Realty Sector Suffered “Notional” Loss of Rs 22,600 Crore From DeMo: It was Well Deserved

The demonetisation (DeMo) of high-value currency notes has impacted several sectors adversely, but one industry whose woes are more self-inflicted than the result of DeMo is real estate, India’s most corruption-infested sector.

According to a report by Knight Frank, a property consultancy, in the fourth quarter of calendar 2016, the realty sector suffered a sharp drop in sales in eight major cities, resulting in a “massive notional revenue loss of more than Rs 226 billion (Rs 22,600 crore)”, not to speak of the – again notional – revenue loss to various state governments on stamp duty collection, which has been “in excess of Rs 12 billion (Rs 1,200 crore)…”. (Read the full Knight Frank report here)

Unlike the other sectors that suffered sales and revenue losses due to DeMo, the losses of the real estate sector are truly well-deserved. If this loss does not prompt them to take corrective action, both on exorbitant pricing and excessive stamp duties, nothing will.

The national level “notional” losses of the realty sector will be higher, for Knight Frank data covers only the top eight cities – Mumbai (Metropolitan Region), Delhi (NCR), Kolkata, Bengaluru, Chennai, Hyderabad, Pune and Ahmedabad.

While one should commiserate with those whose livelihoods depend on the real estate sector, the reality is that this sector cannot ever achieve its true potential without a serious price correction of 30-40 per cent in major metros, and even more in city centres (probably 40-50 per cent).

The health of an industry depends on broad-based demand, which, in turn, depends on prices that are aligned to mass affordability. But the rapacious real estate sector, which is where crooked politicians and babus park their ill-gotten wealth, works on the unstated assumption that the existing “notional” profits of benami holders must be protected, and hence land availability – a crucial determinant of house prices – must be artificially constrained to hold prices high. This is ensured by artificially restricting vertical building, illogical zonal laws, delays in building permissions, and levy of high stamp duties which encourage sellers to accept payments in black.

According to Knight Frank, the demand compression brought on by DeMo was so strong that the October-December quarter saw sales volumes drop “by 44 per cent YoY (year-on-year)… and new launches fell by a massive 61 per cent YoY during the same period.”

The Knight Frank report clearly gets it. That prices are the problem, not demand. It notes: “The first and foremost step that the industry needs to take is to make houses more affordable. Currently, the biggest factor affecting sales is the unaffordability of the homebuyers (sic). House prices till 2012 have increased significantly faster than the income level of home buyers. During the last four years, the growth in residential prices in most of the top eight cities of India has been below retail inflation growth – a clear reflection of time correction. But still this is not enough to make housing affordable to majority of the homebuyers in the top cities of India. Developers need to give a relook at the pricing, size and configuration of residential units in their planned developments…”. (Italics mine)

A dog’s tail does not straighten just because it is kept in a tube. So DeMo is unlikely to straighten the crooked realty sector, which is essentially backed by crooked laws and regulations enacted by crooked politicians.

Prime Minister Narendra Modi clearly has to take his fight beyond DeMo to political funding and realty sector reform. The Real Estate Regulation and Development Act 2016 will constrain realtors from fleecing and cheating home buyers, but the real reforms have to come from states and municipal corporations, which decide floor space indices and building laws and permissions. Not to speak of stamp duty.

Modi needs to use the new Benami Transactions (Amendment) Act, notified in November, as a stick to force states to act in these spheres. He could face as much opposition from his own party as from the rest. So it needs even greater political courage than DeMo.

It is a tough task, but real growth in jobs will depend on a streamlined and efficient realty sector, where land supplies are increased to meet demand for affordable housing.

A robust housing sector calls for much lower realty and land prices in urban areas.

If realtors and their hidden benefactors are unwilling to cut prices to boost demand, the market will. Prices will stagnate for years so that inflation brings down the real cost of property.

It is better for the industry to swallow the bitter medicine in one go, instead of seeking placebos like interest rate cuts and tax sops. Unless it would rather bleed for years till real prices catch up with affordability.