Why do people buy homes they don’t live in?

I live in the central Mumbai locality of Prabhadevi. When I moved here 17 years back in May 2006, it was a quiet quaint locality lined up with trees everywhere lanes that led to the Arabian Sea. Of course, as was the case with a lot of other parts of central Mumbai, old derelict textile mills were just starting to be replaced by office complexes. Now nearly two decades later, like other areas of central Mumbai, Worli, Dadar, Lower Parel, Parel, Matunga etc., the area is full of residential high rises which cost a bomb. What was largely a lower-middle class middle class area, has become very posh. On the last count, there were at least eight Starbucks coffee shops within a couple of kilometres of where I live.

Nonetheless, if you walk around the area in the late evening, you realize that many of the flats in these skyscrapers continue to remain uninhabited. One can make this out from the fact that no lights are switched on in many homes. And this is after some skyscrapers have been around for more than half a decade.

So, what does this tell us? Either builders have still not been able to sell some of the flats or that people have bought flats kept them locked. Given that some of these skyscrapers have been around for a while, I am more tempted to go with the latter. Now the question is, why would anyone buy such expensive flats keep them locked.

Those in the business of selling real estate tell us that these locked flats are an investment. Perhaps they are, but there is another important reason why people buy these flats then keep them locked. And that is conspicuous consumption, a term that was coined by Thorstein Veblen, a sociologist an economist. As he wrote in The Theory of the Leisure Class: “Conspicuous consumption of valuable goods is a means of reputability to the gentleman of leisure. As wealth accumulates on his hands, his own unaided effort will not avail to sufficiently put his opulence in evidence by this method.”

Now what does this mean in simple English? Philosopher William Macaskill defines conspicuous consumption in his book What We Owe the Future, as: “Wealthy individuals buying goods to show off, in very public ways, of how much wealth they have.”

Let’s take the example of corporate executives who run up the hierarchy very fast. Of course, they are very well paid. But unless you have seen their salary slips, there is no way for you to know that. And no corporate executive in their right mind is going to put out their salary slip for the world at large to see. Also, they may have a great portfolio of investments in shares of other companies, mutual funds, etc., along with company esops. But all this is paper money.

How can such individuals project their richness to the world at large? One way is by buying expensive residential real estate. They might start living in the new flat keep their earlier flat locked or they might continue living where they were keep the new flat locked. As Macaskill writes: “The universality of conspicuous consumption suggests that there is a cultural evolutionary pressure towards it.”

The evolutionary pressure notwithstanding, in a country like India, the conspicuous consumption of real estate just creates the wrong kind of incentives. A house that is locked is of no use to anyone. Whatever went into the making of this house, from sto cement to steel to bricks to capital, could have gone somewhere else. This conspicuous consumption adds to demwhich pushes up prices for everyone else. Also, it creates incentives for builders to keep concentrating on the upper end of the market, without really trying to cater to the lower end. The fact that affordable housing in India refers to flats which cost 40-50 lakh or more, is a joke that comes out of this conspicuous consumption.

The irony here is that the government incentivizes people buying homes they don’t need through various tax concessions. This is something that needs to end. Of course, this still won’t stop people from buying homes in order to keep signaling their richness, given that it’s something culturally built into our value systems. Nonetheless, it will be a good start to prick this bubble.

 Vivek Kaul is the author of Bad Money.

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