How many Mercedes can you sell in the land of Marutis?
Not every one understands the dynamics of real estate and why the market is down. So let us understand the scenario in the real estate sector vis-a-vis the auto industry. Why is the real estate sector facing a slowdown in India while the auto sector is doing fine? If people are buying cars and bikes, why are they not buying houses and preferring to stay on rent?
In most of the developed countries, people own houses and cars are taken on long-term rent or, as they prefer to say, lease. So why shouldn’t the same scenario be in India, especially considering that a house (or any property you buy) is an appreciating asset (well, most of the times!) and vehicles are a highly depreciating asset, with most experts considering the value of a vehicle equivalent to nil after 8 years?
The very first thing you learn in economics is demand and supply. When the demand is high and the supply is low, the market goes up and vice versa. There is a lot of demand for housing in our growing economy. At the moment, approximately 32 per cent of the Indian population stays in urban areas. This figure is said to go up to 45 per cent by the year 2030, with 13 per cent of the young and growing population shifting to urban areas. Therefore, the demand for housing is expected to remain quite high in next 15 years. When we consider 13 per cent of Indian population, we are talking big numbers. That is more people than 226 countries individually and only 7 countries in the world have more population than 13 per cent of Indian population.
With such big numbers, the effects can be seen in the auto industry. India is said to become the 4th largest auto market in the world in 2017 as per IHK Market, a London-based consultancy firm. The Indian two-wheeler market has overtaken China’s and is now ranked one in the world. But at the same time, the real estate market in India is going through one of the worst phases it has seen in many decades.
The reason of disparity between the auto market and the real estate market is quite simple: there is a high quality car or bike for every segment in the auto sector, but the same is not true for the real estate sector. A good quality house is considered a luxury item in India. We need to understand that housing is a basic necessity of living and not a luxury item.
This is where the problem lies for real estate.
The supply of quality affordable housing has been very low or limited in India. Most of the private housing companies have focused on high-end luxury properties and have got good results until recently. The demand of luxury or high-end housing was always there. Along with the demand of end-use, HNIs and NRIs who bought these properties in multiple numbers used them to park their funds. Housing in India became more of an investment option than necessity. This in return gave huge profits to builders and their focus was to construct a more luxurious and expensive housing society than they did ever before. The dependency on this superficial demand and not the actual demand of end-use is what got this sector to a point where it is today.
The government, until recently, has not done enough to promote the actual real estate segment of affordable housing where there is still a lot of demand for end-use. There has been a limited release of inventory by the government authorities for affordable housing and the sale of the same was done mostly through lottery system and the inventory was, at times, less than 10 per cent of the actual demand. This further left a majority of population to settle in the big cities in kacha houses and colonies without the support of basic amenities. Therefore, it is imperative that the authorities come up with schemes to provide housing to all as it is a necessity and not a luxury that you can win by lottery.
With the launch of initiatives like 100 new Smart City projects, Housing for All by 2022, Pradhan Mantri Awas Yojana and various affordable housing schemes by many state governments, there can be some tailwind for the sector if they are implemented efficiently and the supply of the property is generated as per the actual end-use demand.
Government should promote affordable housing in India as it did when it tied up with Suzuki to bring affordable personal transport in the eighties to bring the legendary Maruti 800. Thereafter the Indian auto industry never looked back.