City Sunday

Avoiding market failure to boost growth

With the rapid urbanisation and growing energy consumption in India, the trend of higher demand for urban housing and energy is here to stay. While urban residential real estate has seen a slight improvement of late and commodity prices have subsided from the highs of 2018, both housing and energy sectors will need renewed attention going forward especially to avoid future market failures.

In a recent article for the World Economic Forum titled “Why the world should be watching India’s fast-growing cities”, author Sangeeta Prasad points out an interesting statistic that “70 per cent of India’s built environment for 2030 yet to take shape”. The biggest takeaway is that with the rapidly growing urban population, necessary infrastructure such as housing will be in demand. Therefore, it is essential that the residential real estate ecosystem is well equipped to cater to the increased demand.

The current scenario of unfinished residential projects and inventory of unsold properties points towards both overall market failure and financial indiscipline on the part of the various players in the market.

The slowdown in residential real estate over the last few years has been a dampener to both formalising the real estate sector through more efficient balance sheets and allowing increased access to housing for home buyers. Residential real estate needs a refocus on tax policies that can boost sales and create market-clearing prices.

Policies that can help significantly boost sales in residential real estate will have two distinct advantages. Firstly, greater sales help expand the tax kitty even in a lower tax regime, whereby the significant increase in volumes would more than compensate for a lower tax rate. Secondly, the sales of the inventory of residential real estate held by the financial ecosystem will help boost the flow of credit within the economy and increase the investment multiplier.

The eventual sale of residential real estate will help clean up the balance sheets of developers, banks, non-banking financial institutions and homebuyers. This credit release from the clearing up of inventories will help boost both private capital formation and consumption, thereby creating new business opportunities in the economy.

The distressed residential real estate sector and the impending urban housing demand also present large institutional investors an opportunity to generate significant returns. Partnering with local operators to access residential real estate at attractive discounts can help the entire ecosystem. (MR, Inputs: Agencies).

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