MoneyVedam

The last decade (2003-2013) has been a one-off property boom era fueled by a high growth economy, excessive leveraging and rising income levels. However recent economic indicators are proving that growth is on the decline - Rupee is on a 20-year decline, inflation is not reigning in, manufacturing index (PMI) has been declining, FIIs exiting from stocks & debt markets and employees are being fired (but as a huge relief, agriculture is expected to produce better results this year!). Given this doom & gloom situation, one would expect property prices to decline as well - surprisingly they have not budged in, we are told that Realtors have deep pockets, so prices would not correct. But a quick check on the listed realty companies shows they are sitting on a mountain of debt & their stocks have lost up to 80% of their peak value. So, what is keeping the property prices up? Lets answer by looking at some of the key underlying factors. How is the real estate sector funded?

For a decade Indian real estate has boomed as a high profit business for builders, land-owners, land bankers/hoarders, real estate companies, foreign investors, property agents, speculative retail buyers, NRIs and numerous supporting businesses in the informal sector. This has led to a new breed of real estate millionaires and tycoons who profited largely from the property boom with very little capital in a short span of time taking away 100s if not 1000s of crores in profits. What happens on the ground? Property story in India is similar to its onion story. In the case of onions, the farmer gets a fixed price for his produce of Rs.8/Kg (includes Rs.3.6/Kg profit), which the middlemen and traders hoard, inflate and sell @Rs.70 to the average consumer in the vegetable market. Similarly, the original land owners (mostly agriculturalists) sell their land for a pittance to land bankers, who hoard and sell them to developers at anywhere between 10-60x depending on the time of their sale

Gone are the days when rising realty prices were the topic of any gathering (social/official). Today's topic is all about (un)affordability of homes and how owning a home has become a distant dream for a good majority of Indian urbanites. As for those who could still afford it, it comes with a 20-25 year EMI tag, enslaving them for the rest of their working life to pay up a huge liability. This was not the case even prior to 2007, so what has changed in the recent past to make homes so unaffordable? Let us look at the details. What is affordable? In economic terms, one practical way of measuring affordability is the income-to-property price ratio. A look at annual wage-to-land ratio and annual wage-to-apartment price ratio reveals the underlying problem of unaffordability.                         Wage-to-Land Ratio   Wage-to-Apartment Ratio Prior to 2000    2x                                3-5x Post 2000        7-9x                             7-9x Data is based on per c