Home truths

Reports of rents in many cities going up even as home prices are cooling down could point to a correction of sorts under way in property markets. Such a correction, if happening, is desirable. The price of any asset should ultimately have some relation to its underlying income-generating value. The annual rental income from most property today is far less than that which would accrue if the sum equivalent to the value of the property was put into a fixed bank deposit. Of course, rental returns are not the main factor which influence home purchases. Most people buy with a view to having their ‘own’ home, for which they would pay a premium over the cost of renting the same property. ‘Pure’ investors, likewise, see returns more from price appreciation than rental income.

That being the case, it is significant to see the National Housing Bank’s ‘Residex’ index tracking property prices declining over the last one year in cities such as Kolkata, Lucknow, Ludhiana, Indore, Vijayawada, Coimbatore and Kochi. Even Delhi/NCR, Mumbai and Bangalore have seen very small increases, while property prices in Hyderabad are actually ruling below their 2007 levels. There has been no similar pressure on rents, which have even risen significantly in many parts. Either way, property markets clearly are not overheated as they were a couple of years back. At the same time, any drastic cooling seems unlikely as real estate markets don’t ‘clear’ at equilibrium prices that easily. One reason for this is that barring builders — who have no option but to sell since they need to pay back financiers — most property owners are reluctant to cash out. Even when prices are flat, they don’t seem to mind holding on in anticipation of the next boom.

That boom may or may not come in the immediate future. But it is preferable if this happens on the back of two things. The first is real growth and overall higher incomes that will drive up rentals and demand for property. Secondly, we need state governments and municipalities investing more in urban sanitation, water and metro rail transportation, making it possible for people to live and commute from the suburbs more easily. This, apart from reducing congestion and unsustainable property prices at the centre, will contribute to a healthy decentralised real estate boom. Everyone stands to benefit, including even ordinary middle-class folk who simply cannot afford homes of their own today. Such ‘pricing out’ is undesirable for the long-term growth of the country’s real estate sector and the all-round economic activity it is well capable of unleashing.

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