Buying a home in India is a nerve-wracking experience. Not just because they're so expensive, compared to average incomes, nor just because the paperwork is onerous, or because many of us dread being told to make a portion of the payment in cash, but also because there's always the chance that at the end of it all one winds up without a house at all.
The Supreme Court's unusually furious broadside against the real estate company Amrapali - "you are perfect liars", the judges declared, and "the worst kind of cheaters in the world" - gives voice to this, one of the greatest fears of the Indian middle class. Tens of thousands of flats - 42,000, according to most reports - were due to be built by the company, but the home-buyers in question haven't seen them yet. According to the group of home-buyers who petitioned the courts, the company has made off with Rs 3,000 crore of other people's money. The court has not pronounced on this matter yet, but somehow I think that the judges are not likely to look favourably on a company that they have already labelled as the worst cheaters in the world.
This is the trap that Indian real estate has found itself in: many tens of thousands of people have already bought flats; many of the companies that they gave the money to are effectively bankrupt. But a sector dominated by companies with such dodgy balance sheets is incapable of building any more. The government is faced with a choice: should it help make things easier for the companies that nobody trusts? Or should it abandon them to their fates, knowing that this means that many home-buyers will never see their houses, and that there will be a long and painful period of adjustment before new companies start building again to serve another set of home-buyers?
And there's another trap too. Everyone knows that hundreds of thousands of flats are lying empty in India's metros. Here are the numbers from this year's Economic Survey: half a million empty houses in Mumbai, 300,000 in Delhi and in Bangalore. A full quarter of houses in Gurgaon lie vacant. Some of these are houses bought by speculators that they are unwilling to sell on unless they make enough money on the deal. Others have been bought and should be put out to rent - except India's property laws are so renter-friendly that people are unwilling to do so. But a large section have never even been sold in the first place.
Why should houses not be sold when there are so many families looking for a place to buy? Well, for one, the prices being asked for these houses are too high. But basic economics of supply and demand suggests that then the price should fall so that more of those houses get bought. The problem is that the moment a company drops the price of one of its houses by the amount needed to actually sell it, it reveals that the value that it has given its housing stock on its books is completely imaginary. And then the builder itself looks a lot less valuable - a particular problem if it also has a lot of debt. If a company starts selling what it has at a rational price, then it will look even more bankrupt than it did earlier.
The government has done a bunch of things recently to try and make the real estate market become cleaner and more efficient. One of those was the passage of the Real Estate (Regulation and Development) Act of 2016 - commonly abbreviated as RERA. This was pretty home-owner-friendly regulation. But it had two problems. The first was that every state that used the law made arbitrary changes to the rules governing its application - and so the RERA in Maharashtra is not the same as the RERA in Karnataka. Many of the changes diluted the homeowner-friendliness of the original law.
The second problem emerged when the government also passed the Insolvency and Bankruptcy Code, or IBC. Now the insolvency code is a major reform, which allows sick companies to be wound up or revived effectively, and lets banks recover as much of their bad loans to these companies as they can. But nobody seemed to give any thought to how the two new laws - the IBC and the RERA - would fit together. This led to an entire set of problems. Technically, it meant that a bankrupt real estate company would have to prefer banks - as "financial creditors" - to their home-buyers, who would be treated as "unsecured creditors". When the company was being wound up, the financial creditors would be first in line to get their share - and home-buyers would be the last priority.
Naturally, this infuriated many home-buyers, which challenged the dissolution of one company - Jaypee Infratech - in the courts. The Amrapali case that so infuriated the judges was also born of similar circumstances, after the Bank of Baroda dragged the company to the National Company Law Tribunal under the IBC and then home-owners went to the Supreme Court in fear that their rights would be overlooked. This confusion got so great that eventually the government had to amend the IBC by passing an ordinance in defence of home-buyers' rights.
But, in actual fact, that attempt to protect home-buyers might make things worse. Now it is banks that are furious, because they may not get as much of their money back - which means in turn they will be reluctant to lend to real estate companies in the future, and fewer houses will get built because of this shortage of credit. But as Finance Minister Arun Jaitley himself points out, the central problem of the sector is that real estate companies don't have enough financial resources: "Some developers have very little resources of their own. They use the home-buyer's money to develop, invest in land banks and then get caught in debt trap." But the consequence of the dating up of bank credit after the ordinance will be that real estate companies will have to depend even more on the money they get up-front from home-buyers - which means the change might actually increase the risks taken by future home-buyers, instead of decreasing it!
This entire sector looks so messy at the moment, therefore, that it's hard to see how Narendra Modi's promise of "housing for all" by 2022 can be met. Indeed, we seem decades away from that goal. There are a few things, however, that the government can do to make things better. Most obviously it should be made much easier to assert your property rights. In other words, ensure that home-owners don't have to worry that if they rent out a house, they will never get it back. That will immediately increase the number of houses that are rented instead of lying vacant. Plus the more people willing to rent instead of buy, the cheaper it will become to buy instead of rent. The truth is that we have to stop obsessing about home ownership and instead focus, as the Economic Survey argued, on a "holistic" view of the housing market, a view that includes the problem of rentals and of vacant houses. Regardless how angry the Supreme Court may be, the truth is that just protecting those who have already put money into homes will be counter-productive.
(Mihir Swarup Sharma is a fellow at the Observer Research Foundation.)
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