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Jehangir S. Pocha
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Bring down real estate prices, let India dream

The main goal of land-use policies must be to create affordable housing for first-time buyers.

‘Talk to anyone. They’ll tell you their biggest impediment is super-expensive real estate.’

t is sacrilege to say real estate prices must be brought down. But that is exactly what the government must do to rekindle the Indian dream.

Talk to anyone wanting to start a business, marry or retire. They'll tell you their biggest impediment is super-expensive real estate. Land prices in India are among the world's highest. In metros, an average person would need to work 200 years to afford a two-bedroom flat. Even in smaller centres land prices have risen almost ten times since 2007.

This is partly the natural result of economic growth. But land prices are also being pumped up. Officials give builders plots at rock-bottom prices and then manipulate land-use rules to jack up its value. New projects are favourite places to invest black money, which propels prices even higher. NRIs and foreign funds flush with cheap money are also gobbling up land, despite regulations to counter this. The media is subtly co-opted with huge real estate ads. Honest officials play along because real estate taxes are a key source of revenue for local governments.

People with inherited properties or the skill and capital to speculate in real estate have raked in the money. Real estate now contributes to about 15% of India's GDP growth.

But this is a pyrrhic achievement.

No one calculates the loss to the economy and employment from businesses that never get started because of costly space. No one talks about how rising land prices are fuelling inflation. No one cares that spiralling land prices are preventing millions of people from buying homes.

It is time the government stopped seeing land only as a financial asset whose price is to be boosted but also recognised it as a limited national resource to be used for public good.

The main goal of land-use policies must be to create affordable housing for first-time buyers. American history shows this is the key to stronger economic growth and democracy. The simple reason is that universal home ownership makes everyone a stakeholder in society. To achieve this, half the land released for development should go to affordable housing projects at 50% the regular commercial rate.

Consider a flat costing Rs 1 crore. Its land cost would be about Rs 80 lakh and construction cost Rs 20 lakh. So a 50% "discount" on land would reduce the flat's cost to Rs 60 lakh.

The land must also come with all clearances, so builders do not lose time and money on overcoming bureaucratic hurdles. This includes earmarking areas for stone and sand mining so builders do not have to buy these from mafias. Doing this would cut building costs 20%, says HDFC chairman Deepak Parikh, bringing the cost of our flat to Rs 50 lakh.

Reducing black money in real estate deals will also cut prices at least 10%, reducing our flat to Rs 40-45 lakh. Mumbai has the best policies for this. Other cities can be made to adopt Mumbai's best practices under threat of losing their urban development funding from the Centre.

Also, almost half of all new flats are bought for investment, which inflates prices. To curb this, purchases of second or additional homes should be taxed 2%. Conversely, to incentivise genuine buyers, EMIs on self-occupied homes should be 125% tax deductible. This would lower the cost of owning a home between 10% and 30%.

Another reason land is expensive is that India is short of it. India's people-to-land ratio is 750 people per sq km, one of the highest in the world. India just cannot afford sprawling low-rise cities like Delhi. Cities must move to vertical rather than horizontal expansion even if it means investing more in public transport, power supply, sewage etc. Horizontal expansion is what is leading cities to encroach onto surrounding agricultural land, which isn't sustainable if India is to feed 1.2 billion people. State governments must earmark land for farming, housing and industry and changing this land-use, a favourite pastime of the builder-babu cabal, must take the direct sanction of Chief Ministers.

Lastly, it is time to recognise real estate as an industry. This will allow banks to lend to builders and help genuine entrepreneurs enter the business.

All of the above is do-able if the will exists. Doing it can reduce home prices 40-50%, which will boost both homeownership and economic growth.

Ignoring the mess in real estate, or worse, caving in to vested interests and myopic economists itching to boost land prices, will create economic, ecological and sociological problems that will reverberate for centuries.

 
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