We know that graft (boodle, pay-offs, corruption) raises prices for the final consumer. There are enough studies out there that prove it and give numbers for it. And if you pay 50 paise more every time you cross a toll bridge that may or may not be the cost of graft, you are unlikely to really worry given that urban mass affluent lives are torn apart by work, family and the fight to maintain the urban bubble existence—the presentation is due tomorrow. Shoot, I forgot that new water bill. The kid has a sports day coming up. The inverter needs a new battery. And that darn storm water drain is overflowing again. But the one time the cost of graft (or boodle as it was called in turn of the 20th century New York, when the US looked pretty much like India does today…but that is another story) hurts is in a real estate deal.
Moderating a Mint event on real estate last week, the conversation among the panellists was a mix of the real estate bigger picture, where India and Indians are being held hostage by institutionalized corruption, and individual stories on how this translates into a hard knock for each of us in our urban lives. Each person had a story to share. Distilling the conversation and the debate, I found that individual costs come in three ways. One, an overall cost escalation due to cheap money bidding up prices. Two, a choice starvation. Three, an honesty tax. Brokers and those in the real estate business talk of the slush funds from the Commonwealth Games being one of the pushes for the real estate price escalation that Delhi National Capital Region saw over the last 12 months where prices are up around 30-40%. Mumbai and Delhi real estate look to be the soaking grounds for slush funds from deals, projects, mines and other on-sale national assets. While investments in the stock market with such funds has a much higher transaction cost (it has to round-trip abroad and then there is the pesky regulator), real estate happily falls between the Centre-state cracks. More importantly, it is in nobody’s interest to solve this tangle to get in greater transparency. For example, it would take a simple exercise to find out a single “white only” deal (yes, there are still some that happen that way) to expose the ridiculously low-circle rates and show that most second sales in residential real estate (that makes up around 70% of the real estate market in terms of value) deals have a 60-70% cash component. How difficult is it for the government to ask how one house has got sold for Rs1 crore and another, next to it, for Rs30 lakh in terms of the registered value? Cheap money makes housing unaffordable for the average urban citizen who does not have a straw in the slush pool. Graft leaves the average citizen priced out of the market.
For those who are willing to pay the higher prices and have the resources to do so, the dark side of real estate now imposes the second cost: choice. Cheque-only “white” deals are almost impossible to get. Out of 50 calls to brokers, just two may yield a full-cheque deal—the rest want up to 60-70% in currency notes. The lack of deals in the market costs in terms of choice. Location, amenities and timing—white-only buyers must compromise on all these as they are backed into a corner with limited choice. They must buy what they get. Or move to the suburbs for a first deal with the builder. Even then, they have to be really quick—the brokers-builder handshake ensures that by the time the ads and the SMSes begin to come, the first sale has already happened.
Negotiate with the above two and then comes the hardest slap. The honesty tax. The salary-linked-equated monthly instalment loan person who is hawking his freedom to being a salary slip slave for the next 20 years to buy through a cheque (he has no money in cash to give and is unwilling to convert white to black) is told by the seller that he must pay the seller’s capital gains tax for the cheque-only deal to work! I can still hear the indignation of the storyteller on this last insult. “I am the honest guy here and I am being told to pay his capital gains tax. Unbelievable!” Higher prices, choice-starvation, push to the suburbs and the honesty tax—all make renting looks smarter than buying.
Way out? Nothing tomorrow or the day after. But if the current stirring of the great Indian ability to digest anything catches momentum, change will come. But we must all hope for a process that makes the changeover institutional rather than through lynch mobs. Revolutionary sharp shifts in a country this size mostly lead to bloodshed.
To read all of Monika Halan’s earlier columns, go to www.livemint.com/expenseaccount
Monika Halan works in the area of financial literacy and financial intermediation policy, and is a certified financial planner. She is editor, Mint Money, and can be reached at firstname.lastname@example.org