Why Developers' Role In Real Estate Needs More Recognition

Governments across the world try to ensure that their people live in properly constructed houses that meet certain standards. An often ignored factor in such discussions is the role of real estate developers in meeting a country's housing need. The term developer here includes others involves in the process, architects, contractors, engineers and other construction workers.

If housing has to become affordable to the general public, the construction industry should produce more houses. When there is a greater supply of houses relative to demand, prices will fall. It is true that countries like Singapore and Hong Kong have a large segment of the population living in public housing. But, in Singapore, this has not led to great diversity in housing. In Hong Kong, the government intervention has made housing extremely expensive and out of reach of the rest of the population.

Many intellectuals, journalists and activists often blame the builders for not building enough houses for low-income households. The truth is that builders are not responsible for making housing expensive. Even if some developers raise the price of houses, others will lower prices to attract more consumers. The price of computers, for instance, fell in the past few decades because producers were lowering prices as much as they could to attract consumers. It may seem that housing is an exception to this rule because the amount of land on earth is fixed. But, this is also true that the whole of the world's population can fit into the State of Texas.

Similarly, only one per cent of India's land is enough to house all of India's population comfortable. Moreover, more land is reclaimed every year. Bridges are being built to connect non-contiguous pieces of land. Roads, highways and railroads increase the supply of land where houses can be built. More importantly, in large cities, regulated FSI (The ratio of floor space builders are allowed to build on a certain plot to the area of the plot) is raised when cities become more populated. If this was true of Indian cities, people would have been living in cheaper, more spacious houses.

But, what role do real estate developers play in making housing affordable? How can government policy allow them to build more houses for low-income households?

• The regulatory framework, above everything, should lower the cost of housing. Indian real estate developers often claim that the cost of construction is very high. The regulatory approval process can take anywhere from three to five years. Needless to mention, the home buyer ends up paying for the cost of adhering to regulations. The taxes on real estate assets are very high, too. Some estimates suggest that nearly 35 per cent of the cost of housing is in the form of various taxes levied on properties. Some real estate developers like Niranjan Hiranandani claim that the cost of construction has risen by 35 to 45 per cent in the past two years. Hiranandani points out that till 2008, houses which were lesser than 1,000 square feet were exempt from income tax. When such houses also came under the ambit of the taxation system, the cost of housing rose, too, making house less affordable for low and middle income households. 

• A major difficulty that real estate developers face is an ever-changing policy environment. The uncertainty in the policy environment has led to real estate prices stagnating in the past two years. This is why developers have not cut prices and this is why there is very little unsold inventory in large Indian cities, among fully constructed houses. It is the under-construction houses that are not in great demand, because buyers are not too sure when these houses will be up for position, and how the regulatory environment and interest rates may change in the near future. As the newly constructed houses and under-construction houses in the market are such a small fraction of the total houses in India, this leads to wide fluctuation in prices. Not surprisingly, this lowers supply, raises prices and delays the possession of houses. 

• For housing to become affordable, builders should be free to create different kinds of housing arrangements. The fact is that there are many builders who are quite capable of building houses for low and middle income groups, as long as governments allow them to do so. This is so, because when there is a market demand, there will be people who are willing to meet that market demand. Some regulations like minimum plot requirement or open space requirement or car parking space requirements prevent builders from doing so. The point is not that residential developments should not have car parking spaces or open spaces. The point is that if such standards are arbitrarily enforced without understanding what home buyers can afford, more people will be unable to afford houses.

•  Similarly, if real estate developers are allowed to hire architects, engineers and other qualifies staff from abroad, they will be able to cut the cost of building houses tremendously. This is because building cost-effective houses is a highly sophisticated task which required great expertise. In the modern world, it is impossible that such expertise exists within a certain country. 

• Housing prices often fluctuate because of variations in monetary policy. For example, inflation prevents real estate developers from undertaking many long-range projects, because prices may vary widely over this period, creating greater uncertainty. Moreover, when interest rates fluctuate, home buyers will hesitate over their decisions for a longer period of time. 

• Rent control regulations are another factor that makes housing less affordable. As renting is not profitable for many landlords, they are likely to: 

A) Not build houses to rent it out.

B) Let houses remain idle.

C) Not see houses as good investment in the market, because they do not earn from it when it remains idle.

D) Not renovate houses in the rental market, because it is difficult to evict tenants or use it for other purposes.

When there are less houses in the market, more home buyers will compete for limited floor space, bidding up the price of housing. Even though many blame builders and speculators for over 11 million urban houses remaining idle, this actually means that there is not enough demand for the services. Developers are as important to housing affordability as doctors are to medicine.