Clean up housing sector mess

Drive past any major road in Mumbai and it is impossible to miss the empty shells that stand where apartments, often of the luxury variety, were meant to come up long ago. The story is reflected across many cities of India. So we did not need official figures to tell us that there is a crisis brewing in the sector. If there was still any doubt, the recent collapse in the National Capital Region of Jaypee Infratech, which left some 32,000 people in the lurch with no signs of either the promised house or getting back their life savings invested in the property, told us that the problem has reached “main-street”. People have eventually had to come to the roads to protest. In cities like Mumbai, there are many who have experienced, seen or heard of individuals caught in lone ranger battles, with nowhere to go and no means to hold the builder to the promised delivery of a flat duly booked and paid well in advance.

RERA has now brought us dismal data that indicates just what kind of a mess the sector is in. An estimated 3.5 lakh houses out of the total of 6.7 lakh registered as under-construction in the Mumbai Metropolitan Region (MMR) with the RERA authorities are unsold, constituting an unsold inventory of 52 per cent. The figures have been collated and analysed by the global property consultant Cushman & Wakefield and real estate data analytics firm Propstack in a joint report. As many as 43 per cent of the projects have been delayed by up to three years, and another 14 per cent are delayed for periods of three years and higher.

One can only imagine how bad the situation could be in other markets. Yet, it is ironic that this high inventory is not reflected in a lower street price of new homes, suggesting that the elementary rules of economics apparently do not apply to the housing market. Indeed, the numbers come alongside reports that prices have been “largely stable” though the momentum of new project launches has slowed in the MMR region.

Even today, many suggest that the asking price from the builders left with ‘unsolds’ is (artificially held) steady and some are working almost like cartels to hold on to high-cost inventory rather than see the prices slide to their natural level to enable sales. This happens even as such firms are holding on to bank funds and probably contributing to NPAs in the system. An analysis of how many banks are financing this ride to doom would be interesting, scarring both our city skyline and the national bottom line.

The incongruity, it can be argued, is partly the result of costs spiraling out of control when overleveraged companies see their projects delayed (which is pointer to the way business is conducted in the sector) and partly because builders are deliberately going slow in the hope of a turnaround in the market and the return of happy times when prices seemingly bounced higher on thin air. In fact, this has been a sector that has attracted many with the hope (and realisation) of windfall gains and no trick has been left unused by (most of the) builders to milk the market.

There was a time in the not-too-distant past when all kinds of wheeler-dealers entered the market, became builders almost overnight and took on funds, got projects, collected money and left or sold off to another midway. As long as sentiment was good and the prices moved up, it was a sector everybody wanted a slice of.

This is not to suggest that the bigger construction companies are necessarily different, as is being argued from many platforms these days. In many cases, they too have got away with grave violations and often worked on the premise that anything goes if only you can manage the authorities and the end user has no one to turn to.

So while RERA is one of the biggest and positive regulatory changes we have seen in recent times, this does not mean that all will be well just because a law has been brought in. It also does not mean, as is being suggested, that the small will disappear and the big will thrive. Many big names in the business will also disappear, as indeed they should, because they, too, have lived wildly and cannot work with a RERA-like regulation.  So buyers must continue to beware and the government must get on with the task of regulation, if need be a heavy-handed one.

The Housing Minister noted last week that “we are still witnessing the final phase of a cleaning up process involving the misdemeanors of a few who tarnished the image of the many developers who were genuine in their dealings.”

But this is sadly not the final stage of a clean-up. Nor is it correct to say that we have only had “misdemeanors” by a few. The rot has spread too far and too wide. And this is just the beginning of the clean-up. To enforce the legislation in the manner it ought to be will not be easy, given that builder groups are already raising questions and lobbying for relaxations.  Let us not forget that the law came in because we had thugs ruling the system. And they will not leave in a hurry till the government stands firm and comes down heavily on those who cheat the ordinary citizen of India.

At the same time, there is a case for active intervention in the market to ensure that prices reflect a market reality. Even an advanced economy like Germany does so.  An old report once explained: “In the German system, moreover, house-builders rarely accumulate the huge large land banks that are such a dangerous distraction for U.S. house-builders…German house-builders just focus on building good-quality homes cheaply, secure in the knowledge that additional land will become available at reasonable cost when needed.”