Relief package will worsen housing woes
A medium-scale builder of Ghaziabad explained the dynamics of the housing sector.
A medium-scale builder of Ghaziabad explained the dynamics of the housing sector. He had purchased a plot for Rs 300 crore to build a housing society of 1,500 flats. He planned to sell the flats for Rs 1 crore each, or for a total Rs 1,500 crore.
He sold flats worth Rs 1,200 crore out of these before demonetisation. He used one-half of this money, that is, Rs 600 crore, for building the project; and used the remaining Rs 600 crores to buy land for his next project.
This was the "standard" practice used by him successfully for the previous two decades. The formula was to use the profit part of the proceeds from the current project for funding the next project. The catch was only of timing.
The investment in the new project was done upfront while the existing project was completed "as you go," or as he was able to sell the flats. He committed no crime.
Now came the crisis born of demonetisation. The requirement for completing the project was Rs 900 crore. He could sell flats and raise only Rs 600 crore before demonetisation hit the market.
He could not sell the remaining flats. In this situation, both his projects — the existing and the proposed — got stuck.
The existing project got stuck because the property prices had fallen, he was not able to sell the remaining flats and not able to raise the required Rs 300 crores to complete the project.
Then came RERA. The buyers approached the RERA and a case was filed against him. He got enmeshed in litigation and project remained far from completion. His future project for which he had purchased land for Rs 600 crore also got stuck.
The price of the flats had declined, he could not sell the flats at a price at which the project could be completed. The project had become unviable. His investment got stuck.
The builder did not do any wrong. His "mistake" was only that he used the receipts from sales for buying land for the new project upfront. That being so, now the die has been cast.
The "mistake" has been made. How to solve this?
The government has made a scheme to help the stalled projects like this by providing them concessional funding of Rs 25,000 crore.
This builder, for example, needed Rs 300 crore to complete the project. The government would provide this amount. The builder could complete the project with this money. The buyers would get the flats and the government's aim to provide affordable housing to all will be secured.
But, in the same breath, the supply of unsold flats in the market will increase. The 300 unsold flats that are completed with government assistance will now be put on the block for sale. Analysts believe that about 13 lakh housing units are already lying unsold in the market.
These 300 flats will be added to this unsold inventory. If the entire amount of Rs 25,000 crore is used to complete the stalled projects, another 25,000 housing units will be added to the unsold inventory.
The price of the unsold housing units will decline further due to this increased supply. This will lead to more problems for the builders. The objective of the scheme was to revive the housing sector.
Though a number of buyers will get the flats; the impact on the housing sector will be the opposite. Increased supply will add to the unsold inventory, to a decline in the price, and make builders wary of starting new projects.
The government must consider reworking the implementation scheme under RERA. The main problem today is that if a builder does not complete the project on time and the buyers create a dispute, then the matter goes to the courts and gets stuck there.
During this time, both the builder and buyer bear the interest burden on their investment. Here we must take a lesson from China.
An Indian businessman having investments in China narrated this story. The land on which a factory stood had to be acquired for a highway project. The businessman received a notice to remove his factory within six months.
Then came a team of government officials. The businessman, in this case, said that he would have to incur an additional expenditure of 30 percent over the money received as compensation to reestablish his factory elsewhere.
The officials increased the compensation by 40 percent on the spot. They took 10 percent of this as bribes. This was beneficial for all. The businessman was happy because he got the 30 percent extra compensation that he needed to reestablish his factory.
The officials were happy because they got bribes. The economy was happy because the production continued seamlessly. This shows that the Chinese bureaucracy is perhaps as corrupt as our own but there is a critical difference.
The Indian officials would march into his office with a warrant of arrest and take bribes for not arresting him—leaving the problem of shifting the factory unsolved. The Chinese officials took bribes for helping relocate the factory.
Coming back to our Ghaziabad builder. The fact is that the property prices have declined and the builder, the banks and the buyers are all losing money. The dispute is that each party wants his own money to remain intact and the others to bear the burden. The government must determine this sharing of the losses.
It must establish a "Settlement Commission." It should arrange a meeting of the builder, the banks and the buyers. The officials should decide across the table the amount of hit to be taken by each party then and there. This will truly resolve the problems of the project.
Giving loans under the proposed scheme will solve nothing because each party would still want to recover his full money when the price of the property has declined.
The problem of unsold inventory will also get worse by the addition of completed flats to the unsold inventory.
This problem cannot be solved by tinkering within the housing sector just as the problem of a malnourished poor man cannot be solved by tinkering with his meager food basket.
The need is to generate demand for housing. The root cause of the decline in demand is the policy of the government to promote large-scale production. This is mostly undertaken by automatic machines.
Less employment is generated. Small industries remain in problems. The need is to provide protection to small industries so that employment and demand for housing is generated. Only then the housing sector will revive along with rest of the economy.
(The writer is formerly Professor of Economics at IIM, Bengaluru)