Archive for the ‘Mumbai’ Category

Navi Mumbai airport delayed..cost prices rise tenfold..

April 3, 2013

It was amusing to read the travails of Navi Mumbai airport y’day.

The CM of Maharashtra said there has been no proress on the airport and work hasn’t started yet. Moreover, cost to build it have tripled:


A-resilient vs B-resilient cities

December 21, 2010

After reading this article from Mario Polèse, I checked other papers by the urban economist. I was impressed right away.

This paper looks at the issue of resilient cities. He looks at cities which recover from external shocks. He categorises such cities as two types –

  • A- resilience: ability to survive shocks
  • B- resilience: ability to change and grow after shocks



Navi Mumbai Airport — an economic perspective

October 5, 2010

Navi Mumbai Airport is in news for all the wrong reasons – another instance of crucial infrastructure project delay, environmental concerns, political parties divided on the airport etc. Just recently, the Ministry of Environment asked CIDCO (the nodal agency reposnsible for development of Navi Mumbai) to draw the plan again. There were some errors.

However, the project is of a lot of interest  for people interested in  Indian infrastructure. The project shows once again how our infrastructure projects are mired with controbversy and delay. One has been hearing about the new airport for some years now but nothing has hapenned so far.

 What is also disappoininting is lack of any study to understand the issues. Even if there is, it is hardly put up on any website. So, if you go through websites of CIDCO, Ministry of EnvironmentPlanning Commission’s Infrastructure Secretariat etc you just don’t find anything useful. After searching Ministry’s website, you just get this useful information. It talks about coastal regulational zone (CRZ):


Research papers on Indian housing sector

April 16, 2010

I came across very useful set of occasional papers on Indian housing sector by National Housing Bank.

I have read executive summaries of the papers and found them to be quite good. They give you good insights into Indian housing sector. The second paper on transaction cost in particular is very interesting as it explains transaction costs of house buying in various cities across India.

NHB has done its website quite a bit. There is an updated time series of its housing index – NHB Residex. It includes data till Jan-Jun 2009. Previous analysis (till 2007) can be found here.  

  • In Bangalore, Kochi, Hyderabad and Jaipur prices have declined from 2007 levels.
  • In rest of the cities prices have increased.
  • The crisis started from Sep 2008 onwards. So let us compare what happened in the period July-Sec 2008 and Jan-Jun 2009. In Jaipur, Hyderabad, Bengaluru, Bhopal, Delhi and Kochi have registered a decline in the period. The cities of Lucknow, Mumbai, Pune, Patna, Faridabad, Surat, Kolkata, Chennai and Ahmedabad- see no impact of the crisis
  • In particular the rise in prices of Kolkata is quite spectacular. Mumbai shows steady growth throughout the period 2007- Jan-Jun 2009

Also check various areas in these cities.

Mumbai has water problems and Navi Mumbai has swimming pools!

January 12, 2010

The chronic water problems in city of Mumbai are no more news. What is news is how worse the problem is going to be this year or in coming future. This year because of the poor monsoons Mumbai’s municipality body BMC has decided  to cut water supplies this year. But the problem is not limited to this year and is going to continue in future.

Now I don’t know one bit about the water supply and distribution in Mumbai. But what irks me is to see what is going around in its nearby cousin town – Navi Mumbai.

Now, in Navi Mumbai most new construction residential houses you get to see have swimming pools. You ask brokers/builders about why have swimming pools given the water crisis in Mumbai and you are laughed off. They say there is no water problem in Navi Mumbai and they can afford to have swimming pools.

I have nothing against swimming but clearly it is a luxury given the water crisis Mumbai has.

First, If Navi Mumbai has water surplus, why can’t it be transferred to Mumbai. It will not solve the water deficit of Mumbai but still could fill up atleast something.

Second point is how long does it to take to get into a water crisis. As it is quite a few societies in Navi Mumbai already have water problems. So surplus water from other Navi Mumbai regions should be first transferred to deficit Navi Mumbai regions.

Third, what happens to swimming pools? Someone was telling me that BMC allows one swimming pool for a large residential building complex (say 10 buildings etc). So we can have same kinds of rules for Navi Mumbai as well.

Fourth, it would make housing more affordable. The builders charge you for club houses which has swimming pools, sauna, gym etc.

I don’t think we are taking the water crisis situation seriously. It needs a lot of strict urban planning.

RBI wants to regulate HFCs but who regulates housing market?

August 10, 2009

Business Standard news says:

The Reserve Bank of India has added a rider for offloading its stake in the National Housing Bank to the government by suggesting it handle the regulation, licensing and supervision of housing companies to provide banks and housing finance companies a level playing field.

Housing finance companies are currently regulated by NHB, which is, in turn, regulated by RBI. NHB is wholly-owned by RBI.

RBI sources said the need for regulating housing companies arise because they do not have prudential guidelines or risk-linked capital limits to which banks, which come under the central bank’s purview, are subject. “There is clearly a regulatory arbitrage here. Housing is a priority sector, so many entities are getting into this business by floating housing companies and thereby skirting RBI’s stringent prudential guidelines,” said a source.

This is all fine and needed but the question that still remains is who regulates the housing market?

As I have pointed out in many a post (focused on Mumbai with similar trends catching up elsewhere), the way housing market runs in India is highly inefficient. It is completely run by builders /brokers and is just a plain seller driven market.

As a buyer you are always at the mercy of the sellers and there is just no clarity in the transaction. A buyer is not just worried about the arrangement of finances but the paper work as well. And a buyer is really lucky not to land into variety of problems from really complex problems – land deed, clearance from govt authority, quality of construction etc etc to simpler ones (relatively)- water, power, security  etc etc.

Despite all this, People just end up buying houses as everyone wants to have a permanent home. Moreover, staying on rent and shifting places is a pain for all. But am sure none are happy with the state of affairs. It is always the builders /brokers/sellers which laugh all the way to the bank.

RBI Gov in his excellent speech (my comments on the speech) says:

Forgotten in the euphoria of financial alchemy is the basic tenet that the financial sector has no standing of its own; it derives its strength and resilience from the real economy.  It is the real sector that should drive the financial sector, not the other way round.

In sum, we first need better regulation for basic housing market which is completely a miss. Though, this is not to criticise RBI move of regulating housing financial companies. It is much needed. However, by not having a proper regulatory framework for real housing sector we cannot expect the housing finance sector to work efficiently. This only complicates things for RBI.

I just don’t know why we don’t see any kind of work on these basic issues. The transaction sizes or size of the market is just too big to be ignored. It beats me completely.

Built up, super built up or plain loot?

July 22, 2009

This post is about the state of housing market in Mumbai and it is the third option right away. ME has been a big critique of the way housing market functions in Mumbai (and as others point out the trend is same in other places as well). It is  a market highly distorted towards the sellers and brokers with customers having no choice but to get looted as everyone wants to buy a house.

I had earlier pointed out to the economics of house in Mumbai. I thought things might improve after the ongoing crisis where realtors were the most effected. As the crisis situation has eased the builders show that they have not only refused to learn the lessons but have even decided to distort markets further.

Okthe main problem one sees in buying an apartment is this concept of built-up/super built-up (i call it plain loot). Under this, the builders say the flat size is say 1000 sq ft but is based on super built-up area. It means out of 1000 sq ft, you would get around 650 sq ft carpet area (if super built up is 35%) and rest 350 sq ft is for elevator, stairs, terrace, play-area etc. After all builders have incurred costs not just on apartment but other things as well and people should pay up for the remaining facilities as well.

Fair enough. But how much built-up? 25%, 35%, 45%?? How much?? It differs from building to building. You ask 2 sellers how much is the built-up and you get 3 different answers (and we just blame the economists and accountants for the same). What is worse is that when you see the final papers you realise the built up is much more than what you thought was already very high. When you protest, you are told if you are spending so much how does a little more matter? Some even say, if you think this way you will never be able to buy a apartment here!! Most want you to pay all the built-up minus carpet area difference in unaccounted money and we aren’t talking about a few thousands here.

The old buildings which perhaps had much lesser built-up, the sellers in the same expect same kind of charges. Why can’t we have some kind of standards across housing buildings?

When the crisis started, the realtors started crying hoarse that demand has fallen, they have high excess capacity, sources of funding have dried etc and need support. Large part of the media weer sympathetic to their cause saying they employ large number of people and should be supported. However, media also added prices were too high and need to be lowered. Some builders started lowering base prices but actually raised prices elsewhere (parking charges, increased built-up area, floor rise charge (every floor rise you pay some amount extra) etc etc). Some started offering discount but it was a % (5%-10%) which was available even before the crisis.

Now as the crisis has eased, the base prices have also started to rise and the recent advertisements show the builders are actually doing us a favor by offering flats at what they think is very low prices.

And this is not the lone factor.  If you delay your EMI, you are charged a penalty but the builders can continue to delay their projects without any penalty. Some may never even complete their projects. All you can do is do a court case against them andloose more money in process. The quality of the construction is never known. You don’t know whetherthe builder has got all approvals from the concerned authority. You don’t know whether the building is on legalised land? We don’t have a list of brokers in the market who are authorised to serve this market.  I mean you name it and we have issues with this housing market.

And despite all the issues, no one really talks about them. All we get to know is whether share price of some realty form has declined or risen.  We have seen how bad housing market is linked to the real economy in this crisis. It is time we sort out this mess.

The other issues may take time but we can surely do something about this built-up/super built-up issue. You keep hearing carpet area regulation has been passed (builders to sell on carpet area) but no one complies with it. Even if the builders are charging a built-up we need some standard %. Is it too much to ask for? It will be great if media also takes up this issue with fervour instead of just looking at share prices and landbanks.

Is Mumbai more costly or Delhi? Analysing residential housing prices

December 30, 2008

I had posted a while back on launch of India’s official Index  that helps track prices in residential housing market. The index is developed by National Housing Bankand was named as NHB-Residex. The index was launched by then FM P. Chidambaram on 10 July 2007 but was not available on the website.

However, the good news is that index has been made available on the website. It is a delight as we have some official data to track developments in real estate. It is available for five cities – Mumbai, Delhi, Bangalore, Kolkata and Bhopal. The recent interview of NHB Chairman tells us that it would be expanded to 15 cities.

NHB’s RESIDEX, which is India’s first official property index, was launched in July 2007 for five cities — Bengaluru, Bhopal, Delhi, Kolkata and Mumbai — covering the period 2001-2005. It has since been updated to December 2007. The property index has been well received. It is being expanded to cover 15 cities and up to December 2008 which will be ready by March 2009. In another year, it will cover all cities with population above 10 lakh.  

Another feature of the data is that we have intercity data as well. So for instance within Mumbai we have data for Malabar Hill, Navi Mumbai etc. I have written number of posts on Mumbai’s housing market (which mainly said it is unaffordable) but have never had the statistics. So this data will help and it will also help compare the trends across cities.

So what are the trends like? We have data from 2001 – 2007, so 2001  is  the base year at 100. The growth trends are as follows:


Housing Market continues to increase prices

December 15, 2008

I don’t understand this hue and cry which real estate companies have been making. They show as if skies are falling for them, but refuse to make any changes in their practices and prices. If any company (or a set of companies) is (are) in trouble and are not able to sell their products, the obvious choice is to incentivise prospective customers. However, such things don’t apply to real estate industry. They drove irrational exuberance and want to continue to live by it (see this article on DLF and Unitech practices by Mint and a primer on economics of home buying in mumbai).

I happened to visit the recent property exhibition at Navi Mumbai by Builders Association of Navi Mumbai and was visibly disappointed. The builders continue to increase prices of properties compared to previous exhibition in 2007. Some seemed to have learnt lessons but are passing off cheap discounts as say 10% off, stamp-duty off etc. This is trivial stuff as the real thing- property prices continue to be high. And despite the government notice to sell property on basis of carpet area, one still has to pay 30%-40% as the super built-up area ( see the explanation here

Now, it is demand and supply basics. They could pass-off these higher prices pre-crisis but if they want to sell off now, they have to lower prices. Why? because there is weak demand.

First, home loans are coming at a higher interest rate. Though banks have lowered rates for houses less than 20 lakhs, there are hardly any houses available for that amount in Mumbai (and I would guess the same for other metros)

Second, people don’t have the kind of incomes they had. Most of  this home buying was driven by people in growth sectors- IT, Finance etc and these sectors don;t have the kind of growth.

Three, people can see now the bubble has been burst with real estate companies losing so much value on stock indices. Financial markets are lead indicators of further trouble to come.

Fourth, the easy money phase is over with foreign money and domestic money drying up. Liquidity may be much better now, but people are wary going forward.

And despite all the trouble no decline in prices.  I have been seeing news channels, reading papers etc on housing markets  and all say the same- hardly any change in prices. I was hearing a radio station where someone from the real estate industry himself said the industry has been thriving on excessive profits for past 4-5 years and that phase seems to be over. However, nothing is being seen in change in prices.

I agree this industry employs large number of people and needs support. But you support an industry which is willing to change as per economics of the situation. All this help from RBI and Government is not going to lead to demand as prices are still too high. And once you include practices (there is just too much information asymmetry between a builder and a buyer, see this), you know the buyer is being taken for a ride.

This is actually a great time to reform the industry and its practices. But there seems to be no effort on this front. What one gets instead is bailouts and cries from the industry.

Understanding the surge in housing prices in India

September 5, 2008

I came across this interview of Deepak Parekh, Chairman of HDFC. It has loads of wisdom on housing markets, reforms, indian economy etc.

First and more importantly his view on housing:

I personally feel that the developers have gone totally haywire. They were buying land as if there is no tomorrow. That was a big mistake.
RBI prohibited all of us from lending money to buy land. In fact, the RBI directive was repeated – first, it was meant for banks but later (it was) extended to housing finance firms too. It expected the asset bubble. RBI had said that banks can only fund the developers after the projects get the commencement certificate. We followed the RBI norms and most of us are safe today.
When we stopped lending, foreign equity flowed in. A host of private equity funds and venture capital funds came to invest in land and they all were promised the moon… phenomenal rates of interest. Most of the transactions were debt transactions from overseas in the garb of equity.
They came through the automatic approval route under FDI (foreign direct investment) and money came in quickly as equity deals do not need prior approvals. They are mostly convertible debentures and preference shares, with conditions that before three years they will be redeemed. The developers borrowed money from overseas to fund their land deals at 18-20% interest. The land prices have crashed but they have committed to pay high phenomenal interest rates. Overall, 60% of such deals could be debt and the rest equity, and my estimate is that between $12 billion and $15 billion (Rs53,160-66,450 crore today) has come through the FDI route.
This is superb and explains what has been going on in the housing markets  in India . I have explained in numerous posts (see this) that despite interest rates rise etc, we don’t see any correction in housing markets in Mumbai. The prices continue to rise. Moreover, the developers expect sales to pick up during festivals and prices to rise. The developers have borrowed money for development and only way it can be recovered is by keeping the prices high. They seemed to have forgotten basic economics – when prices go up, demand comes down.
Where will the maximum correction come?
Is there some more pain coming?
Yes. How will they (developers) pay back? Where is the liquidity? Sales have stopped. Even those financial institutions, who have disbursed money carelessly, will find themselves in trouble as a large number of builders will face difficulty.
We need to categorize developers’ investments in various segments — malls, shopping centres, commercial and residential complexes. The malls have been worst-hit and the residential units the least-hit.
The advantage with the residential segment is even if the prices come down, there is some demand because of the shortages, but the malls are going abegging and people are converting malls into offices.The maximum pain left is in the retail segment; followed by IT, commercial; and the residential segment.
How much pain is left depends on the locality. For instance, in south
Mumbai, there is a shortage and hence prices will not come down drastically as you are not reclaiming more land, increasing FSI and redevelopment is not happening. Where are the new buildings? So, prices cannot go down. But in the suburbs, they can…
I worry about Bangalore, Chennai, Hyderabad because supply was ten times last year. The maximum pain left is in the retail segment; followed by IT and commercial segments; and finally residential segment. I’d think that Mumbai will be relatively less affected because of lack of land here.
I never really understood the concept of building so many malls in Mumbai when housing supply itself is short (see my post here). You see malls springing everywhere. I can understand all this consumption buzz but it has been overestimated. Most people visit malls to just enjoy the cool AC, eat food in the food courts and do window shopping. I have been noting quite a few shops which had taken space in Malls have vacated it. Only big brands are managing to stay float. The question over cheap housing  in Mumbai still remain.
How do you make housing affordable?
The land prices have gone very high and the only way to get cheap land is to do rehabilitate a slum and you can really move fast if there is political support.
Loads of wisdom from the man who is closest to the housing market in India.  I also liked his take on reforms in India:
The Indian economy has had a phenomenal growth till recently. Do you see any missed opportunities?
We didn’t do many things. Particularly, we did not start any large project. There are six steel mills under planning but not even one of them got the (required) approvals. There are problems of land allocation, environment, iron ore, lack of infrastructure…. The Mittals, the Tatas, the Essar group, the Jindals (JSW Group) and Posco, all have big plans but none of them has started construction as yet.
Similarly, I know plans of a dozen-odd greenfield and brownfield cement plants are. For instance, LafargeSA has plans for four states – Himachal Pradesh, Karnataka, Rajasthan and Meghalaya, but not a single project has started. 
If we don’t increase our domestic supply of cement and steel, it’s going to kill us in the long run. In every sector, I see the same thing.
We have been hearing horrendous stories about FCI. Food is rotting there. Has anybody looked at reforms at FCI? Shouldn’t there be a public debate on it? These are all adding to our inflation….
We have killed our fertilizer industry by giving them unremunerative prices. The government subsidy comes after 18 months and banks do not give working capital to the fertilizer companies. I was a director on the board of fertilizer company but I left as the company was turning a defaulter. I could see this coming and resigned very quickly as otherwise RBI would have blacklisted me (for being a director of a defaulting company)

House prices in Mumbai refuse to decline

September 1, 2008

Niranjan Rajadhyaksha in his superb blog Awkward Corner had pointed the stock market gave more returns than Mumbai real estate during 1979 and 2008. This was an amazing piece of statistic.

However, unlike the equity markets, house prices just refuse to decline. Though, there have been reports over decline in housing prices, it is somehow only on paper. A recent Newsweek story said it is cheaper to buy a flat in Manhattan than Mumbai.

The stock prices of most real estate companies have slumped, but not the prices of the goods they manufacture. If interest rates are rising, we should see a fall in house prices. But there is nothing like that happening.

Talking to various brokers in the city, the prices are still very strong and infact continue to rise. Why should this continue? I had pointed to the presence of endowment effect being present in the housing market. This is just getting stronger as sellers have really high holding capability.

I was reading in one of the papers that Builders actually expect prices to rise further hoping demand increases in festivals. Well, what can you really say?

Improving housing market practices via banks

June 19, 2008

In his open letter to RBI Governor , V. Raghunathan (CEO, GMR Varalakshmi Foundation) starts like this:

Dear Dr Reddy, have you ever read—I mean really read— the contracts builders hand out to ordinary homebuyers to sign for a transaction worth lakhs and even crores?

People would know what is to follow next. He goes on to say the contract leaves the home buyers without any help whatsoever. He is completely at the mercy of the builder as the contract is lopsided. The builder charges a huge penalty if the buyer misses an installment on the due date but hardly any penalties are there if the builder misses his completion stages.

While the buyer will have to pay a penal interest of 18% per annum for a delay of even 15 days on his instalments to the builder, the builder has no such obligation for delaying the completion of the work by any length.

Then he points there is no say to enforce quality of construction promised. It all depends on the builder. All sellers say it is high quality stuff at time of sale but we all know how false these claims are. Other products don’t matter as much as a house. In a house most people put their lifetime savings (or are entitled to pay the bank for near life time) and there is no recourse. In Navi Mumbai for instance, whichever property you buy, it starts leaking in the first rain itself and you can’t do anything except spend more to fix it. 

The author then asks RBI Governor to use banking system to impose some standards in this industry:

Often, the agreements with the builder are linked to the loan contracts, so that the loan disbursals go directly to the builder. So it should be possible for banks providing the housing loan to require all payments from buyers to the builders to be made through an escrow account. The bank could also hold a limited power of attorney from the homebuyer (borrower) to ensure that the builders have met their obligations and once so satisfied, clears the escrow.

I must say it is a good thought. The practices in housing markets in India (particularly in metropolitan cities , where we have multi-storey apartment system) are so bad, that any help would be great. The Builder-Broker nexus is too strong and you feel duped all the time, but can’t do anything. Whether you take a house on rent or buy it ( See the economics of house-hunting in Mumbai), there are such huge transaction costs that you always feel burdened.

For instance, in Mumbai you have something called a “super built up” area which is roughly about 35%-40% of area. So, if the builder quotes 1000 sq ft area what you get is 600-650 sq ft area but you pay for the entire 1000 sq. ft. Super-built up includes area of terrace, balcony, parking, garden etc. and as this also involved development costs. the buyers have to pay for it collectively. But why 35-40% from all the buyers??  This was earlier called built up which was 15-20% but now has been extended to 35-40%. And worst of all, this has now been included for all flats. Even the old properties are selling at superbuilt up areas.  

Apart from this, Banks can also be very usefully used to do some rating of the builders. As of now, Banks just approve certain builders but there is no rating. You really do not know which builder is a good one. As a result, the apartment prices are near similar and depend on the area, not the quality of the builder. Some builders have developed a brand equity but they are very few in number.

The author also points to a problem which provides some food for thought for beh eco guys: 

And the most unfortunate thing is that most buyers do not (and others cannot) even read what they are signing on, thinking the process to be a mere formality.

This is also a big problem. The form is a mixture of legal and financial lingo and very few people have the speciality to understand both. The forms should be made simpler and shorter. But again this is a less of a problem than solving the above issues.

Housing is big problem in places like Mumbai and it is a very basic issue. If banks can help, it is most welcome. Moreover, research and debates are advocating that Central Banks need to look at asset prices (discussed here) and asking banks to monitor developments in housing markets might just be a good idea.

Mumbai Metro- in a mess

May 7, 2008

How messy things can be in infrastructure can be seen from the ongoing Mumbai metro rail project. (See Wikipedia link as well).

The project is to be done in 3 phases and with each phase linking certain places. In all there are going to be 9 such links:

Phase I (2006 – 2011)
Versova – Andheri – Ghatkopar  – 11.07 Km
Colaba – Bandra – Charkop – 38.24 Km 
Bandra – Kurla – Mankhurd – 13.37 Km
Total – 62.68 Km
Phase II (2011 – 2016)  
Charkop – Dahisar  – 7.5 Km
Ghatkopar – Mulund – 12.4 Km
Phase III ( 2016 – 2021) 
BKC – Kanjur Marg via Airport  – 19.5 Km
Andheri(E) – Dahisar(E) – 18 Km
Hutatma Chowk – Ghatkopar – 21.8 Km
Sewri – Prabhadevi – 3.5 Km  

The Total Length is 146.5 km  and is estimated to cost around Rs 19,525 Cr .

The first line linking Versova – Andheri – Ghatkopar has been done under a PPP agreement called Mumbai Metro One which is a Joint Venture Company formed by Reliance Energy Limited, a Reliance ADA Group Company, Veolia Transport, France and Mumbai Metropolitan Region Development Authority (MMRDA). ThisBusiness Standard news tells me that this first line might get funded under Jawaharlal Nehru National Urban Renewal Mission (JNNURM) to meet the funding gap. It was expected that remaining 8 lines would also be developed under similar lines.

But not anymore. There is another development and now Maharashtra government has set up the Mumbai Metro Rail Corporation (MMRC), a separate body that would develop remaining eight metro rail corridors in Mumbai. And moreover an ET report says state will develop these 8 lines all by itself via MMRC and will not do any PPP.  The model has been adopted on lines of Delhi Metro which has made Delhi a much better city.

I hope they stick to this model and there are no changes. It has already been delayed quite a bit. Mumbai needs an alternative mode of public transport badly.

What if the apartment owner doesn’t pay-back the deposit ?

April 23, 2008

I had earlier written about the options one has to find a house in Mumbai. It is tough but one has to do the ordeal. There is no choice really. I just came across this story which I thought was important to share.

I had mentioned if you rent a house, you have to pay a deposit to the owner. The amount varies from places to places. Like at most places it is 10 months rent but in more expensive areas you pay something like 4-5 month or a fixed amount say Rs 2 Lakhs etc. This deposit is like a security you place with the owner and you are supposed to take care of his/her house.

Now, this money is a free-float for the flatowner and he is only entitled to pay you the actual amount. He can save it is a fixed deposit, invest in equities etc and keep the returns to itself. So apart from rent there is an added source of earning. But is it is a huge amount and it is important that the owner pays back the amount.

Now there are two situations-

  • Your term is over and it isn’t renewed- if the owner doesn’t pay the deposit back, then one can refuse to vacate the flat (though am not sure how many are successful)
  • You might have to leave the house because of a job change/place change etc – This is a trick situation as you have to leave but the term isn’t over. And now if the person doesn’t payback the deposit what do you do? What is the recourse?

I know somebody who was trapped in the second situation and the poor person didn’t know what to do. The owner said he had invested the money in equities and lost it and was unable to pay. He had to move to a new house as office was very far from the new workplace. So, he had to find a new apartment for rent, pay the deposit and rent and also haggle with his previous apartment owner to pay-back the deposit. And in all this he had to manage his office as well!  All know nothing can be done as there is no legal recourse. I am sure many in Mumbai and elsewhere must have faced this problem. But there is no way out.

In India, the legal system is so poor that everything comes to a standstill. You have a complaint, stay with it. Only those who have enough energy can run after the courts for redressal. But overall, it is really pathetic.

I had earlier raised an issue why Indian companies have such poor after sales service? One very good way to assess how bad the situation is to visit all these companies after sales service outlets. Huge frustration everywhere. One very important reason is that they know even if you have a complaint, the company is actually doing you a favor by rectifying it. As we have a poor legal system most companies know they can get away with these abysmal standards. 

The importance of an effective legal system is extremely important. There is huge evidence how certain legal systems lead to better financial system and a better economy. People know they can’t get away if they have signed a contract. In India, the sanctity of the contract is hardly respected. We need to address this urgently as contracts are central to a functioning market- based economy. Otherwise we will never see the kind of infrastructure, financial system etc which we keep debating endlessly. 

How about buying a house in Omaha instead of Mumbai?

March 10, 2008

There are a lot of blog posts and comments over annual treat for finance professionals- Warren Buffet’s letter to shareholders. It is one of the most awaited events.

This one is also full of anecdotes Buffetisms:

Some major financial institutions have, however, experienced staggering problems because they engaged in the “weakened lending practices” I described in last year’s letter. John Stumpf, CEO of Wells Fargo, aptly dissected the recent behavior of many lenders: “It is interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine.”

You may recall a 2003 Silicon Valley bumper sticker that implored, “Please, God, Just One More Bubble.” Unfortunately, this wish was promptly granted, as just about all Americans came to believe that house prices would forever rise.

He explains the great, good and gruesome business

The great one pays an extraordinarily high interest rate that will rise as the years pass. The good one pays an attractive rate of interest that will be earned also on deposits that are added. Finally, the gruesome account both pays an inadequate interest rate and requires you to keep adding money at those disappointing returns.

Before he begins to explain how much he earned from his 4 lines of business (insurance, utilities, manufacturing and retail, finance and finance products), he writes:

The best anecdote I’ve heard during the current presidential campaign came from Mitt Romney, who asked his wife, Ann, “When we were young, did you ever in your wildest dreams think I might be president?” To which she replied, “Honey, you weren’t in my wildest dreams.”


He goes on to criticize overstated reportings by public companies and defends sovereign wealth funds.

And finally, he says the annual meeting will be on May 3 2008. And the centre would have many avenues for shopping. What caught my eye is this

This year we will again showcase a Clayton home (featuring Acme brick, Shaw carpet, Johns Manville insulation, MiTek fasteners, Carefree awnings and NFM furniture). You will find that this 1,550- square-foot home, priced at $69,500, delivers exceptional value. And after you purchase the house, consider also acquiring the Forest River RV and pontoon boat on display nearby.

I just checked the website of the Clayton and came across some superb homes.

Well, now the main point. If you calculate the per square rate of this house it costs just about Rs. 1793.5 per sq ft! And that too with some basic furniture.

You wouldn’t get a house at these rates in Mumbai and would have to go really to far-0ff places. Like let us compare the ratesacross the 3 railway tracks . You wouldn’t get a house for this rate as far as Panvel (the last stop on Harbour Line) and might get one beyond Ambernath (on Central Line) and Virar (on Western Line).

So, those having a house in Mumbai and are looking to invest, Omaha could be a good option; prices are rock bottom in US and one can gain from appreciation over the years.

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.

Do we see similar housing demand in Mumbai?

March 3, 2008

Bob Shiller (of Yale) has written a wonderful articleexplaining the recent Housing Bubbles. Shiller is an expert on matters pertaining to housing markets. He applies the principles of psychology really well to understand the developments in financial and other asset markets.

What struck me was the way in which the concept can be applied to understand housing markets worldwide.

 The failure to recognize the housing bubble is the core reason for the collapsing house of cards we are seeing in financial markets in the United States and around the world. If people do not see any risk, and see only the prospect of outsized investment returns, they will pursue those returns with disregard for the risks.

Were all these people stupid? It can’t be. We have to consider the possibility that perfectly rational people can get caught up in a bubble. In this connection, it is helpful to refer to an important bit of economic theory about herd behavior.

Precisely. We have to consider the fact that even rational people can make poor decisions. Then he points to a paper which helps us understand the process:

Three economists, Sushil Bikhchandani, David Hirshleifer and Ivo Welch, in a classic 1992 article, defined what they call “information cascades” that can lead people into serious error. They found that these cascades can affect even perfectly rational people and cause bubblelike phenomena. Why? Ultimately, people sometimes need to rely on the judgment of others, and therein lies the problem. The theory provides a framework for understanding the real estate turbulence we are now observing.

Mr. Bikhchandani and his co-authors present this example: Suppose that a group of individuals must make an important decision, based on useful but incomplete information. Each one of them has received some information relevant to the decision, but the information is incomplete and “noisy” and does not always point to the right conclusion.

The main issue he tries to address is that best people in the business are bound to have incomplete information. So they rely on others who also have incomplete information leading to a cascade of poor decisions and what the authors call as “wrong collective action”. The finding is quite surprising:

Mr. Bikhchandani and his co-authors worked out this rational herding story carefully, and their results show that the probability of the cascade leading to an incorrect assumption is 37 percent. In other words, more than one-third of the time, rational individuals, each given information that is 60 percent accurate, will reach the wrong collective conclusion.

37% !! That is a big number. So, even if we assume rationality, there are bound to be huge errors.

The same concept can be applied to the other asset markets even in other parts of the world.

Like, 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 prices showing on demand. The main reasons given are pretty rational ones- increase in demand for housing due to rising incomes, migration etc.

Though, I am sure large part of the rise is also because of the information cascade effect explained above. Just because someone else has bought, the other person feels it is the right time. And if he is a leader in the peer group/family, the cascade effect is bound to be larger.


I couldn’t find the original paper, but here is a similar kind of research paper from the same authors. It looks like an updated version as well.

What is driving the housing prices in Mumbai?

February 26, 2008

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.


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.

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.


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.

How do economists think about cities?

January 8, 2008

Edward Glaesar of Harvard University is one of the best urban economists you can come across. For a profile of all his work so far see this.

I just finished this paper from him titled ‘The Economics Approach to Cities’ and was quite impressed. The usual urban policy emphasises place over people but economics looks at it the other way round. This means say you are building a road, the urban policy would look at how it would help city transport, but economists would look at whether the road helps give them more choices. At the end, urban policy focus would also lead to better choices for people but the focus is not on people. Whereas economists would first look at whether the welfare of the individuals is increased or not.

I haven’t read at all on urban economics but his paper is an excellent primer on the same. He discusses the various models which explain the mobility decisions of people and firms. I liked this expression which explains what helps people choose various locations:

Income + Amenities – Housing Costs – Transportation Costs

He builds his around this expression. Read the entire paper to understand the approach.

I was wondering whether we could apply the approach to Mumbai which is being pitted as an International Financial Centre. (See the various articles etc on the same here)

MIFC looks like a report which is place based. The first question is if Mumbai becomes an IFC what extra choices would people have? Would it mean better housing conditions? Would it mean people have more and better transportation choices other than local trains?

The report does have a chapter on urbanisation but is it enough? The chapter talks about new ideas needed to reform Mumbai’s infrastructure but there are just a few suggestions. The focus seems to be on how Mumbai’s strategic location and if we don’t get our act together other cities (like Dubai, Shanghai etc) would gain.

I think the report would have found more takers if the focus would have been on urbanisation reforms and how that can enable Mumbai become an IFC rather than the other way round. There are just too many problems in Mumbai and only a person living there can appreciate them.

I understand that because these reforms would take time and the MIFC would loose the race. But that is reality. One simply can’t shrug it. Efforts need to be made to make Mumbai a better city first (giving people ample choices) and IFC can follow.

One of the ideas behind MIFC is to draw talent towards Mumbai. I just have one thought. Suppose someone does come from say New York on great expectations. If the company doesn’t have suitable accommodation and he/she has to search for one and travel in local trains (or even takes a car), I am sure they will catch the next flight back home. Coming to Mumbai and staying at five star hotels and travelling to Nariman Point is a lot different than making Mumbai a home. And that is reality.

Economics of finding a house in Mumbai

December 28, 2007

Mumbai is a great city to work. The city, spirit and honesty at most times (taxis/autos run strictly on meter) is remarkable. Most are professional at their jobs and is usually a no hassle free place. But you need a home where you could go and sleep and that is where problems begin.

Finding a house to live in Mumbai is perhaps one of the toughest task one can be given. (The toughest of course is trying to reach workplace and home in the local train!). 

There are 2 ways you can live in a house-

1. either you buy one or
2. you take one on rent.

1. Buy:  Just forget it, atleast in these times. (I have posted the reasons here).

Moreover, builders are getting extremely adventurous these days. There is something called “super built-up area” which means the area quoted to you. This does not mean that your apartment would be of that area. The builder charges you for additional space you use like the stairs etc. The usual difference between the two nowadays is 30-40%. This means :

a) Suppose the builder says the area is 1000 sq ft. So you pay 1000* the rate per square feet.
b) But the area you get to live in could be 600-700 sq. ft. So you pay 30-40% extra !! And when you complaint, the reason given is it is a standard.

2. On rent: As house prices increase, the rent has also been increasing. Moreover you can rent an apartment only for 11 months and for this the charges are:

a) The monthly rent (depends on the area)
b) Deposit (you need to submit a refundable deposit with the apartment owner for security reasons) – usually equal to 10 months rent. The deposit can be used by the owner for whatever purpose and you don’t get any interest. So in financial terms, you are worse off as your deposit would be of lower value after 11 months (because of inflation)
c) The Broker charges- you can’t find a house without a broker in Mumbai. They know the area well and help you find the desired house. The owners also have to pay the broker as he gets them a rentee. So, a broker takes money from both the sides which is fair as he is doing market making.

But his charges have increased from one month of rent you pay to 2 month rent. This means you actually pay for 13 months. There are number of brokers in an area and you should expect competition with some brokers offering lower charges and better services than others. But this is not the case. Instead, the charges have only increased over the years.

d) Other charges- Well, you wouldn’t find a nail inside most apartments which means all the stuff would have to be yours. So, add those expenses as well.

I don’t know what are the practices in other cities, and may be they are similar. But because of scarcity of homes here, the process is a lot difficult.

To address the rising prices many changes need to be done. But I think something can be done to make living more affordable in Mumbai as far as renting business goes. 2 suggestions:

1.  It is a great area for the companies to get into- house broking. This will help both the sides- the rentor and rentee. The competition would drive the broking fee down and would help both sides. It will also make the pricing more transparent. As of now, you just don’t know what is the right rent in the area. The industry would also become more organised and have better standards.

2. Another suggestion is to make buildings whose purpose is only to give apartments for rent. To buy a house is increasingly becoming a very costly preposition for those living in Mumbai. [A 2 bedroom apartment (It is usually called 2 BHK – 2 bedrooms, one hall and a kitchen; don’t be misled by the word hall, it could be smaller than the room J) costs Rs 50  lakhs plus in even the most far flung areas.] Mumbai invites huge migration because of opportunities and such options could be of great help. The person can simply walk into the office of the builder and check if there is any apartment available for rent. This would save brokerage costs as well. Some might argue that buildings with rented apartments are least maintained. Well, the builder can add a maintenance cost to the rent as well. I am sure most want to live in clean surroundings. The maintenance charge can be a fraction of the rent. This makes the pricing also more transparent.

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