By: Prameet Narula
Track2Realty Exclusive: It is strange paradox of economics that property prices keep on moving up despite the sluggish market economy and demand. Various research agencies in recent years have reported about the amount of unsold stock lying with the developers and how it has increased over the last quarter or year. This gives hope to the end users that prices might come down to reasonable level.
Genuine home seekers sit on the fence hoping that prices are going to come down, but it happens the other way round. Demand or no demand, prices of residential properties in India move only in one direction and that is up. There is never a correction. Why? It is the underwriters’ capacity of holding up of existing inventory that keep the prices firm and finally the buyer gives in and the cycle continues as usual.
Problem is that the non-perishable nature of real estate added with the psyche of housing being treated as investment class rather than a basic need creates a vicious cycle of greed. Those with deep pockets or unaccounted income get hand-in-glove with the developers to invest in their projects and park their money.
When a developer advertises that ‘No Black Money or Cash Component Accepted’, it is often a covert invitation to park black money. A builder thus offloads its stock to underwriters and then underwriter sells the stock to end-users or investors. Based on the artificial demand created, builder keeps on increasing the prices repeatedly and the underwriter then sells the property at lower value than the current builder price.
The premium charged by the underwriter is usually paid in cash by the buyers and this leads to a circle wherein unaccounted income/cash component/black money is flushed into the real estate market.
Though many of the developers that Track2Realty approached refused to speak on the subject, some analysts maintain, while requesting anonymity, that this artificial appreciation is actually not good in the interest of the realty market. It may send a signal to the market that ‘All is Well’ but plays havoc with the demand-supply equilibrium of the given city. That is precisely the reason there is a huge mismatch in the capital value appreciation and rental yields.
“If demand is robust it must reflect in rental yields as well. However, what we see in most Indian cities is the fact that rentals have not kept pace with the capital value appreciation. The artificial demand created by the builder-underwriter nexus keeps the capital value of housing stock unjustifiably high,” says an analyst who does not want to be quoted.
Developers, on their part, try to paint a holy face asking how could they make out who is a genuine buyer and who is an investor. A Noida-based developer laughs it out that even his barber offered him during hair cut that he has got a few customers and how much the developer is ready to offer him.
This raises the fundamental question as to whether there is any mechanism to break this builder-underwriter nexus. A section of analysts believe it must be made mandatory by law that the buyer information will be made public. Well, it may not be a complete solution in itself as the value chain of underwriters is so thinly spread (some having more than 400 staff plus many sub brokers) that it is not that difficult for them to get the block booking with different names and pan cards. However, by having the buyer information, at least some rationality can be expected in monitoring the actual demand, if not completely putting a check on the entry of black money in the sector that acts as a catalyst to artificial appreciation.
