Is there any great logic to real estate prices or is it just the land, builders and the bank mafia that is responsible for keeping the prices high?
Well let us look at the irrationality.
Ahmedabad offers land, people and electricity (the needs for a BPO) at 50% of the prices in Malad or Goregaon. However there are more back offices in Malad and Goregaon than in Ahmedabad.
Bangalore has more high paying jobs than Chennai, but Chennai real estate prices are at least 50% higher than Bengaluru.
Navi Mumbai has power cuts for 4 hours a day (many parts) but the great Maharashtra government will not allow Tata Power to supply or distribute power in Navi Mumbai.
Infrastructure in Mumbai has not kept pace at all- but prices in Ghatkopar, Santacruz, Malabar Hill, — hardly matters which part have gone through the roof. In the UK the cost of a house is about 3.4 times the 'average income' — let us say the 'average income' in Mumbai is Rs. 5 lakhs (not sure if I am right)…so the cost of a house should be Rs. 15 — 20 lakhs! It is about Rs. 1 crore. When will we stop pretending that 'all is well'.
The real estate mafia in Mumbai (including some very respectable names) has kept the prices so high that it is not possible to buy without mortgaging at least 20 years of your life to the loan repayment!! If you see what the supply of office premises has done to Mumbai is that the rental market esp for office space has remained constant or people have got better quality of office for a slightly higher rent. However the rental market for residential houses is not so efficient.
If rents are not going up, but property values are going up, it is a good sign of a bubble. And like in any bubble, do not go short, just stay away!!
The author P V Subramanyam is a Chartered Accountant by qualification and a financial trainer by profession. Writing being a passion he also regularly pens his thought in his blog Subramoney.com
25 comments
VINEET 1 hour ago Report AbuseThe government dosen't regulate this market because all the money the politians and beaurecrats earn (I mean, actually earn, i.e. the "under the table" stuff, their official salary being just entertainment allowance) ultimately does not end up in Swiss Bank accounts these days. After 9/11, when these guys realised that the corruption money (that these jokers claim by right) they used to stash abroad would start getting traced by agencies out of their control, they started dumping almost all of it in the real estate market. (Hence the absurd CAGR's in the land market post 9/11). The people of choice they give their money in confidence to, are builders and real estate agents who generally promise "good" rates of return to their "akkas"(lords). The entire country is seeing land cartels/mafias jacking up land prices beyond control or economic logic. Land prices should reflect economics but in our country it's a science of it's own. The indicators actually tell of a system dangerously out of natural bounds and constraints and actually foretelling a colossal failure of the entire economic system.
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Land is an ultimate resource in short supply.
What we see are politicians and beaureucrats hoarding land to make senseless returns on colossal ill gotten gains. In countless cases, mafia has cheated owners and taken over land at laughable prices.
If the government so wants it can easily control this market. By appointing a fair, indepedent, autonomous regulator whose job it would be to be regulating the market in a transparent manner. People wanting to see their land should be allowed only to sell to the regulator which buys it at prices linked to an electronic market, much like the share market these days. All land that is available should be listed on the market and any person who needs land can only officialy buy from the regulator. The desirious buyer would bid online for the land they require. It will create an independent transparent market mechanism and ultimatley take care of a lot of issues including the huge problem that is "black money".
A key point of this system would be creating an electronic registry of land records with all land owners providing their UID's. No UID = no registry and after allowing a reasonable time, land without a linked UID could be declared "benami" land and taken over for reuse by the regulator. Another key change that this UID linked system can effect is that anyone in access of ownership of certain amount of land is obviously very rich and can therefore be made subject to the maximum taxation rate. Since the land rates will reflect market conditions, the problem of municipal councils not having enough revenue can be tackled too. Municipal tax rates can be linked to actual market prices then. Another problem of not enough rental property in the market can be tackled by taxing rich people two or three times the going municipal rates on excess property that they keep vacant and not give out on rent. It will bring about a huge transparency, end up rationalising land prices, shut down land hoarding, free up land supply thereby providing fair market price linked rentals and take care of a huge contributor of the "Black Money" problem.
Well of course we know such an independent system is never ever going to be implemented in this country as the people who will be effected most by it are the rich and the most powerful in the country.
All this manipulation of land prices puts a colossal financial burden on the ordinary people of this country.
IT is equivalent to a huge unfair tax on people who can least afford it.
I guess - WInston Churchill was right "Give Indians the right to Govern and Tax and one day they will tax the air".- Deepesh 1 hour ago Report Abuse
Now a days analysts will tweak the record in such a way their statements are reaching as they expect... Do you realy think India has land scarcity
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Real estate is reaching new heights because of fools and wifes(!no explanation needed). What ever the price they quote people dont bother to go out to market and do research.
Why real estate price in chennai are high 50% bomb blasts are minimal and it will became like London in 5 yrs multiple airports and flying train will soon roam.. You will find enough takers for statements like this
However things are changing a bit as their is no easy money anymore - Krishan 1 hour ago Report Abuse
In european and especially in USA ,the builder has to pool its resources first to build houses and thereafter on completion of his project can sell properties to general public and that is the reason housing is affordable.Whereas in our country there are innumberable nomenclature-pre laun ch booking/l
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aunch booking and it does not end there ,on comletion it is CLP/FLEXI/Down payment etc. - Puneet S 2 hours ago Report Abuse
property is much cheaper in dubai as compared to ludhiana....leave delhi and mumbai........
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i was reading an article a few days back where they mentioned that in india we have failed to create affordable and practical housing. even flats/apartments built 20 kms away from main cities are costing so much.....without any reason......god knows what is happening - Gav 2 hours ago Report Abuse
The comparison done above between average price in Mumbai and UK is incorrect. UK consists of 4 countries, which are England, Scotland, Wales & Northern Ireland. However compression is done between a city and Country, if we find out the price of average house in India then it might be way below 3.4times of the annual salary. Similarly it is impossible to fine a house or even a 1BHK flat in London(which is part of UK) which can be bought at 3.4times of annual salary. Hence this scenario is always there in big cities.
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Thus I would like to conclude findings by Mr P V Subramanyam are highly misleading or proper research has not been done before putting this on web. - KUMARAPPAN 2 hours ago Report Abuse
I wish to add a saying that" over priced markets could continue to stay over priced and under quoted markets remain under quoted " until the last bull or bear changes his view.Then a rerating takes place .and everything is reversed.The viewS about realty are that HNI's continue to speculate as they put in money which is not required for a longtime.This is opposed to a stock market where some people punt for short term gains.If you do have a largish capital then investing patiently in avenues like debt products ( risk averse investor) and in Blue chip equity ( more risk taking investor) yields the same return. over a longer period.You can sleep in peace as you know its very liquid should you need them.
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A friend of mine whose ancestral property was bought at Rs 500/= in 1939 was sold at 4 crores and was very happy.You would be amazed to know that it has yielded only 16% Compounded Annual return(CAGR).POWER OF COMPOUNDING AT WORK !!!! Thanks to the fact that the property has appreciated over 100% in the last 7 years
The moral is not to punt on real estate but to plod along religiously in avenues of investment which are more liquid.The services of a Financial planner would be of immense help( But BE SURE TO PAY HIM FOR HIS SERVICES) - YAHOO NEVER DISPLAYS ME 2 hours ago Report Abuse
well said subbu . yes there seems to be no control on these real estate guys . no govt gets involved into helping the middle class to own a house at affordable price. ( like you said in the uk ) the govt loves to make money in chennai on wine shps bringing them under govt control and make a lot of money but when it comes to selling of homes and residencial shelters for the middle and lower classes the govt leaves it to these agents who sell at very unreasonable prices . equally the banks loans out money at abnormal rates and make the salaried people pay all their life . why not the govt take over the real estate and housing projects like the wine shops and sell them at affordable prices.. no govt ever thinks of good things like that.
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on the other hand , the house owners rent out their property at abnormal rents and keep increasing every year . next is the abnormal advance money for rentalls . 10 months , 15 months and the poor middle class never gets a chance to settle in a own home all their life. just think of their plight after retirement . son says no as the land lord said no to old people . the daughter is scared to take old parents because the in-laws may be against or parents dont like . where will the old ones go . all thir lives they worked , educated the children with the small earnings . the prices just go up and up , taxes go up and up and finally they are left with nothing during the @#$% end of lives. should all this also be thaught about mr, subbu ?? please think . i am writing all this as i found your topic and writing very reasonable. may be my points can spice you up . god bless. me too subbu - Sureshkant 2 hours ago Report Abuse
Sir, There is a nexus between builders, banks and politicians to exploit the common class people, otherwise why builder are not obeying Government directive to sell house on carpet area basis.
Replies (2) - Sanjeev 2 hours ago Report Abuse
Sir
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One of the factor which determines the price is 'Demand'. In mumbai demand is much more than the availability of houses. Therefore common man is not able to afford to purchase a house in Prime Areas of the country. Recently a news paper has published percentage wise cost of a house which showed that only 35 per cent is actual construction cost and rest is going to officials involved, underworld etc. This position may not change in a short duration, hence no question of bursting a bubble. Those who can afford and will be able to manage to purchase a property should go ahed as soon as possible, otherwise they will miss the opportunity.
Sanjeev - Anand 2 hours ago Report Abuse
Cost of Land and the cost of material and its variations in different locations are determinants in the final prices. Demand and supply adds to the determinants again. All other factors although applies but are negligible.
- Keerthi 2 hours ago Report Abuse
In the Real Estate business the Black Money will play more.Real Estate Agents knows Know the pulse of seller and buyer accordingly they fix the price for seller and buyer, the over and above the different price they will pocket the money and again the seller wanted to dual price one for real sale and registraion sale and buyer has to arrange cash for one amount and other registration purpose, like many types of business will happen.Again some states made cumpulsory of registraion for realEstate Agents but it is not in practice.But Govt.Has failed to safe guard the interest of public.
Reply - A Yahoo! User 3 hours ago Report Abuse
This article may be partially correct in such way about the land mafia.
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But comparing UK and India is not a correct way as population in UK is less so land availability is more. Whereas in India it is a different case. So 4 times 5 times average income calculation may not be a correct one. - Anil 3 hours ago Report Abuse
well researched article.i am a real estate agent myself from chandigarh.prices are unfair everywhere due to land mafia.this land mafia consists of corrupt politicians, beauraucrats,financiers,builders and dealers also are a part of it.real estate prices wont come down unless black money which this mafia has is snatched from their hands.genuine buyers who need houses suffer due to this mafia.they are made to pay higher and unfair prices due to this mafia.
Reply - Vaseem 4 hours ago Report Abuse
In chennai the land prices are very high. Even small land in slum areas are in crores which is absurd and totally unaffordable. On top of it bad roads, power cuts, no water supply, land grabbing, fake documents are added concerns. I think very soon people will start buying in singapore and dubai instead of chennai
Replies (1) - MADHAVAN 4 hours ago Report Abuse
I doubt chennai real estate prices are 50 % higher than Bangalore/ What is the basis of such an estimate?
Replies (2) - Sujeet Kalantre 4 hours ago Report Abuse
Much of the market is speculative (just like the shares i mean..),so the real user is largely not the purchaser.More clearly if prices of land and real estate do not go up people would stop buying.banks should have a more active role in giving away small loans liberally so that the prices come in check.
Reply - Shank 4 hours ago Report Abuse
What could bring a change here? Real Estate is one of the gold mines of all beaurocrats and politicians in the country. The rate of tax charged for buying a property is kept on a higher side by the all possible elements who can tax us. This forces each and every one to buy or sell at a lower valuation in paper. Are we a sinner according to Income tax rules if we buy a house or a land. Yes we are. The paper documents which is still in demand is never going to change. There is no proper track on who hold which and what in any of the government offices. They dont even have a proper track on the government property or they don't want to have one. According to me the situation changes once government do a proper track of the ownership of property and get the valuations of each and every plot on board. A government who does census of 100 crore population, should not consider this as a mammoth task. Remove the cash transactions and make banks come to picture. Reduce the taxes and make people to register the property at the actual price. Put across a proper regulator and pricing mechanism in each locality. If these things are not put in place soon, sure owning a house will become a distant dream of every one.
Reply - Raj Kalate 5 hours ago Report Abuse
Sir,
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as per your perception all builders, land owners, banks and financial institutions are mafia. I think you are burning wet alongwith dry. There may be some people who are doing such malpractices but not all. As we know the price of anything whether its a commodity, services, land, etc etc. depends upon the demand for that particular thing in the market. eg. we can not compare the population of mumbai and ahmedabad, Mumbai is commercial capital as well as a cosmopolitan city so the demand for anything in mumbai will always be higher than that of ahmedabad. So, IT IS JUST THE DEMAND AND SUPLLY WHICH WORKS.......Thank you - Chandra 5 hours ago Report Abuse
Most of the Real Estate mafia in Chennai are the Politicians(Ruling or Against), I feel very bad after seeing this article that Chennai is 50% more expensive in real Estate when compare to Bangalore. FYI my pay is 1.8 Lakhs/Month and I am not afford to buy a house in Chennai may be I will get 100 KM away from the city not sure...even in towns and villages in Tamil Nadu the prices gone very high equal to city rural areas...for each and everything there is a limit, I think we will end up in a situation like US economy fall.
Reply- Mukesh 5 hours ago Report Abuse
politicians & mafias have parked their money in to industry so no demand & supply or annual income principle work here
Reply - Satish Mahajan 5 hours ago Report Abuse
A thought provoking article! Let us hope for the betterment of the current situation.
Reply - Shanmugavel 5 hours ago Report Abuse
It's a valid point not only to Mumbai but to all parts of the country. Will it be addressed? Question remains to be answered for a long time.
Reply - Murali G Kagita 7 hours ago Report Abuse
I would like say tanx for this article. but who will take action or agitation on obnormal issues. I think government won't take decision if will take decision it will support to mafia only i am sure......
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