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India and China: A tale of ghost towns in two gigantic countries

An empty office building in Midtown New York on January 26, 2021. - Boarded-up stores, shuttered restaurants and empty office towers: Covid-19 has turned New York's famous business districts into ghost towns, with companies scrambling to come up with ways to entice workers to return post-pandemic. (Photo by TIMOTHY A. CLARY / AFP) (AFP)
An empty office building in Midtown New York on January 26, 2021. - Boarded-up stores, shuttered restaurants and empty office towers: Covid-19 has turned New York's famous business districts into ghost towns, with companies scrambling to come up with ways to entice workers to return post-pandemic. (Photo by TIMOTHY A. CLARY / AFP) (AFP)

We too could use real estate to drive economic growth but not by building homes people can’t afford


The story of China’s ghost towns is pretty well known. Millions of apartments have been built, but no one lives in them.

Why is this the case? And can India learn from it? As Thomas Orlik writes in China: The Bubble That Never Pops: “For China’s government, real estate is the ballast that keeps the economic ship afloat." In slightly simplistic terms, this means that the Chinese government encourages building of more real estate, whenever there are chances of the Chinese economy slowing down.

Building of real estate leads to a lot of economic activity. Every apartment requires, cement, bricks, sand, steel, pipes, etc. It also requires people to take on home loans.

Also, real estate is one sector which can create a lot of semi-skilled and unskilled jobs, very quickly, thus help people move away from agriculture, which tends to employ more people than is economically feasible.

In many Chinese cities, thanks to overbuilding, demand for homes just hasn’t materialized. As Orlik writes: “As of the end of 2016, Luoyang, a town of 6.7 million, had 33.7 million square meters of residential property under construction—five square meters for every man, woman, and child in the town." This led to a huge debt overhang in the system with real estate developers borrowing a lot of money.

Also, it led to the more important question of how good an investment is if the asset being created is not being used. As Matthew C. Klein and Michael Pettis write in Trade Wars Are Class Wars: “Investments are worthwhile only if they satisfy unmet consumption needs."

Nevertheless, most of China’s ghost towns are in lower-tier cities and the prices in bigger cities continue to remain high. A 31 January Bloomberg news-report points out that home prices in Xiamen, a second-tier city in southern China, are comparable to those in London, while income-levels clearly aren’t.

India has its own set of ghost towns, the most famous being Greater Noida and if you look carefully, a large part of central Mumbai. But the numbers are nowhere as huge as China’s. We do have a problem of apartments which have been bought by speculators and continue to remain locked. Nobody knows how big this number is, though a 2015 estimate by a real estate consultant put it at a little over 10 million. Further, builders currently have close to a million homes lying unsold, though not all are fully finished, in some of India’s biggest cities.

Hence, as it was in the Chinese case, an investment which has created an asset that is not being consumed doesn’t help the economy in any way.

Given this, policy efforts need to be made to nudge landlords who have homes locked up to open and rent them out. Second, there is a lesson that we can take from the Chinese real estate experience: that a thriving real estate sector is essential for fast economic growth. Of course, China overdid it, but that shouldn’t stop us from trying.

The real estate sector in India has been stagnating for more than half a decade because home prices are way too high for most people wanting to buy a home to live in. Builders argue that the costs are such that they are not in a position to cut prices. Buyers, however, have largely stayed away. In other words, the market is stuck.

A recent research note by real estate consultant Knight Frank, taking into account property registration data, pointed out that in a 12-month period ending 28 January, over 42,800 homes priced at up to 1 crore each were sold in Mumbai.

Assuming a population of roughly 20 million and five people per household, Mumbai has about 4 million households. And only 42,800 homes priced at less than a crore have been sold in the course of a year.

This, in a city where 40-50% of the population stays in slums. Hence, the pricing of an average Mumbai apartment is all wrong. This is true of other Indian cities as well.

Imagine the potential if homes could profitably be sold in Indian cities in the range of 5-20 lakh. That would be real affordable housing and not the way as the Reserve Bank of India currently defines it. For that to happen, the cost of construction needs to come down.

A recent report by IIFL Securities pointed out that government-related charges (floor space index/premiums) form around 20-25% of any project’s cost, in case of redevelopment projects in Mumbai. Clearly, these charges need to come down in this city, as they do in other Indian cities. Further, work is needed on changing land usage norms.

What this also tells us is that not all economic reform can happen at the central government level, and much needs to be done by state governments as well. Ultimately, more economic activity in a state will help its government too.

Another factor holding back real estate is the cost of land. The central government can clearly help by selling excess land that it has for the cause of affordable housing.

Clearly, real estate as always has a lot of potential to create economic growth. But for that to happen, the current mess needs to be cleaned up first.

Vivek Kaul is the author of ‘Bad Money’.

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