“Man…I should have purchased a house ten years back when property was cheap and affordable” This is an oft repeated statement of one of my friends. Please note that he had made the same statement even ten years back.

Homes, the largest investment in ones lifetime, always appears cheaper in the hindsight. And despite the hype surrounding ‘Affordable Housing’ in social media and in political discourses, the terms ‘affordable’ and ‘housing’ still remain what a North Indian would say, “chhattees ka aankda” ( the twain that never see eye to eye). What seems affordable does not appear to be a house and vice versa.

Most discussions end up holding expensive land, fat margins of developers and builder-politician nexus as the key reasons responsible for high home prices in India. Superficially, it may be true but the real reasons are much deeper. These reasons range from consumer psychology to historical mindsets in taxation and from inertia of beneficial interests to acts of citizens. A micro-analysis of these factors shows why the affordable housing issue is much more abstruse than commonly understood.

1. Historical legacy dictating fiscal policy

Historically, taxing land and land transactions meant:

• taxing the rich ; as land was then typically owned by zamindars and other rich people
• low cost of collection ; large tax could be collected from a few transactions
• easy traceability compared to other trades ; as other trade transactions were poorly reported

Things have now changed considerably. Majority home buyers are from middle/lower classes so land taxes hurts them the most. Technology has now enabled Low-cost tax collection even from micro-transactions across businesses and also Enhanced transparent reporting across trade transactions. Thus, there is a huge scope for reducing the dependency on land-based taxes. But still home buyers till end up contributing large sums towards Govt revenues.

VAT, Service Tax, Stamp Duty, Labour Cess, Development Charges, Municipal Premiums, Soil Extraction Royalty et al. You name it and the tax is there. All taxes put together take the govt’s share from sale of new homes to as high as 25%, thus ensuring a wide gap remains between ‘housing’ and ‘affordability’.

2. Beneficial interest in rising home prices outnumber home buyers

Rising home prices are considered a sign of growing economy. They also ensure larger revenues for government. Banks experience higher quality of bank’s existing home mortgages. Home owners too are happy when their asset values rise.

With so much at stake for rising home prices, inertial forces would normally work towards northward movement of ‘home prices’ keeping ‘affordability’ at bay.

3. Consumer psychology widens demand supply gap

Acquisition of property in India is considered a symbol of achievement and success. It makes buyers feel that they have arrived in life. Thus, we have drivers of demand beyond the consumption demand.

In addition, such psychological factors also curtail supply. In India, ‘Sale of property’ is often perceived as signalling ‘a need for money’. No one wants to be seen in the society as “a person selling his property”. A sale decision has to pass through multiple psychological tests. Perceived hassles of buying another property from sale proceeds (to save tax or otherwise) adds another blockade before the property is in the market for sale. Once the property is up for sale, owners have a resistance in selling below an expected return on their ‘cost of acquisition’. As a result, we see a supply that is not only restricted but also quoting higher prices resulting in monotonously upward movement of prices. This historical upward movement of prices has made property an attractive asset class for investment. Thus, creating another driver for demand of properties.

Stock market, the other popular asset class for investment, shows a very different behaviour. Unlike the stigma associated with sale of properties, sale of shares is looked upon as ‘Profit Booking’ and is celebrated. Also SELL call on stocks from experts is based not on its ‘cost of acquisition’ but on the future performance of the stock. Such rationality results in prices moving in both directions. Majority of investors loathe volatility, therefore a big investment demand gets diverted to properties.

With such non-consumption demand drivers for properties coupled with psychological barriers restricting supply of properties, we have an ideal condition where prices keep ‘housing’ away from ‘affordability’

4. Citizens through their act make homes expensive

“Land in India is expensive” …….. a partly correct observation.

“Clear title land in India is scarce”…… a statement displaying ground reality.

Over two crore property related cases are pending in various courts across India. Over and above, land parcels are locked in indecision or non-court disputes like Joint Family, tenant-landlord, encroachments etc. Insufficient judicial capacity is definitely a big cause for scarcity of clear title lands but there are human issues too. Majority of the properties situated at preferred locations have multiple ownership structure (joint family, tenants, co-owners, encroachers, etc.). Since even a single co-owner can veto such transactions, multiple decision-making results in long settlement time and hence high cost of acquisition. While we Indians might complain about high home prices but as sellers/co-owners/tenants settling for anything less than market price appears to challenge our fundamental rights.

So if land transactions for clear title happen only at market price (which by definition is unaffordable), can home prices ever be close to affordable?

Human psychology, historical mindsets in fiscal policy, beneficial interests et al., such diverse reasoning means that if ‘affordability’ and ‘housing’ have to come together, a lot needs to be done by the government, by the citizens and by our thought-process. Till such time ‘affordability’ would only mean ‘housing’ at a distant urban location.

Deepesh Salgia, Director Shapoorji Pallonji Real Estate