MUMBAI: An international research firm has stated that the city's property prices, which have increased nearly fourfold in the last decade, are unsustainable.
It also mentioned that the salaries of flat buyers have not kept pace with the "unaffordable" prices.
In their report, Bank of America-Merrill Lynch (BoFA-Merrill Lynch), which analyzed housing prices before and after the global economic recession in three cities pointed out that in Mumbai, prices rose by 19.5% from 2003 to 2008 and 11.6% from 2008 to 2013 against the salary growth of 18.4% and 10.4% during the same period. "Compared to high prices, the average income since 2009 increased by 10.4% in Mumbai, thereby making a home unaffordable. Given the unaffordability, a drop in investor interest and a fall in commercial leasing, sales of flats have dropped. We now see this trend of high prices reversing in the coming months,'' said Abhishek Kiran Gupta, a research analyst with BofA-Merrill Lynch.
In Gurgaon, prices increased by 17.6% (2003-2008) and at 12.2% (2008-2013) against salary growth of 18.4% (2003-2008) and 10.4% (2008-2013). In contrast, Bangalore was the only market where housing prices grew at 9% (2003-2008) and at 10% (2008-2013) against salary increases at 18.4% and 10.4% for the same period.
According to the report, after the global financial crisis, housing prices in Mumbai and Gurgaon not only regained lost ground quickly but also increased beyond their previous peak levels. In most cases, the hike in prices was led primarily due to a "pent-up" end-user demand and the entry of investors who had missed the previous bull cycle of 2003-08. Compared to the high housing price growth, the salary growth remained weak, as the overall economy started to weaken in 2011.
"The report shows the growth of salaries and property prices as nearly the same," said Lalit Kumar Jain, president of Confederation of Real Estate Developers Association of India.
Lalit Kumar Jain, President of Confederation of Real Estate Developers Association of India said, The fact that the report shows the growth of salaries and property prices as nearly the same, it means prices have not increased so much. Secondly, affordability in India is computed at 5 times the salary of a buyer unlike three times of the salary earned by an American.''
"I would have agreed with the report if it had stated that the unaffordable prices were due to an increase in interest rates. Developers have not increased prices so much as the government that is a major factor in the real estate due to high taxes," Jain added.
The Mumbai housing market has historically been unaffordable, as India had not spent any resources to develop an alternative for Mumbai city. Housing prices in Mumbai rose at 20% Year-on-Year (YoY) for 5 consecutive years (2003-2008), led by the economic boom supported by healthy rise in salaries. Although developers launched projects in a hurry, demand was far ahead of supply.
Annual Income Compounded Annual Growth Rate (CAGR) = 18.4%
Housing Price CAGR = 19.5%
Mumbai housing prices have clocked phenomenal growth (CAGR of ~12%) since July 2009 (general election results); ahead of salary growth in the 5 years post - the 2009 economic crisis. This hike in prices was due to pent-up demand from the pre-2009 crisis period and a lack of supply.
Annual Income CAGR = 10.4%
Housing Price CAGR=11.6%