The Hindu Business Line : In a state of un-realty

Poor land-use policy has created a demand-supply gap, sending real-estate prices to unrealistic highs. If the Government is serious about pricking the real-estate bubble, it has to contemplate certain tough measures, even if not to the extent of nationalising the housing sector, as in Singapore.

POOR LAND-USE policy has created a demand-supply gap, sending real-estate prices to unrealistic highs.

Can anyone deny that an asset price bubble is building up in the real-estate market today? Flats in posh Mumbai areas sell at the rate of Rs 50,000-70,000 thousand a square foot and housing plots in Gurgaon, outside Delhi, are going for Rs 1 lakh a square yard, providing empirical evidence to this phenomenon.

While this may sound like music to those who have been clinging on to their assets, it portends danger for buyers.Though high prices for stocks make capital less expensive for companies and thus facilitate fresh investment, high real-estate prices have largely negative consequences for a broad cross-section of the economy.

Today, one has to reconcile to the grim reality that a premium flat in Mumbai commands a higher price than a medium-size flat in New York's Manhattan, notwithstanding the fact that construction costs in the Big Apple are five times as high as in Mumbai.

Increase in demand

Rising incomes coupled with low interest rates encourage investment in housing, leading to a sharp increase in demand, bringing enormous pressure on land. The scarcity of land in India's cities is largely the outcome of inherent weaknesses of theland-use policy. For example, the land occupied by textile mills closed for decades in a land-hungry city like Mumbai; only now is all that land getting unlocked, though at a snail's pace.

Or, in Delhi, where the government and its various agencies are sitting on thousands of acres, which, if made available to the market, would surely decelerate the spiralling real-estate prices.

The high real-estate prices keep the majority out of the housing market and make the dream of owning a home more distant, in a country where there are few homeowners and even, among this section, a large number has one/two-room apartments.

The second negative consequence of high real-estate costs is that they push up wages — as it has become more expensive to live in a big city. One reason why Mumbai now has competition from Delhi/Gurgaonand Bangalore is because the real-estate cost in Mumbai has gone far too high, and companies are left with no alternative but to look for more economical alternatives. But if the disease of high house prices were to spread to all of India's 35-million-plus population cities (as seems to have begun happening) there is trouble brewing.

Paradoxical situation

It is paradoxical that exceptionally high real-estate prices exist with poor infrastructure and services. It is owing to the inefficiency and laxity in both levy and collection of property taxes, coupled with corruption, that cities are unable to offer residents even basic amenities, such as assured water supply, electricity, an effective law and order machinery, and an efficient public transport system.

While the meteoric rise in real-estate prices has led to a sharp demand-supply gap in several cities, the relatively large capital outlay required for buying property puts it out of reach of smaller investors.

Things could worsen if India were to open its capital account, since the real-estate sector would be open to foreigners without any restrictions.

Attractive option for NRIs

One cannot afford to miss the writing on the wall that that real-estate in the Metros, in general, and Mumbai, in particular, will emerge a highly attractive option for investors abroad. This will push up real-estate prices to such an extent that the houses and flats in India may become out of reach for residents. Prime properties in Mumbai and Delhi could be in the hands of foreign investors who may not have anything to do with India; this could well lead to a situation when the next generation would be paying rents for their flats in Chennai, Mumbai and Delhi in hard currency to someone in the US or West Asia.

Singapore scene

This is one issue that the Central Government and the Reserve Bank of India have to address seriously before contemplating capital account convertibility of the rupee. In this connection it may be worth studying the position prevailing in Singapore, where flats are all owned by a government agency, and it is not possible to make money in the real-estate market as the flats can only be resold to the state Housing Board.

Once there is capital account convertibility, stringent safeguards would have to be put in place to prevent indiscriminate investment in real-estate by foreigners. If the Government is serious about pricking the real-estate bubble and bringing housing within the reach of every Indian, it has to contemplate certain tough measures, though perhaps not to the extent of nationalising the housing sector, as in Singapore.

An immediate step that could help arrest the phenomenon of unrealistically high real-estate costs will be to withdraw all the concessions available to the sector under the Income-Tax Act such as Section 54, where one can avoid capital gains tax by investing the sale proceeds in specified government securities, or subject capital gains beyond Rs 10 lakh to 90 per cent taxation. One has to ensure that the future generations are able to afford a roof over their heads at a realistic cost.

(The author, an IAS officer, can be reached at sitharamgurumurthi@yahoo.com. The views are personal and not of the government he works for.)

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