What is driving the housing prices in Mumbai?

I have often cribbed about the numerous housing problems in Mumbai (here, here and here). I have been noticing quite a few things lately about the housing market in Mumbai.

  • 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.

Addendum:

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.

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22 Responses to “What is driving the housing prices in Mumbai?”

  1. HmmBut Says:

    Do you think its an asset bubble? To me it seems like one. I live abroad but most people I talk to seem to be getting easy credit where it used to be almost impossible earlier. Also, people are buying for speculation, there are some crazy deals that I have heard of and recently I am hearing of people buying out of the fear that they will be priced out of the market very soon. All of this sounds very much like what happened in the US. Of course, I have the bias of what I see in the US. Indians have seen their real wages rise (correct me if I am wrong here.) So the facts on the ground are different.

    But I am jittery.

  2. HmmBut Says:

    I found this:
    http://www.business-standard.com/common/storypage_c.php?leftnm=10&autono=306489

    RBI warns against realty asset bubble
    BS Reporter / Mumbai December 05, 2007
    Buoyant property prices pose risk to banking: Rakesh Mohan.

    The strong demand for homes and home finance is expected to keep property prices firm, posing a risk to the banking system, given the absence of transparency in the real estate sector.

    The elevated realty prices along with non-transparency in the real estate sector may lead to an “asset bubble” and pose risks to the banking system, according to Reserve Bank of India (RBI) Deupty Governor Rakesh Mohan.

    In addition to the substantial backlog in housing, further growth in income and pick-up in the pace of urbanisation are expected to maintain demand for housing and housing finance high over the next few years, Mohan said in his address at the Yale University in the US on India’s financial sector reforms.

    Mohan pointed out: “In view of the expected high demand, pressure on real estate prices may continue. Moreover, real estate markets are characterised by opacity and other imperfections in developing countries……

    I am more worried about another banking crisis with NPAs and also the fact that young people are being priced out of the market.

  3. Do we see similar housing demand in Mumbai? « Mostly Economics Says:

    […] we continue to see the housing prices rise (and rise and rise) in Mumbai. I have explained previously the demand curve has actually become an upward sloping curve with hardly any effect of rising […]

  4. Vikas Deshpande' Says:

    As an realty analyst and dealer, I would like to stress that present, March 2008 realty prices in Mumbai have gone up beyond anybody’s imagination and out of real propertion only because of speculation and NRI’s investment and not at all real end users. From one study report in march 2008, there are about 1,20,000 flats in Bangalore and 80,000 in Mumbai lying vacant. Overseas NRI’s have invested heavily in realty especially in Mumbai and Bangalore, hence unrealistic prices are seen. Real End users with home loans buying at this prices are cautioned as the prices in the coming months may see 30 to 40% decline due to number of factors-

    1)Investors in share market usually book huge profits and divert this extra fund in realy but now have sufferred huge losses due to share market collapse.

    2)As Summer approaching, there will be huge power consumption demand in new hudreds of malls, skyscraper residential and commercial buildings came up in Mumbai and Thane making power failures

    3)Monsoon this season is going to make make havoc and total collapse of infrastructure due to sewage problems created by developmets on the route of outflow of rivers and sewage passing.

    4)Foreign investors start selling flats and taking out money to invest somewhere in other asian cities like singapore and Dubai.

    Those local endusers or budget investors i realty with home loans will be put to acid test like share market

  5. Anil Shanbhag Says:

    I agree with the points mentioned by Vikas Deshpande.

    I had bought a flat in Mulund in 2007 for a rate of 4500 psf. as an investment option. I’m to sell it since last two months to book some profit
    but no takers for even this price. Firstly, people are reluctant to buy paying one time full payment. Secondly if there are bany serious buyers, they ask rates lower than I paid to purchase the flat. The prices heve really
    started going downwards.

  6. Aditya Kashyap Says:

    Realty prices is a big bubble by now like never before and real users or even retail investors need to be very careful here after as the bubble may burst finally in the few months like share market.

    I’m already a proud owner of a flat in canrtal suburb Bhandup. The builders other than my own complex, whom I had approached before and had demanded unrealistic rate psf are now calling back oftenly to offer far less rates.

    40% of total flats in my building are still vacant since we got possession in November 2007.

    I was like I believe many low budget flat buyers were unlucky to book a flat in last year 2007 because what I learned that my builder kept high rates telling us no vacant flat and increasing demand and we fell in trap.

  7. sidharth shah Says:

    The astronomical rise in realty prices in particular last one year is I believe purely speculative and not showing ground reality. Builder lobby is very active and agressively selling flats at unrealistic prices. Artificial demad is created and unsold flats are shown sold so that demand supply gap is widened.

    The aminities and facilities assured in brochure by builder for the price paid to own a flat is not delivered and who cares? attitude is experienced by flat buyers like me.

    The digged roads, traffic jamming, clogged drainages, polluted air with construction activities around new posh buildings add to woes of already frustrated flat buyers.

    I feel that it’s not worth paying current hefty prices for buying a flat in Mumbai and in return get worse.

  8. Avinash Sarang Says:

    What’s driving housig prices in Mumbai?

    You must be kidding. Go to field and try to sell a flat as a builder or flat owner. There are no buyers nowdays. No new projects coming up in Mumbai. There is stalemate. property market is stagnant and only sellers.

    With the new developments in new Bombay, Pune, Nashik etc.. the supply has increased and honeymoon days are over for developers for un imaganable flat prices.

  9. Amol Agrawal Says:

    It is good to get views from so many people over the housing prices in Mumbai.

    I was merely talking from a buyer’s persepctive. I agree to the viewpoint of Avinash who says only sellers in the market. Despite this, prices are hardly falling. You go to a builder in Navi Mumbai and prices are rsing every week. The builders usually say, last week we sold so many flats hence the price rise.

    Similar views are espoused by Anil as well. Vikas gives more reasons for the price rise – NRI money.

    Aditya also has a nice story to tell. Hard luck really.

    All this analysis and discussion points to –
    1) the prices have risen quite a bit.
    2) There are only sellers in the market

    My question is why aren’t prices falling despite so much sell pressures? My best guess is holding powers have increased and sellers can afford to hold on to the propoerty and not lower prices.

  10. How about buying a house in Omaha instead of Mumbai? « Mostly Economics Says:

    […] Moreover, it might also just bring some respite to the Mumbai property market. And address demand-supply problems which a visitors have commented on in this post. […]

  11. Milind Says:

    There must be some move from common public only to stop Land mafia/ currupted minister from the raising the flat prices. The virtual shortage has been created by these land mafia to extort money from common public. The blame goes to Goverment who is not taking any action against it. So its a call from common public as well as media to stop such nonsense since accomodation is primary necessity of the person

  12. P.M.Mathew Says:

    The Govenment need to act immediately for streamlining the rela estate sector. Now it is higjacked by Builders and investors.
    Black money flows into the system. It is a good method to convert black money to white. NRIs and big investors pour money to multiply it. Poor and genuine buyers who enter in the real estate at this time will suffer like those who have entered in the stock market in peak time. There is no competition exists in real estate sector but cartelism prevails. The IT rebate for housing sector is of no use to common man in present scenario.
    The price has been increased many folds and the benefit is not comparable. So the builder lobby is getting benefited.

    Govt. should allow multinational companies in real estate sector.
    All empty flats should be taxed. IT rebate should be allowed for flat purchase only once/twice for an individual. Develop good road infrastructure for better connectivity upto 50 – 100 km of cities so that suburbs can take more housing load. Take measures to curb black money. Call international tender and make affordable housing in Govt. land instead of giving it to builders. This will be more profitable to Govt. and beneficial to public.

    Mathew

  13. Nikhiel Says:

    How do we fix Bombay? For starters, FIX THE MASTERPLAN.

    SOLUTION – Go vertical.
    -Manageable blocks of three to five acres in Bombay have to grouped together and rebuilt.
    -In order to incentivise the redevelopment, the FSIs must increase. It is preposterous that Bombay has an FSI of 1.0 or 1.33 given that the population of the city is closing on 20 MM and will be the second most populous city in the world by 2020.
    -In order to avoid complications of utilizing the FSI for any particular 3 or 5 acre block, the entire block must be redeveloped at once in order to utilize its FSI.
    -To manage the redevelopment properly, these blocks must have no height limits (must go vertical) and must have large set-backs. These set-backs will enabe the City of Bombay to lay urgently needed new and large sewage lines, new public transportation lines such as metros, sidewalks, etc.
    -The 3 to 5 acre blocks, with the additional FSI must have part of the their total development potential allocated to public amenities such as either low-income housing, libraries, multi-level parking facilities, schools, markets, sewage treatment plants, sidewalks, etc.
    -In order to deal with flooding, all new development in low-lying areas must be built atleast 1 to 2 meters above sea level. Over time, all roads, public utilties will also be built at 1 or 2 meters above sea level which deal Bombay’s flooding problems.
    -The proposed solution substantially increases density in Bombay but does so vertically. It increases open spaces by increased set-backs enabling Bombay to deal with its sewage, public transporation and infrastructure problems. Bombay will essentially become a lot like Manhattan where most people, irrespective of income level, use its higly dense public transportation to commute while having almost every possible public amenity in a 3-10 minute horizontal or vertical distance.

    Please note that Bangalore and Chennai have new masterplans. The free FSI (without TDR, etc) are in the range of 2.5 to 3.75 depending upon the size of the road that the property abuts. Given its existing population and taking into consideration its future population, FSIs in Bombay must be in the 4.0 to 6.0 range depending on whether the 3 to 5 acre blocks abut large roads, or are a part of a financial district or residential district, etc.

    Maybe the proposed solution above is not the most optimal, but one must keep in mind that irrespective of whether one agrees with the proposed solution above, Bombay needs a solution to fix its problems with infrastructure, sewage, cost of real estate, low-income housing, flooding and urban sprawl. If not, Bombay risks DECAYING into a very expesnive, low-density, sprawling city like Mexico city or Los Angeles. As it is, it takes 2 hours to get from Mulund to Nariman point or from Bandra to Navi Mumbai, just image what will happen to Bombay in 2020. People will have to commute large distances in narrow roads in over-capacity disfunctional public transporation while increasing pollution, traffic, etc. Quality of life will be miserable – far worse than what it is now.

    Fix Bombay – let’s start the discussion now!!

  14. Nikhiel Says:

    Bombay needs a new masterplan.

    The statistics for Bombay are appauling at the least. Here are few of them:

    -55% of the city’s population live in slums.
    -The cost of real estate is ridiculous given the fact that 300 MM people in India live below the poverty line.
    -The quality and capacity of the infrastructure is far from optimal.
    -Though certain forms of public transportation work reasonably efficiently, they are far from optimal – traveling on Bombay’s suburban train system is a super-human experience – sweat, heat, no place to stand or sit, people hanging out of trains and sitting on top of them.
    -80% of Bombay’s sewage flows into the ocean untreated – that’s roughly 1800 million litres of raw and untreated sewage PER DAY. It brings to mind whether buy an expensive ocean facing apartment in Bombay is actually worth it? Also, it brings to mind whether one should eat fish caught of the coast of Bombay?
    -Large parts of Bombay have no sidewalks so people end up walking on the roads.
    -Traffic discipline is non-existent. Obtaining a driver’s license is a matter of paying a bribe and hence there is no controlled process of learning for new drivers.
    -Flooding in Bombay is almost a yearly event.

    Bombay is unliveable. Unless one is wealthy enough to pay atleast Rs.10,000 to 15,000 per square foot for an apartment, Bombay is a very tough place to live. The rich in Bombay have seceeded from India – they do not use the public transportation (buses, suburban trains), educate their children in expensive private schools (do not use public schools), and are not dependent on the government and municipal authorities for most things with a few exceptions such as using the police and roads. The rich living in their bubbles do not have to deal with getting clean water on a daily basis, commuting to work like a can of sardines on the suburban trains, having to deal with the floods since they live in expensive homes that insulated from the flooding.

    The middle class and the poor who comprise of the majority of Bombay’s population are the ones that bear the brunt for the lack of proper infrastructure, the over capacity of the suburban trains, the almost ridiculous prices of real estate, the lack of a proper mechanism to deal with flooding, the lack of property sanitation such sewage and gargbage disposal systems, the lack of proper traffic management systems, etc.

    The wealthly are thriving, but one only has to view the way the middle class and the poor live to realize that Bombay is crumbling – the right way to describe Bombay is “decay”. Bombay is on a decline – it is decaying. It is probably amongst the worst places to live in India if one is in the middle class or poor.

    How do we fix Bombay? For starters, FIX THE MASTERPLAN.

    SOLUTION – Go vertical.
    -Manageable blocks of three to five acres in Bombay have to grouped together and rebuilt.
    -In order to incentivise the redevelopment, the FSIs must increase. It is preposterous that Bombay has an FSI of 1.0 or 1.33 given that the population of the city is closing on 20 MM and will be the second most populous city in the world by 2020.
    -In order to avoid complications of utilizing the FSI for any particular 3 or 5 acre block, the entire block must be redeveloped at once in order to utilize its FSI.
    -To manage the redevelopment properly, these blocks must have no height limits (must go vertical) and must have large set-backs. These set-backs will enabe the City of Bombay to lay urgently needed new and large sewage lines, new public transportation lines such as metros, sidewalks, etc.
    -The 3 to 5 acre blocks, with the additional FSI must have part of the their total development potential allocated to public amenities such as either low-income housing, libraries, multi-level parking facilities, schools, markets, sewage treatment plants, sidewalks, etc.
    -In order to deal with flooding, all new development in low-lying areas must be built atleast 1 to 2 meters above sea level. Over time, all roads, public utilties will also be built at 1 or 2 meters above sea level which deal Bombay’s flooding problems.
    -The proposed solution substantially increases density in Bombay but does so vertically. It increases open spaces by increased set-backs enabling Bombay to deal with its sewage, public transporation and infrastructure problems. Bombay will essentially become a lot like Manhattan where most people, irrespective of income level, use its higly dense public transportation to commute while having almost every possible public amenity in a 3-10 minute horizontal or vertical distance.

    Please note that Bangalore and Chennai have new masterplans. The free FSI (without TDR, etc) are in the range of 2.5 to 3.75 depending upon the size of the road that the property abuts. Given its existing population and taking into consideration its future population, FSIs in Bombay must be in the 4.0 to 6.0 range depending on whether the 3 to 5 acre blocks abut large roads, or are a part of a financial district or residential district, etc.

    Maybe the proposed solution above is not the most optimal, but one must keep in mind that irrespective of whether one agrees with the proposed solution above, Bombay needs a solution to fix its problems with infrastructure, sewage, cost of real estate, low-income housing, flooding and urban sprawl. If not, Bombay risks DECAYING into a very expesnive, low-density, sprawling city like Mexico city or Los Angeles. As it is, it takes 2 hours to get from Mulund to Nariman point or from Bandra to Navi Mumbai, just image what will happen to Bombay in 2020. People will have to commute large distances in narrow roads in over-capacity disfunctional public transporation while increasing pollution, traffic, etc. Quality of life will be miserable – far worse than what it is now.

    Fix Bombay – let’s start the discussion now!!

  15. Rohit Says:

    Mumbai, the city of Big Dreams and even Bigger Dungeons.
    We Fall and Rise with the turn of events, just like a Fairy tail thet compells aven the ardent of Mumbai Fans to question their passion of living in Mumbai. We have seen the rates go higher and higher and all of a sudden plummet to all time lows. I am often intrigued by the sellers and buyers going all out in outsmarting each other. However, the truth remains, an all pervasive one, that in the end it is the brokers who have a ball at the cost of both sellers and buyers. The flats in Mumbai have become smaller and the rates in the suburbs have begun to rise steeply to make their presence felt when compared to the mainsteram mumbai ones. All said, Mumbai is posed to attract millions with dreams of owning a flat of their own in this city.

  16. Ameet Says:

    Hi, the next boom will be renting out flats. Builders will not sell, if they do not get a expected price. In US renting of flats is very common. With people moving from one state to another for jobs, they would prefer having a rented flat. Secondly i feel that the builders will come out with a small flat so it is easy to sell and also to rent.
    The only way the property prices can come down, is by the government control. Shelter, food and clothing are the basic rights of every citizen, and government should not allow hoarding and hiking of prices on these things.

  17. lanet gonsalves Says:

    lets get together & fight the politician builder nexus the real culprits who are responsible for making Mumbai a living hell…

    Where is the housing regulator or urban planning gone ??? is it only a distant dream what future does this metropolis hold ?? is anyone’s heart burning ? are we not entitled to a decent home in a good locality better quality of life afterall india is shining ??? when will we have a slum free Mumbai or are the greedy politicians creating a vote bank ??? should we struggle & pay our life time earnings for a shelter in this living hell ???

  18. rgreal Says:

    Hi,
    I found this site very useful for finding New Residential Projects in Mumbai.
    http://www.propertiesinmumbai.com.

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