The Indian real estate market has witnessed an astronomical surge in housing prices over the past three decades, outpacing income growth by a factor of three, according to a recent study. While per capita incomes recorded a five-fold increase, property prices skyrocketed by a whopping 15 times.
The study reveals that housing in India is more than twice as expensive as it should be, with a price-to-income ratio (PTI) of 11. This PTI is significantly higher than that of developed countries like the USA, Australia, and Germany, but comparable to developing nations like Bangladesh. In fact, India's PTI is relatively lower compared to Sri Lanka (26.3 PTI) and China (29.1 PTI).
However, the study argues that the rise in property prices is not abnormal and can be compared to the increase in gold prices at 9.2% and lower than the Sensex at 13.5% over the same 30-year period.
The transparency of the real estate industry, including regulatory and legal frameworks, plays a crucial role in driving housing prices. The study highlights that countries with transparent real estate industries tend to have lower PTIs compared to countries with more opaque real estate sectors.
India has made significant improvements in the real estate sector in the Asia Pacific (APAC) region in recent years. Reforms such as the digitization of land records through the Digital India Land Record Modernization Program and the implementation of the Real Estate (Regulation and Development) Act have contributed to India being recognized as the "best improver" in the region.
However, the study identifies the lack of credible and rigorous land use planning and implementation as a major factor limiting land supply, thus boosting housing prices. Shockingly, only 28% of Indian cities have approved master plans, making financing difficult and raising uncertainty about whether the city will develop as planned or not.
Furthermore, the opacity of the real estate sector hampers competition and restricts the entry of new players, leading to low supply. This enables developers to inflate prices due to the imbalance between demand and supply.
The study emphasizes the need for policy reforms that focus on releasing land supply in a transparent manner through credible and rigorous land use planning and implementation. This, in turn, would encourage the entry of new real estate developers and promote healthy competition, ultimately resulting in a decline in property prices.
The study, conducted by Shishir Gupta, Nandini Agnihotri, and Annie George, utilized anonymized transaction-level mortgage data from the Housing Development Finance Corporation Limited (HDFC), one of India's largest housing finance companies. The data exclusively considered properties listed as flats or apartments due to the availability of price per square foot measurements.
The 2011 Census also highlights the demand-supply mismatch in India's housing market. The number of vacant houses in India was a staggering 2.47 crore, which constitutes 90% of the number of rented houses in the country. The proportionate increase in vacant houses between 2001 and 2011 far surpassed the increase in occupied houses.
In conclusion, the study's authors recommend policy reforms focused on transparent land use planning and implementation to address the demand-supply mismatch and curb soaring property prices. These reforms would not only reduce housing costs but also stimulate GDP growth and create non-farm employment opportunities. It is imperative for the Indian real estate industry to undergo significant transformation to achieve sustainable and affordable housing for all.