Recently, respected professionals like Mr. Deepak Parekh, Hon’ble Minister Piyush Goyal and Mr. Uday Kotak have pushed for price cuts in the real estate sector. While their opinion and expertise are well-respected in the matter, one cannot but imagine the adverse ramifications of such an irresponsible call for price cuts going wrong.
I wanted to share my two cents on why repeated public calls for price cuts may be far more detrimental for the economy.

Calls for price cuts can only delay demand and hamper any revival that could’ve come.

Why price cuts might not work?

Economics mandates the protection of the financier and politics mandates the protection of populism. However, this leaves the real estate developer stranded in the middle.

In the last 5 years, Real estate hasn’t seen any price appreciation, investors have kept away from the sector and the market has been dominated by end users. Necessary policy changes like GST and RERA have also left a collateral economic impact. At this moment, calls for price cuts could bring in an unnecessary avalanche.

  • Price cuts is a function of market dynamics and calls for price cuts pushes demand further down the road. With the number of developers shrinking by 50% between 2011 and 2017, and a significantly higher number since the implementation of RERA, who’s going to invest in a sector vilified by the government?
  • On implementing such price cuts, builders will lose a significant amount of their capital base which would hamper the growth of the sector for years ahead. Simple question, with no money, there are no new project launches, and with no new launches, there are no jobs; so, who’s employing this workforce?
  • The expected rise in costs of raw materials will make it even harder for developers to bear the burden of price cuts.
  • Price cuts also have far more serious cascading effects. Typically, a customer pays 5-10% of the property value during the project and the rest is funded by banks.
  • With price cuts you narrow down the LTV (Loan-to-Value of property), with the kind of economic uncertainty that exists, what really happens when the LTV exceeds 100%? Do Indian customers care more about their credit score or in uncertain times, would they rather default on home loans if the underlying home is valued lesser than the outstanding loan?

All of this is going to follow a complete stagnation of around 3 months when the country was in lockdown for the COVID crisis and property site visits were close to zero. If the market can take its form, then there might have been a surge in demand owing to the necessity of owning a home in a COVID world and the fear of subsequent lockdowns. Additionally, RBI’s home loan rate cuts would have supplemented actionable purchases from customers (As claimed by the government itself).

What does Real Estate mean to the Indian Economy?

As one of the largest industries in the country, real estate has a far-reaching impact on the economy. Here’s a look at its highlights –

  • It, directly and indirectly, employs the second largest workforce in India, second to agriculture.
  • It supports about 250 ancillary industries like steel, cement, interiors, etc. According to ICRA, it is the third most influential sector in the country.
  • Real Estate has the fourth highest GDP multiplier effect on India’s economy.
  • The $180 billion sector comprises $100 billion from residential real estate. It contributes to only 6% to India’s GDP when we have the fifth largest economy in the world & the second highest population coupled with one of the highest population densities in urban areas. This contrast with the global average of 13% of GDP contribution gapes at the negative bias that real estate faces in India.
  • The value of all outstanding home loans is around $250 billion in 2019 or 10% of the nominal GDP. Mortgage loans at 10% represents significant under-penetration compared to global peers with China at 18%, Malaysia at 34% and developed economies at 50+%.
  • Banks should focus on what is their most secured asset class when corporate debts are going under. Home Loan NPAs stand at around 1-2% for banks compared to 9.5% average for India.

With such statistics, it is not hard to imagine what a transformative impact the growth of real estate could have. However, it needs a more considerate policy-making approach that is currently absent.

So, what are the alternatives to price cuts?

Finding unanswered questions in policy is easier than keeping an eye out for solutions. However, such an eye is far from correct. To tackle the situation at hand, we investigated some of the alternatives that could work:

  1. The government should first reduce the circle rates to protect real estate companies from tax burdens created under section 43 and 50 C of the Income-tax Act, 1961. With Ready Reckoner rates being close to the market value in several micro markets in the country, it is legally impossible for companies to sell below those rates. Moving to a dynamic circle rate concept is the only way forward to prevent black money from coming back into the ecosystem and ensuring that market forces determine the price.
  2. Urban Municipal bodies should make urban infrastructure augmentation the highest priority. If COVID showed us anything, it was how crumbled our urban infrastructure is. Renewed focus on Smart Cities is the need of the hour.
  3. Banks should focus a lot more on home loans, considering the low NPA. Support the developers who are originating the loan for you.
  4. Work with state governments to see how stamp duties can be reduced without it causing a significant impact on state finances.
  5. Real Estate developers too can find their alternatives by adding more freebies and ensuring delivery lifecycle price guarantees for customers to encourage sales.

I’d like to end this article with a plea that everyone needs to hear. The Government has done a lot to ensure only the credible developers survive.

Large scale consolidation has taken place into the hands of professional real estate companies which are setting a higher standard for corporate governance, housing and the industry overall. 

Now is the time, to repair relations between real estate, bankers and the government. For the Indian Economy to succeed in its revival, India needs Real Estate.

Akhil Safar, CEO, Loyalie

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Rohit gada

Completely agree to this. Are these bankers cut the interest rates ? No they dont want to. What about ministers ? Their own income tax law doesnt permit us to sell below a rate specified by tax laws. Moreover there are more than 250 ancillary industries depends upon the real estate development.

Mukesh M Patel

The wealth of middle class family in india is always real estate property.You ask any no of persons who have purchased real estate in1970,1980,1990,2000,2010,,you will invariably find that the education of Childern,marriage in the family,medical treatment,for parents,expansion of business,all have been possible because the property prices have been increasing at a reasonable scale.
Every home buyer want his/her property to appreciate after the purchase.The resection in price as recommended by a few leaders will simultaneously reduce the value of all those whose own real estate including the ones who have purchased in last 5 years.So the wealth of the nation (millions of middle class families)will reduced drastically just because of prejudice towards developers and short sighted gain/popularity.

Pranay patel

True.In order to reduce the property rates first all corporations including state governments will have to reduce the circle rates which will reduce the burden on developers to pay premiums,fsi ,fungible charges etc .make single window clearances of all approvals and reduce corruption.reduce GST ,stamp duty etc

Maria Armita Latam

I agree 2000% on this article….instead of finding solutions, the policy makers /along wirh politicians give drastic statement thus tumbling the life out of middle incomers.

Sumedh Kadam

In my opinion the builders have a high profit margin especially non listed players.

These are heavily levered entities which on an average have given superb returns to entepreneurs.

If the margin is to reduce by a few 100-200 basis points it won’t hamper the profitability of the sector.

Rather it would encourage lower leverage.

Lower prices will lead to more demand.

If I conduct a survey of individuals, most will agree to buy more real estate if the prices were a tiny bit lower.

You suggestion are absolutely necessary for the sector as a whole. In my view you ignored the blatant exploitation by the builders of the govt(by avoiding taxes), of the buyers(by providing below par projects) and finally the economy as a whole by promoting high leverage which was eventually bailed out by us the taxpayers.

This was my opinion. Would like to hear your views on it.

Nice article .cheers.

Akhil Saraf

Dear Sumedh,

Let me start with the “below par projects” I will only speak of our clients who have been delivering excellent projects. To the point, that we are in the business of getting their own customers to refer for them! People who have experienced the developer’s projects first hand are the ones who are referring the most.

Now the price correction:
In our experience, we’ve personally not encountered developers who would be shy to give a 100-200 basis points discount to a buyer to close the deal.
The challenge here is unrealistic discount expectations being forced down the industry’s throat.

I’d also like to write a little note on the “super normal profits ” argument I often hear.

Super normal profits isn’t something possible in a perfectly competitive environment where demand has been sluggish for an entire business cycle (Last 7 years). Higher yields, leads to higher land costs (Core raw material) and it balances out.

As a function of economics, people who risk more, get more. Banks independently assess the capability of repayment before they actually lend out.
India isn’t a place where cheap capital is readily available. Especially not in real estate.

Today if someone is taking the liability of a loan (50-1000Cr) for the duration of the projects (3-5 years) and is ready to face the law if they don’t deliver (RERA). They are adequately compensated for the risk.

Being highly leveraged isn’t a bad thing. It gives banks interest earnings, people jobs, customers houses and the developer who took the risk, a reward. This doesn’t encapsulate the 250 other industries that are dependent on real estate.

The sins of the past have been wiped out, RERA has brought in utmost transparency where money from promotors and banks are kept in an escrow account till project completion.

Avoiding taxes isn’t as simple as not paying taxes. I was a tax consultant in my past life. There are protections made under section 43CA and 50C of the Income-tax Act 1961 where if a builder sells below an established market price, he will have to shell out the difference between the Circle Rate and the Price its sold at.
This also leads to an investigation into the buyer.

With Circle Rates, and the competitive environment the circle rates itself determine market price.

Hope this helps see a different perspective.

Nilesh Mehta

Very good article. In-depth and to the point.

Sanjay Iyer

Price cuts in any scenario is not the logic that will apply in the Real Estate segment, as it will only fuel the desire for furthermore price cuts. The best solution is to link it with faster payments. These havebto be handled on casento case basis and not as an announcement of rate cuts. Real Estate rates even pre Covid was bottomed out. Further, post Covid, the payment terms are protracted. If there are drastic rate cut, the buyers in the recent past will be adversely affected, as their book value will be less than their loan amount on the property. This will leave them disgruntled.

MP Agrawall

Very well & thoughtfully written article, covers most of the aspects revolving around the industry and institutions….

Atul Parakh

A thoughtful article but this is talked-about long…
We need to find methods on how and why price will not fall….
By what rate the sales comes to normal
How and why the banks come over their hidden risk rewards from reality funding and Star releasing funds.

Rasesh Parikh

I totally agree and believe Real Estate sector need not to cut price but to apply alternatives to facile the buyers.

Chintan Mehta

Hey,nice article very well written

Shekher Hingarh

Very True n Some how this must reach to the policy maker. Amendment to income tax act, if not cut in stamp duty n gst rate aleast some kind of moratorium shall be given.

Sushil Mohta

Dear Akhil
I completely agree with you.
In fact with consolidation happening, reduce launches, existing inventory will be exhausted and prices will correct in favour of developers to incentivise them to start new projects !
Sushil Mohta
Credai- West Bengal,
chairman-Merlin Group, KOLKATA

Priyesh shah

I totally agree and believe real Estate sector need not to cut price but to apply alternatives to facile the buyers.



Just give more light:

i) on the basis of fixing Circle Rate?
ii) Can we quantify the tax outgo on residential property… directly… I mean thru’ stamp duty and indirectly..taxes payable on material / interest etc?

Would love your thoughts, please comment.x