We have created and nurtured a society where insanity works. For example, take the recent advertisements where builders are selling flats with only 10 per cent upfront down payment. And, the balance is to be paid on possession. It sounds good and consumer-centric, but is it really so?
Enter margin trading in real estate. Margin trading, in short, implies buying beyond your means. It is popular in the stock market. After real estate prices doubled in the last one year, builders are only building flats. Investors are buying these and waiting for the greater fool theory to work. They expect consumers to buy the flats at a higher rate from them. However, this is not happening.
With umpteen residential premises entering the market, you need people to buy these so that the investors exit and make money. Consumers who would make use of such flats exist, but do not have the capacity or the money to buy these. Although there is a huge latent demand for housing, as people need houses, it does not mean they will be able to afford the current prices. It is beyond the means of most people. How do you raise money to complete such projects and pay off high-interest debts when there are no genuine buyers at such high prices?
This is how it works. At present, the prices are at a record high, doubled in just a year fuelled by investors’ demand. Flats are on offer at a 10 per cent down payment, and the balance is to be paid on possession. However, the fine print does specify certain conditions.
One of these is that a buyer cannot exit the deal, and if he/she chooses to, there is a heavy penalty. It is only for serious buyers, thus goes the argument. Brokers who get buyers are offered a brokerage of two per cent or above, packaged with gifts of Mercedes cars and other luxuries. That’s real hard selling. At present, real estate prices are highly inflated, and even a correction of just 10 per cent wipes away a buyer’s capital.
So, the upfront 10 per cent is merely an incentive to get the buyer into a debt trap. When it will be time for the possession, who knows what the prevailing real estate prices will be. If the prices are lower as compared to those today, imagine the plight of the buyer. Not only would his asset lose value, but how would he get a bank to finance him? The finance would be at the rate prevailing then. A loss in the value of the asset would wipe out his capital, and he would be in a debt trap. Imagine the interest he would pay, as he does not have bargaining power. High maintenance charges of the new luxurious building would be an additional stress on the already burdened buyer.
The lure of such quick-fix schemes needs to be avoided at any cost. You can’t be margin trading in real estate, especially when there is no exchange to let you know the fair market price. It is run and regulated by the builders’ lobby itself. Surely, these are signs of a big real estate bubble, and crony capitalism allows such Ponzi schemes to flourish.
The writer is chairman, Parag Parikh Financial Services. Views expressed are his own