The main reason that the Indian real estate market finds itself in trouble today is that prices have become unaffordable, even for most professionals. The underlying reason for this is an artificial scarcity of land in our cities.
There are several reasons for this: states have zoning restrictions, land-use rules and so on. This need not be a bad thing, but these rules are administered by inefficient and corrupt bodies. Clearances and permits follow a labyrinthine process and involve the greasing of many palms.
The resultant shortage of land where apartments, offices and shops can be built inflates prices. Today, as demand starts to weaken across property markets countrywide, we need to think of ways to build really affordable real estate.
First, the government must identify tracts of land to build new urban projects. Once identified, the change of land use from farm or fallow land to commercial or residential must be automatic, involving no bureaucratic meddling. With conversion becoming automatic, middlemen and touts will disappear.
The price of farmland will then reflect the real value of residential or commercial property. That will be a huge incentive to sellers, who will realise much higher rates than unconverted farmland. Once land sellers buy into this model, much of India’s current worries with land acquisition and construction will go. Property prices, too, are likely to come down to reasonable levels as the “scarcity of land” argument disappears.
Wherever possible, the government should encourage the building of high-rises, which use all resources, including land, power, water and parking facilities much more efficiently than low-rise construction.
As India urbanizes, we cannot live with archaic models of land administration that encourage graft and curtail the supply of land.