Pankaj Kapoor, the managing director of Liases Foras, a real estate analytics firm in Mumbai, met with me at his office in a new building at Andheri East. Columns of large box files about Mumbai’s land prices teetered in the conference room. Although it was evening on a Saturday, the place was occupied with a row of staff who stared at their screens. Kapoor sipped on a cup of light tea and talked about real estate in Mumbai, NAINA, and what exactly set off land prices in the city (hint: it wasn’t demand).

When did you first start seeing the wealth effects of land?

You know, all this started in 2005. The seeds of the exuberance were put in when realty was open for foreign direct investment. That was the first time the government came forward and started land bidding. Mill land that belonged to the National Textile Corporation was sold, and the price of that land was being discovered. The NTC mill land deals, the MMRDA deals, and similar deals across India set the prices. I remember a time when a couple of land deals in Lower Parel happened. My own estimations for Lower Parel at that time was Rs 6000 a square foot. Land was sold, if you look, for over Rs 10,000.

DLF purchased the costliest land at that time. Land prices were so costly that it was not viable. (The Hindu called the purchase “the mother of all property transactions”.) So it was just built in because broking houses came in and said, “We’ll make a retail mall and give it for Rs 300 or 400 a square foot, and things will become viable”, but they were just exuberant. It was wishful thinking. They said, “Prices will be given by tenants”, but none of that happened. If you look, the property remained undeveloped and DLF had to sell it. Lodha purchased it. But besides that, if you look at all the land that was sold during that time, and if you look at the prevailing development control regulations under which the sales took place, later on, all these lands were given higher FSI (floor space index) to make the projects viable. … There was even a parking FSI which was brought in.

So look at why it happened. Because we brought exuberance in to the price of land, it created an unviable situation. You couldn’t create a project on this land and sell it. To bring viability, the government had to raise FSI. This happened in 2005. Because land is a spatial subject, if you do deals like this, it affects the whole geography. Every property benchmark increases. If I do a deal in Lower Parel at Rs10,000, a person in Prabhadevi (a neighbouring area) will also increase the prices, saying that his location is more convenient. Then you see it in Bandra, and then the whole place. It’s a cascading effect, and that sets new prices for the whole city. There were several such things. I would say more than the developers, the state government officials … were the bigger perpetrators of this exuberance. It came forward to do these deals. And that’s one thing that is very wrong. It spoils urban economics. And because of such price rises, we shifted the focus of realty. In 2003-05, it was the end-user who was buying the property. After that, we had to shift to investors because domestic efficiencies were not there to take of those kinds of prices.

When you say domestic efficiency, you mean…

Domestic efficiency means…

…you mean unaffordable?

…unaffordable. Every geography has its own catchment of people who can go and live in that particular place. Lets assume I draw a salary of Rs1 lakh a month, and I want to live in a house that costs Rs60 lakh. To earn that kind of money, you must work in Bandra or Parel, or in the service sector. But to buy a flat that costs Rs60 lakh, you have to live in Virar (67km by road). So it spoiled domestic efficiencies.

So if you look beyond that, builders had to sell to investors. Property was being sold as a commodity. The builder would say, “Buy at this price. After three years, the property price will double.” And they would sell it to people in the US, UK, and elsewhere. So it was an investor-driven market. There was a time, in 2003, when first-time owners were buying. But if you see the stats post-2007, most of the people who were buying were buying their third, fourth, or fifth property. Look at the census data. It indicates that there’s a 73% increase in vacant homes between 2001 and 2011. And one more thing. Because property had to be sold to investors, builders had to continuously increase prices. Because they weren’t selling a house. They were selling a profit. So if you sell it to someone saying, “You buy it and the price will double”, you will continue raising prices regardless of whether there is demand or not. But there is a threshold. Today prices have reached a level where investors’ participation has reduced because they’re not getting the end user at these prices. The prices have stopped further investors from coming in. At this price, there’s a huge gap between the price and affordability for the end-user. And that’s why we are sitting in a country with a housing shortage, and we are seeing rising inventory. It’s an urban economic imbalance, and it’s a paradox. We require 80 million homes, and we’re seeing retarding sales and rising inventory.

Closer home, between 2001 and 2011, it was the first time the population of Mumbai city dropped. And that there are 200,000 vacant apartments. Is this an accurate figure?

Yeah. There are 170,000 units in the Mumbai Metropolitan Region which are unsold. That’s our data.

So what exactly is happening here?

Private equity money came in, and builders leveraged. They bought the land, brought in projects. So supply was committed, but sales haven’t really increased. Because prices have killed those sales. It’s a vicious circle. When a lot of money was available, builders started increasing their prices. Once they did that – and all this happened in 2004. I remember at that time, builders were sitting on Excel sheets, doing projections of the prices. And based on the projection of the prices, they were trying to do valuations of their land for cashouts.

What does that mean, exactly? Cashouts?

Say the price was Rs2700 a square foot in 2005. You would see a lot of funds scouting around for developers at that point. They’d say, “I’m giving you money”. So that price would become Rs4500 within two or three years. Which made the land price go from Rs600 to Rs2000. Now land is the biggest asset in which private equity investments take place. So the builder cashed out that difference without even developing and constructing and selling. The [new normal is] Rs4500. Now you tell investors at the same time, “If you invest in this, you will get 3x”. So despite a slowdown, the builder kept on increasing the price in order to keep the investor happy. A lot of investors were thinking, “No bother. I’ve put in the money, my value the land has been increasing. I put it at Rs4500, and the price today is Rs8000.” But at Rs2700, the market was selling at a velocity of 3% of inventory a month. The sales velocity became 1%. That led to economically unfeasible projects. And that is where the money was lost. Now, as the selling price increased, the land price continued to increase. So the government also looks at prevailing prices and starts benchmarking prices. They increased the ready reckoner rates. There were approval and other costs that were linked to the ready reckoner rate. They increased too.

We’re talking about smart cities and investments made in them. This infusion of money in each city. What kind of effect do you think it will have?

I don’t think [it will have an effect]. I think it’s an interesting and noble subject. We’re looking at creating a better life for people. Smart cities won’t be about realty exuberance coming back — prices rising, that kind of thing. Efficiencies retard prices. You look at any efficient geography, you don’t have high prices. If I have to make housing affordable for all, I need efficiencies in pricing. So I think this is going to be the concept behind smart cities. They will have sustainable basic infrastructure.

What do you think of the market in Panvel and the surrounding regions?

There are issues. If you look at the whole region, it needs development. There’s no density. And the prices there defy all logic. I always say that the price of the land is determined by the weight of people on that land. At the rate of Rs4000 and Rs5000, there should be enough density for a Cafe Coffee Day or a Starbucks to open up and run a sustainable business. There should be 8000-9000 people per km of density. Here we have 700 kilometres of barren land where no human lives. And there is ample land available. So what is the rationale of those prices? No one knows. And I don’t think developers are the culprit. I think the biggest issue is the urban development bodies and agencies like CIDCO.

Why do you say that?

The reason is, they have locked the land. They have raised prices. Even Raghuram Rajan thinks prices should be corrected. But if you look at CIDCO two months ago, they were doing land auctions at more than Rs10,000 a square foot at Kharghar. What they do is, they look at the market peaks and try to auction their land.

Do they do that?

Yes! Every time. They all believe, “I have land. Let’s monetise it as much as possible.” They don’t realise it spoils the urban economics. They are the biggest perpetrators of this bubble. Government has to think of land in socialistic terms. The way they think about it is completely capitalistic. They think in terms of monetisation, but they should look at land efficiencies.

I’ve heard over and over again in Raigad and Panvel, “oh, that plot there belongs to such and such a person”.

That is not just here. It happens everywhere. I would not like to name this, but anywhere you go, people say this. And I don’t think they’re all wrong. Land has become a parking place for political money. That’s why I’m saying that India has reached the threshold of vacant land tax. Since this is unproductive money, people think, let it be parked there. When we sit and look at progressive geographies and say, “Let’s make Mumbai more like Singapore”, well, Singapore has 5% vacant land tax. [Apply it here], and you’ll see parity.