I live in Prabhadevi area of central Mumbai. When I moved here 17 years ago in May 2006, it was a quiet and quaint area, with trees everywhere and lanes leading to the Arabian Sea. Of course, as was the case with many other parts of central Mumbai, the old abandoned textile mills were just beginning to be replaced by office complexes. Now almost two decades later, like other areas of central Mumbai, Worli, Dadar, Lower Parel, Parel, Matunga etc., this area is full of residential skyscrapers which are priced like a bomb. What was largely a lower-middle class and middle class area has become very posh. At last count, there were at least eight Starbucks coffee shops within a few kilometers of where I live.
However, if you walk around the area late in the evening, you realize that many of the flats in these skyscrapers remain uninhabited. This can be gauged from the fact that the lights are not on in many houses. And this is after some skyscrapers have been around for more than half a decade.
So what does this tell us? Either the builders have still not been able to sell some flats or people have bought the flats and locked them. Given that some of these skyscrapers have been around for a while, I’m more tempted to go with the latter. Now the question is why would anyone buy such an expensive flat and lock it.
Those in the real estate business say that these abandoned flats are an investment. Perhaps they are, but there is another important reason why people buy these flats and then close them. And this is conspicuous consumption, a term coined by Thorstein Veblen, a sociologist and an economist. As he wrote in The Theory of the Leisure Class: “The conspicuous consumption of valuable goods is a means of prestige for the gentleman of leisure. As wealth accumulates in his hands, his own efforts will not succeed in proving his opulence adequately by this method.
Now what does this mean in simple English? Philosopher William McCaskill defines conspicuous consumption in his book What We Owe the Future as: “wealthy individuals buy goods in very public ways to show how much wealth they have.”
Let’s take the example of corporate executives who move up the hierarchy very fast. Of course, they are paid very well. But unless you have seen his salary slip, there is no way for you to know. And no corporate executive in the right mind is going to view his salary slip in front of the world at large. In addition, he may have a large portfolio of investments in company ESOPs as well as in shares of other companies, mutual funds, etc. But it is all paper money.
How can such persons present their prosperity to the world at large? One way is to buy expensive residential real estate. They can start living in the new flat and keep their old flat closed or they can continue to live where they were and keep the new flat closed. As McCaskill writes: “The universality of conspicuous consumption suggests that there is a cultural evolutionary push towards it.”
Despite evolutionary pressures, in a country like India, conspicuous consumption of real estate creates just the wrong kind of incentives. A house which is locked is of no use to anyone. Everything that went into building this house, from sand to cement, from steel to bricks to capital, could have gone elsewhere. This conspicuous consumption drives up demand, which pushes up prices for everyone else. Furthermore, it encourages builders to focus on the higher end of the market without really trying to cater to the lower end. The fact is that affordable housing in India refers to flats that cost 40-50 lakhs or more, it is a joke that comes out of this conspicuous consumption.
The irony here is that the government, through various tax concessions, encourages people to buy homes that they do not need. This is something that needs to end. Of course, this still won’t stop people from buying homes to signal their affluence, given that it’s culturally built into our value systems. However, this would be a good start to prick this bubble.
Bad Money is written by Vivek Kaul.
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