Problems with out-of-sight properties

Investments are thought of as money working for you. But property investments may be one category where you end up working for the investment. Managing a property – from buying, maintaining and selling – can be a chore. More so if the property is located far away from where you live.

It is possible that you bought the property and moved to a different country or city; or you own an ancestral asset in your hometown; sometimes good opportunities come up in other cities and you may have invested in it for income or capital gains.

No matter how you ended up with ownership of a property far from where you live, it is essential to realize the problems it may come with. You can then decide if the asset is worth the hassles and if so, what help to take to manage these.

Regular expenses
Unlike financial assets, property ownership may entail active management and hence expenses. Taxes have to be paid to the local authorities periodically. If the property is a home, regular maintenance – painting, structural checks to verify there are no damages, plumbing related work to ensure there are no leaks or blocks in the system – are needed from time to time to maintain asset value.

Finding someone to handle these or taking time to travel, locating reliable local help to get these done can be a hassle for many home owners. It helps to take the help of professional agencies to supplement support from friends, relatives and neighbours.

Tenant troubles
Some of the problems in maintenance can be sorted easily if the home is rented out and the care is left in the hands of tenants. You can entrust the occupant to pay taxes and ensure good upkeep.

But having a tenant can cut both ways. Tenants themselves may raise many maintenance demands or increase the need for upkeep. For instance, a tenant may not be open to doing simple things such as fixing a faulty electrical outlet and demand your intervention, urgently. Or they may damage wood work and want you to remedy it. They may also create other disturbances and you may have to answer neighbours on the troubles and inconveniences created by your tenant.

Often, there is also a time factor constraint in getting fixes done. Broken water pipes cannot wait for few days that will take you to come to the site. So owners may find managing urgent fixes to be quite stressful. And when tenants refuse to pay their regularly, confronting them and ensuring payment is not easy remotely.

And when the tenant vacates, ensuring the house is handed over properly, cleaning up to make it ready for occupation, finding a new tenant and executing the rental agreement also require time and effort and often physical presence.

There are many professional agencies that can help with tenant management, starting from fixing up the house, tenant screening and ongoing support such as rent collection and regular checks while the house is rented. Fees may range upto 10 per cent of rent and extra charges for additional services.

Plot problems

If a home ownership comes with one set of problems, having a land comes with another. An unfenced plot can be a ripe target for encroachment. Fencing may still not eliminate risks if you don’t visit the site regularly. There are also taxes to pay to local authorities for the plot.

Another risk is Government take-over for infrastructure development. While there is not much one can do about this, handling the authorities remotely may not be easy. If there are legal disputes in the land that were missed during purchase, the pain of handling it may be worse when trying to handle it from a far away place.

Still, in spite of the many hassles, diversification beyond one’s place of residence does have its benefits. Buyers must however think through the likely problems based on the type, age and purpose of the property they want to won and put a plan in place to handle issues that may arise.

Should you invest in a tier-2 city property?

Metro cities such as Mumbai, National Capital Region (NCR), Bengaluru and Chennai account for the bulk of property transactions in both residential and commercial space. Larger markets account for three-fourth of all sales in the country. But smaller towns may offer some attractive and niche investment opportunities that differ from what you may get in metros. Investors who are interested in looking beyond big cities must weigh the pros and cons of small town property investments before taking the plunge.

The good
Infrastructure and job growth in smaller towns offer genuine opportunities for investments that many may not be aware of. For example, IT park development in Coimbatore boosted property prices. Likewise creation of industrial corridors may create new pockets of job growth, spurring property demand.

Property ticket sizes also tend to be smaller in tier-2/3 cities. This can make it an attractive choice for many investors who cannot afford to buy a property without a budget in crores. Home prices in prime neighbourhoods such as Banjara Hills in Hyderabad go for Rs 4,000 to 4,500 per sq ft, compared with over Rs 1 crore tag for a home that is under 1,000 sq ft and in an ok locality in Chennai.

Some locations may also offer niche prospects typically not available in cities. For example, a home in a hill-station town or a tourist spot such as Mysore or Goa may offer good income and price growth potential, driven by factors that differ from what helps price appreciation of a home in the suburb. These may be of interest to some investors and may offer good potential for savvy investors.

The bad
That said, the property markets in smaller towns are, well, small! There are not enough transactions and the market depth is low. As a result, liquidity may be poor. Prices may rise fast on low volume and when things turn for the worse, selling may turn out to be a challenge.

Job growth, which drives property prices, may not happen steadily in smaller cities. So the price appreciation or demand growth that one hoped for, may not pan out. This coupled with supply additions from larger projects that were possibly launched add to inventory that may create price pressure. Unlike large cities, even a few mid-sized projects with only add a few hundred homes each may lead to excess supply, as local demand tends to be typically low.

The choice
Small town investments offer different risk-reward profiles and may yield results in short or long term horizon. For example, currently prices in regions such as NCR are on a severe downtrend; but many smaller towns such as Vizag and Indore are witnessing robust market size growth. Sales volume in 19 tier-2 cities fell by 17 per cent in the last two years, half the fall witnessed in the top 14 tier-1 cities (32 per cent fall), as per a report from PropTiger.

When the property market was hot, there was a lot of investor interest in smaller towns. But when the tide turned, small town investors faced more pain than those who bet on metros. The risks tend to be higher as many towns rely on one or two sectors to drive demand. For instance, the change in oil fortunes in the middle-east impacts the property market in towns such as Kochi where there is a lot of money coming in from abroad. So you must assess the specific risk in a region before investing.

If you are from a small town area, you must be extra cautious to not let familiarity bias cloud your decision. You must separate the emotional attachment aspects from investment potential and assess the opportunity objectively. Buy a property only if it meets your goals of returns and time horizon of investment. Do not overlook risks since you have a comfort factors.

Small town properties can be an interesting opportunity to consider for many, but specific risks, growth drivers and local factors have to be evaluated to decide on the investment.

Three property risks beyond your control

Investment risks may give us jitters but they apply to all asset classes. As they say a butterfly fluttering its wings in China may set off a tornado elsewhere, sinking many a carefully-laid profit plan. Some risks are controllable to a lesser or larger degree but some are usually beyond the control of investors.

For example, when buying a property you can mitigate developer issues, legal problems and agreement trouble to a large extent through due diligence. But not all risks can be foreseen and even if it can be, prevented. This is true not just in property investments but in all asset classes. It is therefore important for investors to know some of the perils one may not have control over.

Government policy
Government, at various levels, can be a real wild card as their policies have a big impact on property investments. For example, a road project that would have greatly enhanced connectivity and boosted growth in a locality may be shelved or stalled when there is a change of power. A new project may be taken up and authorities may acquire land and want to demolish other property in an area. Owners may only get rates below the market rate and are forced to sell if they had intended it to hold it for the long term; worse, even these payments end up being stuck for years on end due to delays or litigations.

Policy changes may also play truant with investments. Adding extra layers of clearances in approval process or any ambiguities in a new procedure may lead to projects getting stuck with the local authorities. New objections may be raised on approvals already given, setting back the clock on completion and hand-over. Buyers and builders do not much recourse in these cases.

Macro changes
Events that impact the larger economy – nationally and globally – are another category of risk over which investors have no control. The global financial crisis sapped liquidity and changed central bank policies and economic growth trajectory globally for many years. The slowdown in China has affected commodity-centric economies around the world. In an inter-connected world, where money flows freely to pockets of opportunities and leaves quickly, sentiments shift suddenly.

There are also wars and acts of terrorism that de-stabilize growth plans. Civil wars and political unrest also create ripples that may take a while to settle. Currency fluctuations, global tax low changes such as FATCA and changes for BEPS also impact the performance of various assets.

While some events such as policy shifts may unfold slowly, most events are sudden but lead to large structural shifts that are long lasting. The collapse of the twin tower in the US in 20011 is one example of a black swan event that was hard to foresee and whose impact lingers for many years.

Natural calamity
Similar to man-made disasters, nature may also wreck havoc on carefully laid investment plans. The tsunami that hit Chennai dented buyer’s appetite for coastal properties for a few years. Cyclones such as Katrina that hit New Orleans, USA may shift property buyer interest from one area to another as their priorities change after the calamity.

While floods or likelihood of water shortage can be somewhat assessed, many others are not so easy to predict. For instance, many regions may be categorised as seismic zones with a risk of earthquake occurring; but no quakes may have happened for even a century. And just when we become complacent, nature may show who is in control. Insurance policies can help with a few situations to reduce loss but the financial damage in most catastrophes is to be borne by the buyers.

So, property buyers must be aware of the worst case situations by understanding the many risks that are beyond one’s sphere of control.

Three use-cases of Property Assets

People buy land or a home not just for their own use but as an investment quite often. In these cases, property is not a consumption purchase and must be seen as a part of a portfolio of assets. When building a portfolio, real estate as an asset class can be a very helpful tool that plays a pivotal role in meeting certain financial goals. Globally, property is an accepted asset class used by financial advisors to meet investment goals of their clients.

Here are three examples of how property investments can be thought of in your portfolio to help you reach certain financial needs.

Education goal

Young parents start to worry about their children’s education early on. The struggle and high fee to get admission to a pre-school makes them wonder about college expenses, given high inflation in education costs. For those with funds available now, buying a property and holding it till the child is ready for college can be one choice to consider for parents.

Land can be a good option to consider as it enables investing a smaller sum as well as a much large sum. You can also buy in smaller quantum and add to the overall portfolio over a few years, as and when you have funds. A home is also an option and rental income can be invested in a systematic investment plan to continue building the corpus towards meeting the education expenses in the future.

Given that property markets go through cycles and selling a property may take time, you can consider selling the property a years ahead of when the funds will be needed. Invest the money in liquid investments such as fixed deposits so that you are assured of having it handy for college admissions.

Retirement income
Property can be a good asset that can provide monthly income during your retirement. This is in spite of rental yields being quite low, only about 2-3 per cent of the property value.

For example, during your working years, you may be in a high tax bracket. You can take a loan for a home that is worth say Rs 30 lakh and avail tax benefits. A second home has no restriction on the amount of interest you can deduct and the expenses you incur on the home can be set off against the tax on rental income.

Say the house price appreciates over the years by say a nominal 5 per cent. In 8 years, you may have repaid the loan (average loan tenure tends to be 8 years) and the house is worth about Rs 45 lakh. At 2 % rental yield on Rs 45 lakh, you earn Rs 7,500 per month. This can cover 10-20% of your monthly expenses which may be in the range of Rs 40,000 to Rs 75,000.

Rents also typically keep pace with inflation. If inflation is 7 % rents would increase to Rs 10,000 in about 4 years and your expenses may be Rs 50,000 to Rs 1 lakh. Rents continue to contribute 10-20% of your monthly expenses. This can be quite helpful especially if other sources of your income – fixed annuities, fixed deposit interests or fixed pension – do not keep pace with inflation.

Asset for business
Property assets can also come in handy if you intend to take some loans in the future. For instance, say you want to start a business a few years down. You can buy a home and pay off the loan while you are earning a salary. When you start a business, this will ensure that you need not have to budget cash flows for your rent. Running a business creates severe cash flow issues as there is no steady income and avoiding one big need for monthly cash can be a great source of relief.

Also, a home is an asset against which you can take loans for your business. It is good collateral, against which many banks and financial institutions lend. The rate of interest on a loan against property, about 12% currently, is also much lower than other personal loans that may be charged over 14%. Unlike gold loan, where the collateral is physically in the possession of the banks you can continue to live in a pledged home and save on rent.

Cash in on low rates to buy a second home

In the last eight months, the RBI has cut policy rates (repo/reverse repo) by almost 150 basis points. But this is not all – interest rates are expected to fall further in the coming months.

As a country’s economy graduates from that of an under developed one to a matured one, interest rates are bound to fall. Sample this. According to data compiled by the RBI, the minimum lending rate at which commercial banks lend (including SBI) stood at 19 per cent in 1991-92. This has more than halved to 7.5-8 per cent by 2010-11. India’s nominal GDP which was $293 bn in 1991-92, is estimated to be around $2.4 trillion in 2015-16. With the economy expected to sustain healthy growth over the next few years, one can expect rates to only fall furthermore. If you are in the higher income bracket falling rate cycle is good for you, because a lower interest rate regime can help you save more. Here’s how.

Cheaper loans

With the RBI expected to progressively cut policy rates, banks will follow suit and lower their interest rate on loans. You can thus look forward to cheaper housing and other loans. This is a win-win because buying a second home in a falling rate cycle can help you save big money on the interest outgo besides availing tax benefit on the interest paid. Though lower interest rate, means lower tax benefit, it is still good for you because the actual saving on interest outgo is far higher than the tax break on your interest. Consider the example below.

If you plan to avail home loan of say Rs 60 lakh to buy a Rs 80 lakh worth property, at the current interest rate of say 10.5 per cent and assuming loan tenure of 15 years, you may end up paying Rs 59.4 lakh as interest over the loan period. You are paying twice the principal amount to close the loan.

Longer the loan tenure, higher is the interest outgo. Keeping the loan amount and interest rate constant, if you increase the tenure to 20 years, the interest outflow alone for the Rs 60 lakh loan works out to Rs 83.7 lakh. But the tax saving if you are in the upper end of the tax bracket will be 30% of the total interest outgo. That is, on a 20 year tenure loan the maximum that you can save on tax is Rs 25.11 lakh.

Now assuming that the interest rates gradually come down, and your effective interest rate reduces from 10.5 per cent to say 7.5 per cent, the interest paid is Rs 56 lakhs, a saving of Rs 27 lakh, plus any tax saving you can avail on this. So this is higher than the Rs 25.11 lakh that you will save on the tax outgo.

Other benefits

The property can also give you rental income. If your property is in a prime location, you can expect to receive a good sum as rental income. You will have to disclose the rental income for tax purpose and can claim tax exemption on the entire interest component of your equated monthly instalment.

Of course, given that rental yields today are at abysmally low levels, long term asset price appreciation and tax saving may be the main motivation to invest in real estate. A property typically appreciates over time, unless it was bought in a high during a bubble. And buying it on a loan would increase your return. For example, say a home priced at Rs 50 lakh appreciates by 5% a year for 3 years. If you only put in 20% as down payment, then your gain is 5 times. How so? The appreciation after three years will be Rs 7.9 lakh. If you only put in say Rs 10 lakh as down payment and even if you paid Rs 5 lakh as interest and principal, your return is upwards of 50%.

Three mistakes property buyers make

Buying a property is not easy, no matter what agents and real estate advertisements want us to believe. And buyers, especially first time buyers, make umpteen mistakes in the process. Rather than paying a high price for the learning process, a few simple steps can help buyers make a good purchase. The first step to learning is to know what the mistakes are and how to rectify it.

Bad advice
Promotions and opinions disguised as advice is rampant and we tend to go by into it. Imagine this. A medical student tells you a great story on how a complicated heart surgery can be performed. Would you trust him to do it for it? Would you take the advice of your car cleaning person to replace the engine? Hopefully you said no (if you said yes, I have a great scheme designed for gullible people. Please call me!). But we buy on advice from friends and relatives without doing our homework.

Misleading testimonials and anecdotal evidence are rife and often buyers are influenced by the images or promises. They do not dig for the truth as unbiased independent information is not readily available. Free advice is only worth what you pay for it.

So before buying, see advice from trusted sources on developer credentials, neighbourhood intelligence, project features, total all-inclusive costs and legal aspects. Talk with credible folks and seek data and the source of the information and avoid opinion based conclusions or gut feeling alone. The data you must go by should be based on your purpose in buying the asset – is it for a primary residence, rental property or an investment. The parameters you weigh would be different in these cases.

High expectations
Buyers get taken-in by grand visions of development that is projected to unfold and make the locality nothing short of heaven-on-earth. Above all, hope that the property will give double the investment return within a year or even six months, if lucky. Often these expectations are formed by anecdotal evidence from a friend-of-a-friend who made windfall gains with a ‘timely’ investment.

Sadly though, our stars are never that lucky. Investors are disappointed if price appreciates slowly and end-users are frustrated with lack of even basic amenities such as water and drainage even after a few years of moving into a new area. What about the highway project and the IT park development that was going to come up?

The fact is that given the way our governments (don’t) work, it is not wise to bet on immediate sure-fire growth, unless you want to speculate. It helps if you have a realistic assessment of when infrastructure projects may start and complete and the timeframe for the other growth drivers to play out.

Low diligence
Property owners may also get into trouble as they forget the simple warning – buyers beware. Misplaced trust – on intermediaries such as property agents and developers – can lead to a lot of pain. Hurrying into an agreement without thorough checks and not bothering to read the fine print often leads to regretting in leisure.
Legal checks on the property and ensuring the agreement is not one sided may seem like basic things buyers must do, but they often skip these and trust that other buyers would have done it. You can be the one-eyed person who wants to verify everything when others are being blindly trusting. Do not be naïve, it is ok to dig deep, ask a lot of questions to assure yourself that there are no legal issues in the purchase.

Knowing the common but critical mistakes in property purchase can make you aware of what you need to do and gain knowledge to do the right things. Property purchases are big ticket buys and it pays to be sure and not take any short-cuts.

Risks in Property Investments

Most people wish they had bought a home sooner or invested in a piece of land. Lately however the charm of property investments is waning due to three main reasons – low returns, illiquidity and completion risks. But the time tested rule in investing is that profits are made by being greedy when others are fearful. Property investors can make handsome gains amidst the current negative sentiments, if they know how to mitigate the risks.

Lowering delivery risks
Poor delivery track record and developer problems are risks that keep buyers from entering the market. In certain geographies such as the National Capital Region, delivery deadlines have been missed by over three years in many projects. Change in project specification, cost escalations and quality issues are other problems buyers had to deal with. These make buying a home, especially one that is under-construction, a risky proposition for many.

That said, the risks can be mitigated with due diligence and rating of developers. You must look at the developer’s credentials for on-time delivery, quality standards and process, customer satisfaction and financial strength to determine the likelihood of on-time delivery to the specifications given. Experts can also help you with the evaluation and rating process so that it is objective and based on data.

Liquidity issues
Property investments, due to large ticket size, uniqueness which makes comparison difficult as well as high transaction costs, are typically illiquid. But when there is good demand in the locality, solid developer credentials that makes the project a sought-after one and reasonable price expectation, illiquidity is no more a worry.

For instance, large plots or high priced homes may take a while to sell, but mid-income homes from a good developer in a well connected locality may not pose such problems at the time of selling. These may have a wider base of buyers and may be sold relatively quickly. The homework you do before a purchase – on the neighbourhood, project features; relative pricing of the property; demand and price growth aided by job growth in the area – would ensure that the property is easily saleable at or above market prices.

Ensuring returns
All these factors also contribute to price appreciation and return on your investment. Take the case of social infrastructure development. Schools, hospitals and shopping areas coming up in a place and connectivity improving over time will create demand for the property and lift prices. Job growth is a key driver of property prices and it helps to keep a watch on which companies are moving into the neighbourhood.

Usually good developers do their homework and perform a thorough analysis of these aspects before launching their project. They ensure that there will be enough demand for their project and price appreciation also happens as the development progresses. They also look at the master city development plan of local authorities and tend to be in the know of where expansions are planned and start a project based on this intelligence. You can look at the developer’s track record of location and project feature choices from their earlier projects to assess their skills and success on these aspects.

For sure, property investment, similar to any other asset class, has its share of risks. But risks are an inherent part of the system and gains can be made by knowing them and finding ways to reducing it through knowledge and expertise. This can enable earning profits over the long-term.

The Psychology behind Property Investments

In a world of multiple investment choices, ever wonder why the old asset class of property continues to be a popular choice globally? The answer may lie in the nature of property as an asset class and psychology of investors.

The problems in property assets are well known – illiquidity, lack of information, high transaction costs – to name a few. These may well be the reasons that make it a good choice in the eyes of many. Property is easier to hold over the long-term because of how the human mind works.

Long-term value
If you look at the key secret that successful investors such as Warren Buffet share, it is quite simple – do not be carried away by short term sentiments. One must keep their eye on the long-term intrinsic value and ignore the cyclical fluctuations that kindle fear or greed in our mind.

This overarchingly simple lesson is however difficult to follow. Humans are, by nature, short-term focused, possibly being trained from pre-historic times to worry about the next meal and not far beyond. The immediate pain also usually over-rides considerations of future benefits.

To illustrate, consider you have a corpus of Rs 50 lakh and you buy stocks for Rs 50,000 (1% of your funds). The stock loses 20% in a short period, setting you back by Rs 10,000. When the stock price rebounds and your portfolio is worth Rs 50,000, it is likely that you are tempted to close your position. The loss aversion feeling is more acute if the investment amount is a larger share of your total portfolio or the dip was higher than 20 per cent or the period of paper-loss was longer. Just seeing the portfolio in the red day after day makes you want to avoid this pain. And in the process we may forget the long-term value of holding-on.

Curse of liquidity
Liquidity is generally a benefit in investments as you can exit a position quickly. Investments such as stocks and mutual funds have their prices updated daily as it is traded actively in the market. This constant price movement can also be a source of discomfort due to information availability.

Seasoned investors are able to ignore the manic-depressive tendencies of the market and focus on long-term value. But many of us are not blessed with such intelligence-filters and hence worry about volatility.

Less is more
One way to avoid over-reactions is to not check portfolio value often. Property markets interestingly offer this filter automatically. Prices are not flashed across our screens all day long. Price data is available based on transactions and is made available maybe only every quarter or so. Also each property is unique and the quoted price may not be indicative of the price for your specific property. For example, the rate per sq ft in a locality would be different between projects based on amenities, in the same project depending on the size, location and customizations.

Selling a property is also not instantaneous. Finding the price, a buyer and going through the process involves time and some amount of effort. And if the market is soft, there may be even more delays and price discovery may be an iterative process.

While the lack of price discovery and possible illiquidity is a problem for efficient market operation in general, it has its benefits. One, owners do not panic as much and get in and out of investments. Two, property is out of sight and hence tends to be out of your mind. Three, even if a price is given, due to the uniqueness of each property, investors are able to filter out information as it may not be indicative of what they would get. These help them to hold on, while the same investor may have sold out of stocks or bonds.

To build wealth, investors have to create a portfolio with many asset classes. The assets must have different risk, return and time horizon characteristics. And property investments differ from stocks and bonds and other alternate assets such as gold, making it an important tool in diversification and long-term wealth creation.

Bring down Property Prices, says Governor Rajan

Bring down property prices, says Governor Rajan

He is perhaps the only governor of the Reserve Bank of India with the looks of a rock-star. Flamboyant and fearless, he is today known amongst school kids as well, given the way he makes his presence felt. The IIT-IIM alumnus, Raghuram Rajan, who had the audience eating from his hands, with his dosanomics that gave a new spin to economics has something to say about realty prices.
In the last 18-months the RBI has lowered interest rates by 150 basis points and it today sits at 6.5 percent. This drop is to encourage consumers to purchase homes and revive the falling real estate sector.
Earlier, Rajan had asked realty developers to bring down prices instead of piling up inventory. With property prices soaring up, the demand is trailing supply. People will get to invest if prices stabilise.
On their part real estate developers have asked for reducing the interest rate on home loans to encourage real estate business grow to which the governor responded saying he does not want to inflate the property prices by a cut in the interest rate of home loans. In vintage Rajan-style, he crunched the discussion with numbers. As of June 2015, home loans disposed of grew by 15.6 percent to Rs.6, 53,400 crores as against the previous year when it by 17.1 percent to Rs 5,65,000 crores. In contrast, the overall lending by banks grew by 12.8 percent in June 2014 and 7.3 percent in June 2015. His argument: the overall credit growth crashed with a brisk increase in home loans.
He further added that home loans given amount to 12.7 percent and 12.2 percent of the total loans in 2014 and 2013 respectively. The increase in home loans has not lead to a decrease in the stock of unsold homes. This shows that the growth in property prices plays the dominant role in unsold home stock.
Rajan sternly believes the central bank can identify a bubble while his US counterpart Alan Greenspan held bubbles are perceptible only after the fact. Rajan says the surging property prices are a bubble, and it needs to fall for the people to buy homes.
Knight Frank India, a real estate consultancy firm, argue that developers cannot drop down prices since the input costs, including the cost of land, have gone up significantly.

Recently Rajan again appealed to real estate developers to adjust property prices. He stressed there should be more transparency on land acquisition, construction, and sales, adding the building of houses and roads is a sign of growth for a developing economy like India.
Rajan cautioned that while there is a difference in how market and developer view the prices, it the situation continues, the real estate sector will be in a holy mess, as buyers will stay away, and sellers will pile stocks. Hence, the best solution will be to reduce the home prices for the market to function. QED.

Time to focus on Rental Housing

Harvard researchers predict that over the next ten years, India can become the world’s fastest growing economy. The real estate sector, the highest job-creating sector after agriculture, has a significant role to play. The government can chip in with the role of an enabler.
Alas, it hasn’t worked that way.
Poorly formulated housing policies can trigger an economic and financial crisis. So, what we need are good policies to support growth in long-term living standards and strengthen macroeconomic stability. Here are a few things the government can do.
The government should intervene in housing markets to ensure equitable access to housing. These interventions could include fiscal measures such as taxes and subsidies, the direct provision of social housing, and various regulations influencing the quantity, quality, and price of houses.
These policies will impact the overall economic performance and living standards, in that they can influence how households use their savings as well as residential and labour mobility which is crucial for reallocating workers to new jobs and geographical areas.
Remember, adequately supervised financial and mortgage market development, combined with policies that enhance housing-supply flexibility, are key for macroeconomic stability.
In a country like India where there is continuous growing population, there is tremendous pressure on the housing markets. The rental property market is the only available option for most people who migrate into a city either for employment or for nurturing their careers.
There is always a demand for rental housing regardless of how the home sales market is performing. This is because rental housing has a positive impact on the development of a city.
Focus on infrastructure and land acquisition
Infrastructure in many Indian cities is inadequate to meet the growing needs of its population. Many people do not move into houses they bought because of lack of amenities like shopping markets, good roads, hospitals, etc. in that area. If there is greater investment in infrastructure in areas that need such facilities, it will lead to opening up of more of the urban landscape for development. This will make housing less expensive, and more people will be able to live away from their employment centres.
But, constraints in the Land Acquisition Act has made things difficult. Thereby real estate development has become expensive. Developers getting entangled in legal battles over land is par for the course. Historically, the world over, when construction becomes expensive, people begin to live in informal settlements aka slums. Data show that nearly 17 percent of India’s population live in slums.
When the title to property is not clear, you don’t have an incentive to invest in improving the housing standards. It also freezes valuable urban land. If the government can legalise these settlements, the informal economy could be brought under the ambit of formal law. This will lead to redevelopment of many households. Here affordable housing could act as a preventive for such unorganized growth.
Innovations in mortgage markets should be coupled with appropriate regulatory oversight and prudent banking regulations. This would increase access to credit and lower the cost of housing finance.
Eleven percent of the entire housing stock is in the rental market. Since 1961, the fraction of the houses in the rental market had declined by over 70 percent in cities like Mumbai. The reason was that rent controls were not eased while allowing for the development of buildings by raising the floor space index (FSI). As most households with low-income levels cannot afford to buy houses, the function of the rental housing market is of great importance. FSI is an important factor in the housing market. Restrictions in this regard prevent redevelopment of old buildings.
Another interesting fact is that rental properties come with variation in budget sizes. The higher one’s budget was, there was scope to get a better place regarding location or size, accompanied with amenities. These ranged from single family homes to high-end multi-bedroom apartments. Rental housing catered to a whole spectrum of income groups.
Developing cities see migration from the hinterlands. We must develop the suburbs and surrounding spaces to meet this demand. This ensures that the wheels of the economy are sufficiently oiled and pulled by the cogwheels called rental housing. Otherwise, we would be staring at a major man-made crisis.