How Real is the Real Estate Growth Story
1) Selling a Premium Condominium after owning it for nearly 14 years, People have not had to pay any Capital Gains Tax after adjusting for Indexation
2) While House Prices have fallen but in cities like Mumbai, it is still beyond the reach of most people
3) Selling one house to buy another or a few specific homes getting expensive on account of such shifting cannot is not net growth and cannot be construed as “Return of the Real Estate Boom”
4) So what ails the Real Estate Sector
5) Interest Rates are at its low like it was in 2000 to 2005 but the demand is not like it was back then
6) What is the difference?
A) JOBS SITUATION
7) Back then the job market was extremely robust but today the Job Market on the back of Automation, Artificial Intelligence, Technology etc is extremely fragile than ever before
8) When we joined the Job Market in the 90s, we had loads of Optimism & Conviction that we will work for 30 years in the same industry if not the same company
9) Many also believed they would work in the same company and they actually did
10) Starting Salary was high + Conviction that the Party will go on for 30 years with Good and Regular increments = Exuberance + A feeling of Invincibility
11) This Optimism fuelled the Housing Loan Market and there was literally a scramble to buy Housing Loans
12) The confidence of servicing the loans was extremely high and sentiments thus were peaking
13) This kind of optimism led to a surge in demand and a hike in prices and we all witnessed a Housing Boom
14) Even though Interest Rates have once again bottomed out, the ecosystem stands completely transformed
15) If a house back then was valued at Rs 1cr, the EMI stood at Rs 1 lac
16) Despite the slowdown and absence of Real Capital Gains, the Nominal Capital Gains too has transformed the Rs 1 crore flat into a Rs 2.5 cr flat
17) So EMI from Rs 1 lac is now at Rs 2 .5 lac
18) The question to ask here is, “Has Salary Growth kept pace with this hike”
19) To service 2.5 lac per month one needs to earn at least 4 lac per month which is a salary of Rs 50 lac per year
20) Even if the Salary is Good in many cases, the confidence of staying employed and earning regular increments for over 20 years is no longer there. Just ask any youngster whether he feels he will hold on to a steady job for 20 years? You will get the answer loud and clear
21) While in the past most of the placements were largely in established Corporates like Tata, Birla, L&T who during those days could promise long careers, today this is no longer the case
22) Job Security has drastically reduced in big Corporates leave alone a 25 years of guaranteed career
23) Most of the Placements are in Startups where the culture is Hire, Reward and Fire
24) This kind of ecosystem does not augur well for the Housing Loans market and consequently the Housing Market
25) However, as India emerges from a developing economy into a developed economy, the Government is likely to spend on creating low cost homes to lift the masses above poverty line
23) Subsidies by the Govt. is likely to help the lower middle class by providing low cost homes to them
24) Hence even if the Housing Sector in general & Companies supporting the sector do well, it may not translate into Higher Prices and Growth that had come to characterize the 2000 to 2010 decade
B) WORK FROM HOME AND HYBRID BUSINESS MODELS
25) The Work from Home or Hybrid Model may certainly make people want to move to bigger and better houses as they are likely to spend more hours at home
26) This will correct the lopsided growth of Real Estate
C) END OF LOCATION ARBITRAGE
27) Back in the 2000s, South Mumbai was downtown and all offices were clustered around Nariman Point
28) Pricing of houses was a function of their distance from the business district
29) Gradually it changed as Offices got relocated in different pockets such as BKC, Parel, Powai, Thane etc. This helped in decreasing the variance in prices across different areas to some extent
30) This lopsidedness in pricing across areas will eventually vanish completely as people move out of expensive areas and move to areas that offer better homes at less prices
31) In Hybrid System of working, if an employee is expected to work from office twice a week, he or she will prefer traveling long distances twice a week for a much better lifestyle & standard of living for the remaining 5 days
D) INCREASE IN FINANCIAL LITERACY
32) Knowledge about money has increased and people are understanding the significance Liquidity Risks
33) People are also realising that their money can earn them much better returns in alternate assets like Equities, Mutual Funds and new Algorithm based hybrid funds which are also offering good returns with minimum risk
34) As more and more people understand the Power of their Money and it’s multiple advantages, the Demand to block capital and stay in debt in Real Estate will further decrease
E) REAL ESTATE INVESTOR – A VANISHING TRIBE
35) Lastly back in 2000s, there were serious buyer demand + serious investor demand
36) The Investor Demand was many times the Buyer Demand and that induced lots of liquidity into the market
37) Selling a house back then wasn’t much of an ordeal
38) 3 months was good enough time to liquidate the asset
39) Today it can take years
40) So even if Real Estate Sector may look up on the back of Government Subsidies, Rolling out of huge Low Cost Housing Projects across the country etc, it may not translate into phenomenal Price Growth year on year as we had seen in the 2000s
F) THE ROLE OF MEDIA AND AUTHORS WITH VESTED INTEREST WILL CONTINUE TO KEEP SENTIMENTS HIGH
41) Many of the articles that we read that promises a better real estate growth are by interested parties who have a clear conflict of interest should they speak their heart out
42) The very purpose of such articles is to improve sentiments for the Industry
G) PRISONERS OF PAST HANGOVER
43) The past experience of Wealth Creation in Real Estate was a Great Experience and most people are emotionally locked into that stort and are living on hope to see it revive
44) We are often influenced by this VOICE that swears by the virtues of REAL ESTATE
45) They take shelter under the words like “Emotional Attachment” so that no one argues with them and reasons out the situation
H) THE PARALLEL CASH ECONOMY
46) Real Estate Growth was largely because of a parallel Black Economy as this sector had the power to absorb a lot of black money generated in the economy
46) With the advent of Regulatory System brought about by RERA and the movement towards a Digital Economy this opportunity is done and dusted
47) To conclude, the real estate industry is certainly poised to grow but it may not translate into serious price inflation due the above factors
48) This is my Personal view and my predictions are based on my reasoning as explained in the article
49) There is no guarantee that things will 100% play out in the way described although I believe that it will largely follow the trend
I rest my case
