The real estate craze has crossed all reasonable limits. Irrational exuberance has driven people crazy and taken home prices to ridiculous levels. These days, it is quite normal to talk of a couple of crores of rupees for a small duplex bungalow or a three bedroom apartment in Hyderabad. What this means is that places like US and Australia have become more attractive places to invest!
Surely, we are heading for a big shakeout. I mean these purchases are obviously funded by loans. And if people are going to take a home loan of Rs 80 lakhs say, they will have to shell out close to Rs 80,000 per month. How many can afford that?
Too much is being made out of the IT industry boom. These people make up only a miniscule portion of the population. And not all people in the IT industry are earning the huge salaries that can support such big loan repayments. And if the industry slows down a little as it happened in 2001, there could be major social upheavals.
People also seem to be smug in their belief that real estate prices can only go one way, ie up. This is a completely wrong assumption. What goes up can come down. Real estate is no exception. Today demand is more in relation to supply. But as smaller towns grow in stature and the demand supply equation in today's metros changes, real estate prices will fall.
But the government should not stand a passive spectator. It should jump in quickly, raise interest rates and cool down the real estate market. Better regulations are also needed. Residential areas should be kept away for the office districts to insulate home prices from avoidable shocks. Too often we have heard in the recent past, an IT company announcing the establishment of a development centre and land prices in the area immediately shoot up.By building good roads and reducing commuting time, people will be encouraged to travel longer distances. In places like the US, this is quite common. You don't find people owning homes in business districts.
A strong public debate is also needed. Ultimately, a house is not about investing and making money. It is about creating a shelter for our old age. If people think that real estate is the best investment oppportunity going around, there is something seriously wrong. For real estate does not add any value for the economy as a whole. It is essentially a zero sum game. It only redistributes income. By bringing back interest rates to the levels of the mid-1990s, the government can ensure that pensioners of the earlier (my father's) generation will benefit even as home prices come down. These people toiled their whole lives for their organisation without being driven by greed. If something good happens to them, I am all for it. And I think the society too would be happy . Only a few real estate speculators may not like it. But who cares?
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