Realty’s onion analogy

Posted on Dec 7 2013 - 4:56pm by IBC News
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The whole country was recently abuzz when the price of onions (one of the most essential staples of the Indian diet) rose above the price limit of ~100 per kg (that’s nearly $0.75 per pound) in the country’s capital and surrounding areas. The reasons for this were a crop affected by unseasonal rains and hoarding by suppliers and a few large farmers to create an artificial supply shortfall. This story finds a parallel in the country’s residential sector.
This sector is characterised by delays in project possession and healthy interest by investors who are not end-users but speculators looking for capital appreciation. There is a certain similarity between onions and the housing sector because both are commodities that fulfil an important need – providing food and shelter. In 2008-09, when housing demand was adversely impacted by the Global Financial Crisis and investors and end-users deserted the residential market, prices tumbled by over 30 per cent across different markets.
The subsequent revival in demand took place in 2010 and it was accompanied by a revival in price as well. Prices have risen by nearly 50 per cent from the market trough seen in 2009 and are trending at newer market peaks in most residential markets. The healthy buyer interest over the 2010-2012 period was the leading factor in driving prices upwards but this is not the case in 2013.
A major factor in the demand revival has been the active investor interest in the residential sector. In fact, in select cities and corridors such as Gurgaon in the National Capital Region, the investor momentum has managed to marginalise end-users, who are relatively risk-averse. By investing in projects that have partial approvals, the investors have taken away a large chunk of the upcoming residential supply and this has been motivation for developers to offer their thus limited stock to end-users at higher prices. This has started to happen more regularly and has made many residential corridors more speculation-driven.
Back to the onion analogy, over the years, onions have seen stable prices (prices have remained at Rs 22-32 per kg) as supply has been synchronised with demand. The wholesale market that hoards the commodity can be equated with the investors who keep end-users away from the market for short-term gains. Farmers – the onion producers who make a healthy profit in a short-supply scenario by selling at higher prices are analogous to developers who look to book returns from their projects by ensuring that buyer demand is always chasing lower availability.
The difference lies in the fact that the government intervened in the essential commodities market by importing onions to control price rises. No such method of control currently exists in the housing sector. Perhaps, beyond the normal income tax payable on house rent income (payable even for non-rented accommodation), some more punitive measures can be implemented to achieve better “price discovery” in the housing sector.

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