Re:Why the Government must Act Now to Prevent Property Bubble Burst & Economic Distress
REJIMON C K
May read this
Dear friends,
The property bubble is about to burst in India while we persist in burying our head in the sand, and continue with business-as-usual. The signs are all around us; we can hear the squeaking and groaning as this bubble stretches to its limits. At least 3-4 years of unsold housing inventories have built up in all the metros, and this is an acknowledged fact: http://tinyurl.com/Unsold-Real-Estate-Metros
But that is only one-third of the story. Another one-third is the buildings under construction, dotting the skyline. Many are redevelopment projects, and so about 25% of these flats are already owned; the rest will swell the unsold stocks by coming into the market within a year or two. The final third is the flats in older buildings, which are not being sold due to unrealistic price expectations because of skyrocketing prices in their neighbourhood. Many of these flats are occupied, although they have been put up for sale.
SO THE ACTUAL UNSOLD STOCKS ARE NOT 3-4 YEARS, BUT 8-10 YEARS. This is not acknowledged by the government and the trade, because acknowledging this truth means calling a moratorium on new building permissions for at least five years. Nobody wants to bell the cat.
Investors with MASSIVE AMOUNTS OF LIQUIDITY (both black and white) are looking for a safe parking place and capital appreciation over a 3-4 year period. Financing new projects of builders has been a profitable avenue for this money in recent years. The bigger the tower, the better the capital appreciation; hence India’s ongoing gigantism in housing projects, typically 30-40 stories tall! Remember, these projects are mopping up funds that could more fruitfully have been invested in other industries.)
To keep investors happy, the builder cartel hikes pricess every few months. Between 2005 and 2010, property prices doubled. Between 2011 and 2012, prices rose another 30%. Characteristic of bubble bursts (such as the dot-com bubble and at least two stock-market bubbles in India), bad news and doubtful signs are brushed aside – for instance, thousands of unsold shops in attractive shopping centres built 5-7 years ago, and the fact that the dream of malls and super-bazaars has gone sour. http://tinyurl.com/Pantaloons-goes-phut
SERIOUS WATER SCARCITY in reported from the rural hinterland from where water is channeled to the metros: http://tinyurl.com/Mumbai-water-villages-dry
Meanwhile, the scarcity of water resources in every metro is growing to crisis proportions while tanker loads of water goes for curing cement-concrete! http://tinyurl.com/Cities-r-dry
Needless to say, 30-40 storied towers in the metros need lots of electricity. Meanwhile, due to the general POWER SCARCITY, the other parts of the country are subjected to merciless load-shedding for many hours per day. Except for Mumbai which is “islanded” from power cuts, most parts of Maharashtra are gearing up to suffer even more than currently. See http://tinyurl.com/Maha-Power-cuts1
When the bust happens, we will have poor administrative foresight to thank for it. Our government’s unwillingness to see the obvious and to step in as a planning authority is letting this housing bubble expand to bursting point.
NEW HIGH-RISE TOWERS OF 40-50 STOREYS ARE DEGRADING LIFE IN THE METROS:
1) PRESSURE ON CIVIC INADEQUATE AMENITIES. Sir, infrastructure in MMR has not been upgraded for decades, except for some road-widening and flyovers. Each new flat puts an added stress on existing scarce infrastructure, namely (a) water supply which already includes supply by tankers (b) sewage (c) schools, hospitals etc. (d) roads space for one or two new vehicles (e) power supply.
2) TRAFFIC CONGESTION, DEGRADING EXISTING QUALITY OF LIFE. A new high-rise building complex in a crowded neighbourhood degrades quality for life for its existing residents. When fully occupied, each new building brings (i) increased flow of hundreds of vehicles onto the road, to and from its gates, disrupting traffic in the area twice a day (ii) a dozen school-buses halting near its gates twice a day (iii) scooters, rickshaws, tempos etc used by service-providers such as watchmen, housemaids, vegetable-vendors & grocers, electricians and maintenance-men.
3) STAGFLATION AS SECONDARY MARKETS SEIZE UP. Flats are an illiquid asset, and the only indicator of market price is the price of the previous sale in that building or neighbourhood. New buildings in every Mumbai neighbourhood are exerting an upward pressure on prices of all the buildings there. Even people living in 20-30 year old buildings start trying to realize per-square-foot rates quoted for the new flats. But the new building diverts all the demand in that area as buyers naturally prefer them. So second-sales in old buildings are stagnating, creating a phenomenon called “stagflation” i.e. inflation plus stagnation. This is artificially forcing the residents to go in for building redevelopment, in the hope of creating market demand for their existing flats!
4) UNCONTROLLABLE FIRE-HAZARDS IN HIGH-RISE TOWERS. In the event of a fire in 40-50 storey buildings or their multi-layer parking, the fire-brigade will be a helpless bystander. Mumbai’s fire-brigade acknowledges that the reach of their snorkels and other fire-fighting equipment is extends upto maximum 12 storeys. Unlike developed countries, we don’t have fire-fighting helicopters. So the only remedies available are the fire-fighting facilities provided by the builders, namely fire-safety chutes, refuge floors, fire hoses, fire-extinguishers etc. Most of these are not tried-and-tested for effectiveness; they are only there to give hope and reassurance. So residents will be left to fend for themselves in the event of any unforeseen short-circuits, power failures, failure of equipment inspection-and-maintenance etc. Also, the internal layouts of these gigantic buildings are so complex that firefighters, police etc. will find it hard to even find their way around in an emergency!
5) RECESSION RISK TO SOCIETIES UNDER REDEVELOPMENT. When property prices crash – which is almost inevitable in the coming months or years -- many building projects will stall midway, leaving original home-owners and buyers in a dead-end situation. The collapse of the US manufacturing sector, unemployment in US and UK, collapse of Greece and other such global economic events is impacting Indian services sector and its economy. Liquidity crunch or rise in funding and other costs may cause unfinished projects to become unviable. If so, builders will leave the projects midway. Courts and bank guarantees do not provide realistic remedies against such risks, especially after the land under redevelopment has got locked in the builder’s possession.
6) BANKING & FINANCIAL SECTOR RISKS. As project financiers, and as lenders of home-loans, banks and financial institutions are at risk. Builders are already over-leveraged, and many home-loan takers tend to survive from one paycheck to the next. If, or rather when, a major property price-correction happens, builders will lose their ability to complete their projects, and home-loan takers may lose their reason to continue paying EMIs. If banks are forced to repossess houses on a large scale, it will hurt banks as well as their borrowers, and will crash the markets when banks reduce prices to sell. Please look at troubled US mortgage companies Freddie Mac and Fannie Mae, which repossessed lakhs of flats, but themselves needed to be taken over by the government.
7) BUILDERS ARE PASSING THE RISK TO OTHER STAKEHOLDERS. Having unfinished business at all times enables builders to pass on risks of unviable projects to investors, financiers, banks, buyers… and the government. The business model followed by builders is to make other stakeholders carry the business risks while ensuring their own safety, and ensuring the profitability of their projects by deliberately fuelling inflation. By creating a lot of grey areas for other stakeholders, they protect their own interests while putting others at risk. (Of late, there is a decline in builders giving conveyance and completely handing over the premises to cooperative societies; they hold onto the plot of land and exert pressure on government to increase FSI, so that they can build some more on such land.) Such market rigging negates the State Government’s agenda of providing affordable housing. Instead of controlling the inflation by making more space available, even Slum Redevelopment works in the builder lobby’s favour by creating more FSI through the TDR route.
If the government allows the housing bubble to grow until it bursts, it will cause widespread suicides, banking failures, business closures and unemployment. Under the circumstances, adopting a wait-and-watch attitude is immoral and dereliction of duty!
CONCLUSION: The government must step in and call a moratorium of further development for the next 4-5 years at least, and enable a gradual market correction to happen over the next few years.
Warm Regards,
Krish
9821588114
Mumbai
