A recent article dated March 4th, 2018 from JLL India said there are close to 4.4L unsold homes in 7 big cities in India. The article goes to mention some of the macro reasons such as Demonetization, GST, RERA has caused this big inventory.
With an ever-growing population in key cities in India, demand always exists for quality homes in India. But in spite of the demand, what is causing home sales to suffer?
Today’s buyers are more information hungry and are seeking more and more information about the properties they want to purchase. They don’t want to rely on real estate company only for all the information. Because, the promises made by real estate companies, sales executives haven’t been kept and hence buyers are always looking out for more details. The buyer thinks the information shared by real estate salespeople is not 100% genuine.
This brings us to the main topic of the article, Is India real estate similar to used car sales as Market for Lemons?
Market for Lemons Quality?
George Akerlof an economist in 1967 published a seminal paper called Market for Lemon Quality Uncertainty and the market mechanism a paper which focused on implications of asymmetric information and its role in markets. In the paper, the author referred the market for used car sales in America during 1960’s.
The article in nutshell describes as below, there are peaches which are good used cars and can sell for say 6lakhs and lemons a bad used car which is selling for 3lakhs. Thing is, the buyer has very less idea of which is peach or lemon as lemons can be made to look like a peach with scratches touched upon, engine problems left undisclosed, even odometers tampered with.
In reality, buyers will struggle to tell the difference between a peach and lemon. Buyer to account for the risk that car is lemon will always ask for discounts. Buyer will ask a peach which cost 6lakhs, at 4.5lakhs as he assumes there is some risk. But the dealer who knows the car is peach rejects the 4.5lakhs offer. The sellers who are prepared to accept 4.5Lakhs are mostly who know they are offloading a lemon. In a nutshell, it is the seller who is always at an advantage.
Smart buyers can foresee this problem, knowing they will only ever be sold a lemon, they offer only 4.5Lakhs. In this case, sellers of lemons end up with the same price as they would have done were there no ambiguity. But peaches stay in the garage.
This is a tragedy: there are buyers who would happily pay the asking price for a peach, if only they could be sure of the car’s quality. This “information asymmetry” between buyers and sellers kills the whole market for peaches.
Information asymmetry and Indian real estate market
Is this “information asymmetry” affecting the Indian real estate market? The evidence in the market of huge unsold homes shows it is not just price issues, but the issue seems to be more of lack of trust and transparency between buyers and real estate companies, due to “information asymmetry”.
The result is, buyers today are looking for more and more information and not satisfied with what information companies provide. They go to online forums, check with friends, legal counselors, past buyers etc to verify that things are accurate.
Just like the used car market explained earlier, not all used car are lemons(bad cars) and there are many peaches (good cars). But buyer’s cannot make lemon vs. peach, I,e bad homes vs good homes and on the other side, the genuine seller has the issue of bridging this “information asymmetry” problem.
A market where huge “Information asymmetry” exists such as in the used car market, a company can standout only when it adopts a customer-centric strategy and trains its salespeople to address customers genuine concerns by being transparent, being authentic and show empathy towards buyers to help them decide to take action.
This is how used car market got changed during 1990’s in America. Used car companies such as CarMax ensured that buyers have all the information of the vehicles so that “information asymmetry” no more exists b/w seller and buyer. This helped buyer know clearly what is “peach” and what is “lemon” and he was happy to own the car of his choice without feeling cheated or asking for any discounts on cars.
Today Indian real estate market is mostly driven by the end user and not investor. End-user comes with various doubts as he is investing his lifetime worth money into his dream home. His concerns are not just limited to price, but mainly about completion dates, quality of construction, legality, neighborhood, transparency in pricing, penalty clauses etc
To help the buyer, Govt has come up with RERA, a buyer-focused regulation. Today many companies are promoting they are RERA complaint as a way to say they care for buyers. Regulations are great, but frankly how much company which claims RERA compliant is helping?
How to not be branded as lemons?
The usual marketing tactics of Indian real estate companies has been one of adopting a tactic of promoting extensively the property, creating a scarcity, urgency in the mind of the buyer by promoting prices will go up in next few weeks etc.
Buyers feel behind many of the extensive promotions there are many hidden facts and he lacks full information. The buyer feels properties are mostly lemon’s and so asks for heavy discounts or says will postpone his buying till property is ready to move in.
Bridging the information asymmetry is key and company should adopt a total customer-centric strategy. In this, the sales team has a major role to play than any other team in the company as only sales team can help build trust among buyers who walks in to see the property.
But the question is are your sales team trained to handle this job well now?
This is a question every real estate company sales head, company CEO’s and L&D manager should keep asking themselves.