On the "sudden" boom in Low Cost Housing

There have been numerous articles in business magazines lately about the "sudden boom" in low cost real estate. Leaving aside the inherent redundancy in prefixing "boom" with "sudden", since a "boom" is by definition, "sudden", for if it wasn't "sudden", it would be better described by "steady rise" - I find this hogging-of-the-limelight by "low cost affordable real estate" moguls a little annoying. First, real estate, in all but the metro hot-spots, is always affordable - at least by the standards of the locality in which it has been built or by the standards of the people the developers hope to sell it to. Second, the "boom" is a gross misnomer since "affordable housing" projects, going by the definition in the previous sentence happen across the length and breadth of the country - these small and faceless developers build housing colonies in small cities, large towns and even in Haridwar. Its just that they dont spend a lot of money on advertising in national newspapers and magazines - which is why we dont seem to notice their existence. Tata Housing and Unitech's new low cost arm are making the front pages because of 2 reasons - A) This is the first time they're doing this low cost thing -Incidentally, I also got the feeling they're trying to project a false facade of philanthropy around the venture though what really drives them is business reality and the sheer volume of "low cost" people. B) They have the right connections in the print media who publish away almost anything from the grand business house of the Unitechs and the like.

How about bringing in a balanced perspective - by interviewing some of the lesser known "low cost" real estate developers, and asking them what they've been up to for the last ten years, what their business model have been like, and how many hundred crores in debt they are - I'm guessing zero - unlike the big real estate firms who, up until now, pooh-poohed the grotesque thought of having to approach the "low cost" consumer and having to serenade him with fancy brochures and footing his travel bills to visit "model homes"- which are luxuries, surely reserved only for the rich and the famous? The venture into low cost real estate is more a statement of their admission of business stupidity driven perhaps by arrogance (of not entering the low cost segment earlier) than any "sudden" boom in demand for low cost housing. Are they trying to convince people that a guy who's lived in a Mumbai slum for the last ten years only recently realised that he'd rather move into a low cost property on the outskirts than continue to reside in barely livable unhygienic one-room-for-six-people slum houses?

While the concept of "Pricing" is deeply entangled in both micro and macro-economics - things I'm only beginning to understand - own price sensitivity, market segmentation and the like, it is also possible to tackle it in a different, albeit, oversimplified way.

Price = Nominal cost (Raw material + Conversion Cost + Research Costs + Overhead + Salaries) + Desired Profit Margin --- (A)

Profit = Free market governed max price a consumer is willing to pay - (Minimum possible Nominal Costs) --- (B)

When the economy is bullish and people decide they've saved up enough to invest in real estate, they enter the housing market looking for an investment. But since money is in over-supply, the mere interest in property pushes property prices up. On top of that, if at this point of time, developers can create an impression in the mind of the buyer, that the specific kind of property they're looking for (say East facing in floors 10 and upwards) is in short supply, they can push the price of real estate up from an already inflated value, and this transfers power from the buyer to the producer, who now becomes a price-setter and not the price-taker. In simpler words, the developer can now shift from Pricing model (B) to model (A). Irrational human tendencies of Homo uneconomicus ensures that market equilibrium no longer controls prices. A good deal for the real estate companies - but only in the short run.

Most crashes are fueled by prolonged irrational human economic activity, and these crashes tend to be amplified by synchronized global human irrational activity. The current crash was no different in that sense. What is worth noting though, is that the crash coincided with the first ever irrational inflation of luxurious-property values in post 1991 India. The same property booked before the crash for INR X Lakhs, was available after the crash for 0.6X Lahks. This unforgiving wrath of the free market together with Unitech's chief financer, Lehmann going bankrupt is perhaps what scared them into low cost real estate, or more accurately, rational real estate activity.

My interest in real estate economics was fueled by an uncle who recently purchased an Unitech property prior to the crash and whose value fell to 60% of its original value after the crash. Human economic activity is all vairy vairy interesting - if you're not at the receiving end that is!