Over the past two years or so, home sales are down and inventories are piling up in India. Slowing demand should lead to fall in the prices. However, that’s not happening in India’s realty market. A closer look will show that both supply and demand are being manipulated to keep homes prices artificially high. Moreover, India’s realty market is catering to investors and not to end users.

Given the estimated shortage of 20-25 million homes and increasing movement of people for business or employment in a growing economy, if supply doesn’t match, it will lead to increase in home prices. In India, that has been happening for quite some time. As a result, property prices have become unaffordable to even upper middle class households. That explains buyers’ disinterest and muted demand for properties at current prices.

That should ideally lead to a drop in the prices but that’s not happening, or happening at a slower rate than it should, because vested interests ensure that the supply of homes lag behind the demand so that even at lower demand, home prices need not fall much. In other words, India’s realty market is rigged.

Otherwise, 2 per cent annual rental when the average cost of borrowing is 9 per cent can’t justify the prevailing realty prices especially in a sluggish market where capital appreciation can’t really compensate for negative net rental.

Realty companies, by imposing lock-in-period for transfer of (usually under-construction) properties to stop original buyers from reselling their properties reduce the effective supply of homes at any given point even if there’s no change in the absolute supply.

Builders also impose hefty transfer charges — ₹100 to ₹1,000 per sq ft to neutralise any capital gains that original buyers may make from reselling their properties before the builder has cleared all his inventories. That keeps the supply of homes restricted. Similarly delaying completion of ongoing projects also helps restrict the effective supply of homes and turns the supply curve inelastic forcing buyers to pay more.

One may ask but why would realty companies delay projects that may hurt them in the form of penalty for delayed delivery of homes. Well, one-sided apartment buyers’ contracts mean builders extract as much as 18 per cent a year if home buyers delay the payment. Interestingly, in the case of any delay in giving possession, builders themselves don’t pay more than ₹5-10 per square per feet per month.

Thus, ₹10 per sq ft per month for a 1,000 sq ft apartment means late delivery payment of 10x1,000x12=₹1.2 lakh/annum irrespective of the apartment price. Many cap their liability to less than 0.5 per cent of the apartment cost and deny paying even that on flimsy grounds.

Realty companies manipulate payment schedules in such a way that long before the actual delivery, they have already collected over 90-95 per cent of the cost of the apartments. Assuming, an apartment is priced at ₹5,000/sq. ft. 90 per cent means ₹45 lakh. Even if one invests ₹45 lakh at 10 per cent per annum (say, in corporate bonds) it would mean an interest income of ₹4.5 lakh/annum. For every year of delay, the builder is making ₹3.3 lakh (₹4.5 lakh-₹1.2 lakh).

Thus, a three-year delay (quite common, especially in Noida) in giving possession means a net gain of ₹10 lakh to the builder (4.5-1.2 multiplied by 3), and 35 per cent extra cost to the homebuyer on interests, rentals and additional taxes. So, naïve home-buyers are actually subsidising realty ffirms or delaying projects. So, why would builders hurry completion of projects especially when it helps to push up prices even in a sluggish market? That’s why builders are opposed to RERA as that will stop this subsidy.

Inappropriate government regulations further restrict the supply of homes by limiting the ‘cost and availability of land’ by ‘changing or not changing rules’ regulating FSI (floor surface index), construction in coastal zones, age for redevelopment of old buildings, competitive bidding for limited quantity of land and allowing or not allowing payment for land in instalments.

Given the exorbitant prices of homes, it’s difficult to understand why permissible FSI is 1.33 in Mumbai compared to cities with scarce land, like New York City (17) or Tokyo (20). Low FSI is bound to keep supply low.

Similarly, allowing payments in parts (10 per cent now, rest in equal monthly or quarterly instalments) rather than full payment at one go increases the number of bidders and pushes up the bidding prices of limited quantity of land – the key raw material for construction of buildings that often accounts for as high as 60 per cent of the apartment cost in places like Mumbai.

Keeping the minimum age of old buildings for redevelopment 40 years instead of 25 years — quite relevant for big cities such as Mumbai where land is scarce — restricts the supply of homes and pushes up prices.

Delays in a key infrastructure project (such as trans-harbour link) connecting suburbs (Navi Mumbai) to central districts (Sewri/Parel) can influence home prices. If trans-harbour project is ready, many prospective home buyers will not be willing to pay the kind of premium they are currently paying for the properties in Parel or Worli in Mumbai.

Even demand can be manipulated by realty companies through misleading advertisements and celebrity endorsements that lure prospective buyers. Moreover, banks and housing finance companies in collaboration with realty companies use many other tactics to lure home buyers e.g. compact homes (which are nothing but smaller sized apartments hence priced lower), and interest rate subvention (pay 20 per cent now and balance 80 per cent on possession) where home buyers bear all credit risks and builders get the money immediately. When everything fails, brokers use the killer argument: paying rent is throwing money while paying EMIs create an asset and we can make your EMI equal to the rent you’re paying.

Banks or NBFCs pressurise realty companies not to reduce the apartment prices as that would reduce the value of their collaterals. Private equity investors also do the same as they look for pre-determined returns on investment for agreeing to finance.

That’s why despite a serious demand slump, India’s realty prices are not falling or falling at a much slower rate that defies economic logic. That however, doesn’t mean prices will never fall. We’re just postponing for future hard landing.

The writer is a Mumbai-based corporate economist