Elections can’t do much for real estate
While there is no direct correlation, the limited upside may result from general euphoria
Elections as a five-yearly obsession that hold the promise of sea changes in the fortune of the country have often driven drawing room conversations. And one cannot but resist the urge to link everything to the outcome of elections. One wonders about the seemingly apparent connection that fails to stand the test of time, that of elections to real estate prices.
Within a margin of 10%, all statistics show a clear demand-supply mismatch for the housing sector. The pent up demand of over 20 million households coupled with rapid urbanization that add upwards of 300,000 to 500,000 units to the demand roster is in itself abundant explanation of this chasm. While it is true that people tend to delay their decisions in anticipation of changes, elections often promise to be one such change agent; life, however, gets back to usual within six months or so of conclusion of such events. Hence, short-term blips aside, there often is no long-term effect of elections on the behaviour of real estate markets.
The demand-supply chasm relies heavily on the pricing to convert to sales given the glass ceiling in terms of affordability across lower- to middle-income groups. The root of this limitation on affordability springs from the fact that essentially we are a capital deficient country. Our middle class, which is the primary driver of real estate demand in most urban centres, mostly survives on the export-oriented services industry. One way that these industries manage to remain competitive in the marketplace is by keeping a tight leash on manpower costs. This makes a large cross section of employees naturally constricted in terms of earning levels and as a direct fallout, lack of affordability renders bulk of demand unattended.
Here again, easing supply through better infrastructure, be it road connectivity or mass transit projects or releasing more city-based land or enhancing potential to build more per acre of available land (also called floor space index) for mass housing projects, creating incentives for developing civic infrastructure including schools and hospitals, and so on could bear fruit. This, unfortunately again, is not linked to the elections process at the Centre thereby rendering little or no impact on the segment.
Historically, real estate hysteria tends to lag stock market hysteria by two-three quarters. It is believed that a buoyant or surging stock market tends to fuel real estate since most investors park their profit bookings in the sector as a safe, inflation-beating haven. It is true that stock markets do get driven by market sentiments, which, in turn, get largely affected by election results, especially if a particular outcome could fuel the bulls in the trade. However, the residual impact it has on real estate itself is increasingly limited as only the domestic investor has the option to channelize her gains into real estate. And the fact is that bulk of the market is now controlled by institutional or international operators who either cannot or do not fancy this diversification plan.
A pro-active government contributes to real estate growth, it is true. However, such contributions tend to be in the form of easing approval processes and providing concessions to certain segments of the industry which need boosting. However, land being a state subject, these are often the prerogative of state governments, hence can be both disparate and unequal across cities. Limited role of the central government in providing a boost to the sector, if at all, can be in the form of tax incentives for the end-users. Apart from this, all other key drivers rest either with the central bank, which so far has and hopefully will act independent of the government, or as stated earlier, state governments. Till now, the federal fabric has not yet reached that level of maturity in our country to allow pro-active central-state government interactions.
It is fabled that elections suck out money from the real estate sector. Often, post-elections, this money finds its way back to the sector and thereby creates an illusion of euphoria. Not to get into debating the merits of this statement, from an end-use perspective, it would be safe to assume that such money, if and where it exists, would find a haven in land and not in completed or even under-construction housing units.
Increasingly, end-users are relying on mortgages to make their purchase. The diffusion of end-buyers creates a robust retail market unlike the market for land purchases, which is controlled by large land aggregators or developers. While the latter may possibly have a correlation to elections, the former is often a function of markets with little correlation to elections.
Hence, while there is no direct correlation of elections on the real estate sector, the limited upside in the short run may result from general euphoria which unleashes fence sitters to culminate their buying decisions thereby resulting in a short-term run in the sale velocity or price graph. The party, however, pretty much ends there.
Jasmeet Chhabra is principal, Red Fort Capital Advisors Pvt. Ltd.
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Business NewsOpinionElections can’t do much for real estate
First Published:12 May 2014, 08:11 PM IST
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