Archive for January 24th, 2008

Is Mumbai a superstar city?

January 24, 2008

One thing which I could never understand is despite so many problems, why do housing prices in Mumbai continue to rise?Both commercial and residential property prices are extremely expensive and continue to rise exponentially. Every day, you get to hear deals being made at even more higher prices when you hoped the previous deal was perhaps the peak.

This paper provides quite a few answers. Thanks to this Mint article for pointing the paper. What is a superstar city?

A MSA (Metropolitan statistical area)

is categorized as a superstar if it exhibits high demand, defined as whether its sum of price and quantity growth over the prior two decades is above the sample median, and it has a low elasticity of supply, indicated by a high ratio of price growth to quantity growth. We allow the high-demand cutoff to vary over time to account for changes in the aggregate economy. By contrast, the cutoff for having a low elasticity of supply should not vary over time since aggregate changes in demand should not affect the ratio of price growth to unit growth.

I will post my comments and its application to Mumbai later.

Addendum:

It is a well known fact that in Mumbai there is shortage of housing units. It is a city which gets talent across fields- acting, modelling, finance, etc. Even most corporate houses have their headquartyers in Mumbai. A Mumbai post is always looked upon as a plum one and the one to hope for.

So, given the limited supply of land/houses, and with huge number of people coming, the only way is to see the house prices going up. So all this is pretty well known but to say all that via an academic paper is what makes this paper different. As the paper shows, Mumbai has all the elements of a superstar city.

However, the situation between India and US quite different. US can afford to have superstar cities as first income levels are pretty high and second there are alternative cities one can work in. In India, there are just a handful of cities which generate jobs and given the size of the population there is always a lot of pressure on the few cities.

As a  result, despite paying such high premiums for a house in Mumbai (and other services), one doesn’t get the quality he should actually be getting. In most places in Mumbai, there is water shortage, poor roads and the list of problems is endless. Despite the problems, people don’t move to other places as you get much better work and opportunities in Mumbai as most companies are based here.

So, it is not really right that Mumbai becomes a superstar city as apart from very rich, loads of low income people also flock to the city. But as house prices are so high, it becomes really difficult to manage a living.

A better solution is to help develop infrastructure in number of cities in the country. This would reduce pressures on Mumbai and help people find employment elsewhere. It is happening as we see cities like Jaipur, Nasik etc coming up but given the population pressures more effort is needed.

Why just focus on Mumbai and make it an international financial centre? This will make it a bigger superstar. Instead develop alternate financial centres in the country and help Mumbai from its existing immense pressures. And after the pressure is reduced, MIFC can be moved ahead. As so far Mumbai is not just a financial centre but does a wide variety of activities. Someday someone will talk about making it an International film centre like Hollywood. How will so many people be absorbed int he city? Those who believe the infrastructure problems in Mumbai can be solved and requires a political will more than anything else, don’t understand the magnitude of the problem.

As Ed Glaesar said, economics of cities approach says people should get more choices. So that should be the approach in India. Otherwise, we will see more and more migration to places like Mumbai and problems of plenty.

And it is not as if the other cities can’t develop. In western UP, every city had some speciality handicraft and number of industries were run based on that art. However, with globalisation and China, industrial activity has slowed in these centres. So, it is not as if Mumbai, Delhi etc alone have been doing some industrial activity, there are other centres as well provided we understand their importance.

This is something even Bob Shiller advocates.

Assorted Links

January 24, 2008

1. CBO’s latest economic outlook suggests there will be a slowdown not outright recession. WSJ Blog also writes on the same

2. WSJ Blog saysthat the rate cut is due to Bernanke research. The research looked at the way financial system drove the length of depression. So, does it imply that we see similar conditions like the great depression?

3. WSJ BLog updates on what NBER thinks about recession

4. Greg Mankiw says markets expect another 50 bps rate cut in the Jan FOMC meeting.

5. Rodrik onDavos

6. Fin Prof points to importance of compounding

7. EPSA Blog on findings of seminar on development in India.

8. TTR getsbacking from Soros

9. Dr. Bimal Jalan (former RBI governor) is a man of few words. But whenever he talks, it makes a lot of sense. See this interview for details.


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