Real estate: Economic de-growth and unaffordable housing
Moneylife Digital Team 08 August 2012

Lack of sales and the piling up of inventory has led to a decline in construction which is affecting economic growth of the country, said Pankaj Kapoor. Speculation had driven up real estate prices, which make real estate unaffordable for the consumer

Speaking at the 124th event conducted by Moneylife Foundation, this time on the “Maharashtra Housing (Regulation & Development) Bill, 2012”, Pankaj Kapoor, managing director of realty research firm Liases Foras, spoke on the current real estate market scenario and if there would be and further correction in real estate prices.
“The inventory is huge and sales are not going up,” said Mr Kapoor. He pointed out that since March 2010 the inventory in terms of area developed has been on a rise while sales have remained stagnant. The inventory has gone up from 80 million square feet to 131 million square feet from March 2010 to June 2012. Sales per month in the same period have gone down from 12 million square feet to 10 million square feet. Majority of the sales have happened at a particular level and a demand shift has not taken place.
Surprisingly, despite sluggish sales, realty prices have been going up as well which is due to speculation. The pace of construction pace is coming down which will have an impact on the whole economy. The cement industry and the steel industry, which are dependant on the construction sector, would be badly hit as well and this would hamper the GDP growth of the country, he pointed out. The construction pace in the Mumbai Metropolitan Region has fallen by nearly 52% from the second half of 2009 to the first half of 2012.
Looking at the inflation adjusted price index and the interest adjusted income index, which shows whether real estate prices are affordable the current income level, Mr Kapoor showed that the gap between the two has been increasing. “The way the prices are going up, people are unable to afford homes,” he said. Even if interest rates come down the prices would have to undergo a 32% correction to reach parity and create an economic balance for the real estate sector and this looks very difficult.
The government has been looking to create affordable housing but has failed to do it, and prices have gone up further. A lot of money in the sector was brought in on the pretext of creating affordable housing. But a lot of this money has increased speculation due to which the land prices have gone up and have created an asset bubble. Developers do not want to cut down on their profits, investors want their own share of the cake and at the end of it the consumer has to bear the brunt by paying higher prices, Kapoor pointed out.
Taking a longer view of the market, corrections started taking place when the value went up and were much higher than the market productivity. This led to the acceptance of very high valued securities and a greater exposure to risk. Correction will come through a combination of time and price. Black money will act as a buffer to price correction, he lamented. 
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