IT/BPO and other industries have been the knights in shining armor for India for much of the last 15-20 years. In addition to enhancing India’s image overseas, these industries have earned valuable foreign exchange for the nation. However, an offshoot of these very industries is the real estate bubble. The organizations and their employees are equally culpable for the situation that has been created.

The race to hire anyone and everyone lest you are caught on the wrong foot when a great business opportunity shows up, pushed the wage bill very high and when a business opportunity showed up, the companies were still forced to poach resources from the market because the bench was really not that strong. So skilled resources became a hot commodity and 15-20% increases in remuneration y-o-y became the norm. Clearly salaries shot through the roof.

The high salaries offered us an opportunity to build a secure future. In many cases even fresh graduates were starting at packages that were higher than what their parents made at the time of retirement. However, it has been a story of total fiscal irresponsibility. Rather than building savings for a rainy day, many of us have taken to buying like there is no tomorrow. The ultimate thing is buying a house that we cannot afford. Don’t get me wrong. Everyone wants to ultimately own a house. But the question that has to be answered is “is ‘being able to buy’ the same as ‘being able to afford’ it?” Unfortunately the answer is no.

The notion that you are building an asset is wrong. If things go bad you cannot quickly move out and sell. And where will you go? You will almost certainly get less than what is advertised to be the market rate in your area. Besides, can you ever be certain that your house will appreciate enough to cover the interest you have paid and the stamp duty that you would have to pay? In the US, prices have gone down so much that people had to just walk out of their houses because the outstanding loan amount is much more than the current market value of their houses. Until mid last year this was unimaginable!

Today everyone will realize that the days for such reckless behavior are well and truly over. Although the extent of layoffs has been less in India so far, delays in recovery in developed countries will put unsustainable pressure on our industry. As hooked on as we are to buying that next big thing, are we also sane enough to realize that the tide has turned? The time has come to ask ourselves, “Can I survive longer than 3 months if I lose my job?”

We may have followed the greater fool theory that is the basis for all bubbles and gambled with our lives. Do you know that even before the current downturn started, it was cheaper to buy a house in many cities in the US than it was in Pune! And we paid these high prices for houses in areas that most in developed world would consider unfit for living! Real estate companies have gotten used to shoving substandard properties down our throats at astronomical rates. We are to blame.

The standard for mortgage lending is that your EMI should be less than half of your monthly disposable family income. Looking at the current real estate prices in major cities, it does not require rocket science to figure out that these norms have been flouted. Without doubt there are many who will not be able to pay their EMIs beyond a couple of months should they lose their job.

Many will contest that the current real estate prices can be compared to a chicken or egg scenario. Are builders increasing prices because there are buyers or are buyers forced to buy at any levels lest the prices go up and they miss the opportunity? A close look at the attitude of the builder lobby gives a clue. Far before a significant turnaround is evident, they are eager to call a bottom of the housing market and have already started increasing the prices. This when there is a huge glut of unsold homes in all major markets. The reason they can do this is that the unrealistic prices we paid for real estate during boom time were far higher than their costs and it has given them a cushion. Also when they were over leveraged they used their lobby to influence policy makers and got banks to restructure their loans. Thus, it should be evident that the builders have been driving this all along and it is us who have been taken for a ride. I believe the latest push from builders to sell is to generate cash flows as the banks won’t play ball again.

If you haven’t burnt your hands yet, now is an opportunity to undo some of the damage done so far. Ignore all the talk about a revival of the real estate market. Put pressure on prices. It is a game of staring between builders and buyers. We can’t be the ones blinking. Let us see how deep their pockets are. We have been very aggressive in buying whatever we wanted. For once let us sit tight. If we succeed in bringing the prices down we would have done great work for our city.
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