Houses are similar to equities/shares: Usually, the demand is inversely related to price i.e. if price goes up demand falls and vice versa. However, in equity markets we see that if prices rise demand for that sharte rises expecting further appreciation. This is infact not limited to just equities but commodities as well, which are traded in various exchanges these days.Similar behavior is being seen in housing markets. As prices have risen, so has the demand. I am yet to see slowing down of demand for houses in Mumbai.
This takes me to the next part of the analysis. What is driving so much demand? Where is so much money coming from? How come people are willing to buy more and more at higher and higher prices. Most properites are already booked and you are oftyen told that only a couple of flats are left. And this is a common statement no matter which part of the town you are in.The people say it is due to the growth in economy which has led to higher salaries/incomes etc. I don’t really agree as economy has increased by about 30% in 4 years, the housing prices have increased by almost 200-300% in all the regions. I think a large part of the increase is due to the increase in equity prices. The high equity prices have led to increase in wealth which has been deployed in housing markets.
Another point to debate is whether the housing prices have reached to new highs and would not decline to the earlier levels. In economist jargon, whether the demand curve has shifted to the right indicating higher prices for each unit. Like we say Indian economy has moved to a new growth trajectory can we say the same for housing markets?Here, it has been seen that this is not the case as similar highs were reached earlier as well (around 1993-95). So we can’t say whether demand curve has shifted right or is it simply a movement on the curve.
Another point is that information asymmetry is at its highest (and worst) in this market. How do you know whether the price is a correct one? How do you know whether the builder is a good one using proper construction material?I still haven’t figured out why we can’t have some regulation in this market to verify builders, prices etc. Given the huge costs and lifetime incomes, it is really surprising. The Banks do act as a quasi-regulator while giving loans but it is not enough. We still do not know whether the prices are right or is because of collusive practices.
The summary is the same- it is going to be really difficult to survive in this city going ahead.
I get some support from Govind Ethiraj. He expresses very similar views in his article and adds that RBI should only cut rates when property prices fall.