Thursday, July 10, 2014

Affordable housing, reality or bubble?

Low cost or affordable housing is one of the major problems in India. Even for engineers, doctors and other professionals may find difficulty in buying a house even after working for a decade. Yet housing sector is one of the favourite sectors for our policy makers. When there was dot com bubble burst in the starting of the previous decade US responded by energising the housing sector. This created another bubble called housing bubble which eventually, led to the global economic crisis in 2008.

Nevertheless, our case is different from that of US. In US there were a large number of ‘abandoned’ houses which is not likely to happen here, in India. The problem for housing sector in India other than the tax laws etc is the rent seeking attitude. In tier II and tier III cities the cost of land is exceptionally high. I really could not comprehend why the cost of flats in cities like Lucknow is very high. The problem is investing in flats and land has altogether become a big business. People book their flats during construction and sell it at a higher margin as soon as the flat is ready. These people earn a lot and hence, more and more people are attracted towards these businesses. As a result people tend to invest less in manufacturing as they can gain huge money at low risk in the housing sector.

These have a cascading effect even in the small towns where people are not interested in micro or cottage industry. Even in villages buying and selling land has become a major occupation. But apart from these let’s talk about the input cost other than the land. To reduce the cost of houses we have to look at the supply side problem. To solve this we need to reduce the cost of manufacturing which in turn brings us to the raw material cost. This brings me to my parent industry i.e steel. Now steel cement and bricks are the basic raw material. We export iron ore to China and buy rods from them! PSU should be made as model for producing low cost rods; other steps can be providing captive mines to the steel industry.

But after checking supply side economics, the road ahead for the government should be to do something to dismantle the business of buying and selling flats. Let the person in need buy it. One thing can be done is restricting the person who buys a flat to not to sell it within 10-15 years. You can only take loans on it and only banks can auction it in case of non-payment. The same thing should be done with buying and selling of lands. These steps can reduce the cost of flats even in the present market. Moreover it will help in checking the black money which is invested mostly in real estate.

Another spill over effect of these would be reduction in demand of luxury items. Most of the less hard earned money is spent in this sector. Hence, people will be forced to deposit it in bank thereby increasing the gross domestic savings which in turn means more money for investment. Huge investment means good manufacturing and good manufacturing will lead to a better and stable macro-economic parameter of India.

P.S. Its Nikola Tesla birthday, the person who electrified the modern world!