisation in 2016. Also, the unemployment rate going up to record highs (a tad above 6 percent at the last count) shows the pathetic state of the employment situation. Also, stricter LTV (loan to value ratio) rules means that the buyer has to bring in at least 30 percent money upfront, which is not possible for many. This wasn’t the case before when banks used to offer even up to 90 percent of the cost (in some cases even higher).
What the government has done is an attempt to boost the sentiment in the real estate sector by offering a distressed fund. Announcing the measure, Sitharaman had said the government will contribute Rs 10,000 crore for the special window and roughly the same amount is expected from outside investors.
"This window will help in completion of affordable and middle-income housing projects. The fund will be managed by professionals," the finance minister added.
But, it was obvious from the word go that this alone won’t solve the stalemate in the real estate sector. About 5.5 lakh housing units are stuck or delayed in the top seven cities alone which would be much higher if we consider all cities and towns, according to the estimates. The government needs to follow up with tax cuts and incentives for the cement industry which is crucial and also make sure interest rates are passed on by banks to end-borrower.
The government has also said external commercial borrowings (ECB) guidelines will be relaxed to help housing developers obtain overseas funds. The ECB guidelines will be relaxed to facilitate the financing of homebuyers who are eligible under Pradhan Mantri Awas Yojna (PMAY), in consultation with the central bank. This too will boost sentiments. But the point is government alone cannot revive the real estate market.
Realtors must reciprocate by lowering the unrealistically high prices in major pockets. The real estate cartels holding on to the high prices have contributed to the sales slump in a big way. If prices come down by, say 40 percent, this will instantly add to the demand and change sentiments. There are several potential buyers who have postponed their buying decision expecting a price crash.
Buyers will return only if they are given an assurance that prices are reasonable enough to buy compared with the estimated gains in terms of capital appreciation and rental yields. Question is whether the real estate cartels will wake up to the reality and smell the coffee.
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