The wrong real estate economics
Feb 28, 2024
Lands and developed real estate units are not commodities though they are treated as commodities. The mistaken consideration has its long-term risks also. Lands are for shelter, farming, and creating a suitable living ecosystem, which are civilisational requirements of human beings. When lands become the domain of the mafia and people have settled their lives well under a desirable environment, the so-called mafia will have to live with the burden of over-supply! Their holding cost is running high.
Once, the property was a parking place for people who made huge money in a short period and those who had in their hands a staggering amount of money. No one formally disclosed the exact value of the sale-purchase deal. Too many of the deals took place under benami. Now, the rules are tight and tax-efficient.
Besides these, the mandatory documents required for registering the deal create headaches for new buyers and sellers. Somehow, the demands plummeted sharply, and hasty sellers found no one good buyer even at half the pre-demonetisation price. After the Covid-19-induced economic downturn, the demand decelerated further. The demand decline and the hush money hunt by the government rendered a combined shock in the property market, where many are waiting to sell at any price the buyer quotes.
These days, liquidation of the investment is not very easy without getting the source of the money under the new regime. Genuine buyers, mainly the self-made middle class with no inheritance of lands, have enough choice and space for a killing bargain. When the land registration department fixed a fair value to boost the government revenue, seemingly to partake in the fortune of investors, investment in the land became a disappointment. The government takes away its share in the deal without considering profit and loss in the hands of buyers and sellers. If the seller makes a profit, the tax department comes into the picture and determines its share.
Land is an asset with too many informal and unwarrantable valuation methods. The hush money of politicians and unaccounted money of many people untraceably occupied the property market. In the same market, hard-earned NRIs also have built a stake. While the investments flowed into the land parcels in rural areas, the same went into residential and commercial properties in the urban areas. In the urban markets, properties are the parking places of hush money that came back into India through various offshore routes. The mandatory linking of property details with aadhar numbers enables the government to trace the actual property owners, thanks to the tiresome integration of land registration departments. The tax department already has a technology architecture to infallibly trace the transaction and record even the last rupee the seller gets.
Real estate property became an investable asset after people began to park their surplus income in lands and real estate units. Strangely, those who invest in the lands do not look at the productive resources of the land or the real estate unit but future price appreciation. Earlier considerations of location advantages are now irrelevant as cities expand and business centres get disengaged. Still, investors always maintain a blind expectation of price appreciation and make a killing at some point. Middle-class investors, while investing their surplus, expect a regular rental income after retirement to support their lives.
Sometimes, no expectations work out because of imprudent economic calculations on two fundamental human necessities. The market considers land as a tradable commodity. Land is a place for shelter, farming, and building a sustainable living ecosystem, which are unavoidable civilisational needs of human beings.
Price fluctuation depending on demand-supply is inherent in every trading system. The price fluctuation is more natural in commodities, whose production is variable and weather-dependent while the demand is invariable. When the production falls below the demand, the prices go up. But in the case of land, which if we consider a tradable unit, where is the question of supply variability unless the buyers hold on to their units to artificially rig up the value? Artificial mechanisms can collapse under their weight. That is what perhaps we see in the drastic demand decline, plummeting land prices, and artificially supported urban real estate prices.
SAJIKUMAR
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