The general belief is that with houses getting more affordable, a larger share of population will be able to buy homes, resulting in a better quality of life for the citizens. While this argument is correct, it is not without a fallacy. The fallacy lies in the fact that this logic only looks at interest of future home buyers. It neglects the interest of citizens who already own real estate.
Besides impacting existing owners of real estate, falling home prices will also hurt interests of banks and housing finance companies (HFCs) as the value of underlying assets they hold shall come down, affecting their asset coverage ratios. Falling asset prices also create a disincentive for home buyers to repay their loans. Defaulting then becomes an easier option for many borrowers. Large number of defaults reduce the chances of recovery for banks and HFCs. Along with them, the government is another important loser — as falling home prices reduce revenues in the form of GST and stamp duty.
Another impacted segment would be redevelopment of old properties. Lower property rates would mean lower profits for developers undertaking redevelopment of old buildings. Developers would accordingly offer lower areas to tenants in rehabilitation projects. This will result in resistance from tenants resulting in fewer redevelopment projects taking off, thus forcing tenants to continue staying in old, dilapidated buildings.
So, while lower home prices is a good emotional wish and an excellent political argument, the same comes with its own baggage of problems. Declining property prices is, therefore, an extremely complex situation, the impact of which is difficult to fathom.
Myth Series: What is its purpose?
While real estate is among the fastest growing businesses in India, it rarely finds respectable space in curriculums of business schools. Also, there are hardly any case studies available to explain the intricacies of the sector.
For these reasons, many facts and theories floating about real estate follow a ‘common sense-ical logic’. Unfortunately, many of these are misconceptions, myths or even downright false.
The purpose of this series, therefore, is to take one real estate myth in each blog and provide insights on the real issues.