Housing is not a smart investment for the Indian middle class anymore

India’s property market is rigged—there's a reason housing isn't affordable for all.

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Indian real estate — barring luxury projects that cater to the non-price-conscious super-rich — has been in a bubble for some time now. But no realtor will tell you that. Still, both anecdotal evidence and hard data point in that direction.

As of December 2024, India’s top eight cities have more than one million unsold real estate units. Clearly, people are not buying at unaffordable prices, especially when income growth remains uncertain. Rental yields, which measure rental income as a percentage of property value, are well below 4-5 percent in most cities, except for a few micro-markets. In fact, your money would earn better returns in a bank fixed deposit.

The scenario in the commercial real estate sector is even grimmer. Reliance Retail shut down 80 stores last year, just two years after opening them. Zara closed its high-rental store in South Mumbai because the business was not covering the costs. Commercial real estate is a truer bellwether of the property market, for, unlike ordinary home-hunting middle class individuals, it is business returns that drive prices, not sentimentality.

Here’s the clincher: if you truly believe the story about the continuing boom in property prices, the real estate index should reflect it, right? This is what I found. The S&P BSE Realty Index is 17.5 percent lower, yes lower, today than it was in July 2007. (You can see this in a Money Control chart when expanded to cover 2007-08). Sure, stocks too boomed and went bust during that period, but look where the stock indices are today with respect to 2007-08.

So what is one getting at?

Like any journalist, I will state my conclusions first, before providing the explanation.

Should you buy a house?

First, housing is not an investment for the middle class. You should buy only if you really plan to live in it and can afford the price. It is about the use value of the property, not its potential income value.

Second, the property market in India is rigged, and this rigging happens largely in the land market, where politicians, bureaucrats, and builders work in league to prevent new supplies from entering the market before existing supplies are disposed of. Zonal and land-use restrictions give enormous discretionary power to those deciding building permissions. This means fresh land gets released only when previous supplies are used up. In short, the land supply squeeze is the only thing maintaining high prices despite an inventory pile-up. Conspiracy theorists suggest that the Mumbai Trans Harbour bridge, which connects central Mumbai to cheaper real estate in Navi Mumbai, was inordinately delayed only because realtors had unsold inventory in central Mumbai. Now that the inventory is down, the bridge has seen the light of day.

Third, the real value from any land-fuelled property price boom is captured outside listed companies. In the S&P BSE Realty Index, if the value of highly priced houses had been fully captured in listed companies, the index would be higher today than in 2007 or 2008. The Sensex, which also peaked in 2007-08, is more than three times as high today despite a sharp fall in valuations in recent months. Sure, the realty index gave positive returns in shorter periods between 2007 and now, depending on base year, but if the underlying assumption is that land values never fall, at least some of the value created in those years should have been captured in the index today. It isn’t. The value is captured elsewhere.

Four, unless you are a sharp-nosed land speculator, the assumption that you cannot lose in real estate over the long term is doubtful. I can give you my own example. I bought a flat in Thane in 1997 and sold it 25 years later at 6.7 times the original amount I paid. Sounds great, until you see what I paid for the replacement. I bought a smaller carpet area flat at a price that is nearly 10 times the amount I paid for a larger flat in 1997. Did I gain or lose? (PS: I made the change because the older flat needed more upkeep, etc.)

Should land prices continue to rise?

Five, the assumption that land prices have to keep rising because “they ain’t making any more of it” is not quite true unless you are talking about micro-markets. Sure, in Mumbai’s Malabar Hill or Delhi’s Defence Colony, land supplies will be limited and square yard prices could keep rising. But here, too, this assumption can be flawed because land supply is limited by how much you are allowed to build vertically. If you were to double the floor-space index (FSI) from one to two in any area, you essentially double the availability of land without actually increasing the amount of square yards of land supplied. The FSI is the tool used by the neta-bureaucrat-builder nexus to keep land prices higher than they need be, not least because they are invested in these properties, either directly or through benamdars. Today, as municipal governments seek to build new flyovers and metros, land acquisition is paid for by compensating the seller with FSIs. This is leading to low-rise areas getting over-built with high rises based on acquired FSIs.

Six, headline property prices are sticky, but deals don’t happen without discounts. And the transactional friction in buying and selling properties is huge (stamp duty, brokerage, registration, etc) unlike in the case of shares or bonds or even physical gold. This makes property the worst kind of investment in terms of ease of transactions.

Seven, the reason land prices remain sticky is the sheer number of parties interested in keeping them high apart from the corrupt. Consider banks, which consider mortgage loans the safest form of lending activity, for individual defaults are few and far between. If land prices were to crash due to higher supplies, banks would be in deep trouble, with some facing insolvency issues. This would explain why governments tend to focus on pushing realty sales through cuts in interest rates and tax breaks, instead of allowing land supplies to increase—which would be the ideal way to bring down house prices.

Eight, middle class home buyers also seriously mistake property for land. Land may (in a rigged market) be an appreciating asset, but not buildings, which need to be maintained. Builders promise premium features like club houses, jacuzzis and swimming pools, while the real costs relate to maintenance of these pools and amenities, which you have to pay for in the end. EMIs and rentals are not the only costs of owning or renting a house.

Yogen Shah, a supply chain director at Petrofac, says the Indian real estate market is “hyperinflated,” thanks to the “black money of corrupt earners.”

This is why realty prices have to go through a time correction rather than a price correction, which means current prices have to be maintained for long periods of time, letting inflation erode the real value of these prices. A 5-to-10-year time correction is what could make housing more affordable, even though easing land supplies is what will stop distorting the realty market.

We are in a bubble, and the high inventories suggest that buyers are waiting for a time correction before buying.

R Jagannathan is editor and former editorial director of Swarajya magazine. He tweets @TheJaggi. Views are personal.

(Edited by Prashant)