India can learn much from China, including from its mistakes. One ready lesson comes courtesy China’s recent experience with real estate. Overcapacity in this sector has left ghost towns in interior China with unoccupied buildings. Galloping prices have left Beijing officials panicking.
Indians will be familiar with runaway housing prices, a constant worry for the middle class. By some indications, excess housing capacity should start being a cause for worry too.
Data from research firm Liases Foras, reported by The Indian Express on Wednesday, shows a market in Greater Mumbai where 96.3 million sq. ft of residential area is unsold as of June, nearly twice what it was two years ago. Anecdotal evidence suggests a similar glut in Pune, and perhaps also around Delhi.
Commercial real estate is worse. Liases Foras notes that last year, despite ready inventory at 148 million sq. ft in six major cities, only 16.8 million sq. ft was sold. So what factors have conspired to create such over-supply in a nation otherwise hungry for property?
Illustration: Jayachandran / Mint
First, real estate development in India is erratic. Sometimes, as Mint reported last month, builders announce projects but leave them unfinished, increasing the unsold inventory (property is bought or sold even before construction). Sometimes, as HDFC chairman Deepak Parekh has noted earlier, builders market too many projects at once, again leaving many unsold.
Second, special economic zones don’t help. We argued last year that these areas masquerade as China-type manufacturing centres and enjoy tax relief, all the while just selling, for instance, commercial real estate. This is artificial oversupply.
You would think that such oversupply would push prices down. But, third, it doesn’t seem to be. Builders could be blamed here for unfair pricing. But buyers have as much a role. With few assets yielding decent real returns, property is surely becoming a financial investment. When buyers speculate in their second houses, they push up the prices of, say, other units in the same building, squeezing out the marginal buyer.
More profoundly, the problem here is that India’s demand for real estate—as an investment or otherwise—is such that higher prices don’t appear to be deterring those who can afford it.
And therein lies the challenge for regulators. As much as they should inject transparency and regularity in real estate and stay vigilant over wanton borrowings in this sector, they should also enable supply to meet unmet demand in the longer term. That means, instead of an oligarch-infested market, India needs one with more builders competing to build more homes.
Otherwise, just as China now harshly clamps down on the market while encountering overheating, regulators will be forced to overreact.
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