Unaffordable Mumbai
Jun 18, 2013
Source : The Financial Express

 

MUMBAI: For Mumbai, the city which has for years carried the unwholesome reputation of being the most over-priced in terms of residential real estate valuations, there is no relief in sight for aspiring home buyers. Over the last four years, property valuations in the financial capital have increased by an average of 66 per cent. All ‘expert’ predictions over the last three years of an imminent correction have proved to be wrong.

 

It is true that going by all known market dynamics, a correction was inevitable. Lack of affordability over an extended period is a known catalyst for downward revisions in any market category, including real estate. Another globally accepted precursor of a correction is a surfeit of unsold inventory. If these two indicators would have held true, the city’s residential market should have corrected three years ago. That, however, is not the case.

 

Ground Reality

Residential prices in Mumbai have increased steadily after the correction seen post the Lehman debacle. In the period from the second quarter of calendar 2009 to the same quarter in 2013, residential real estate prices in Mumbai have increased by 66 per cent. In Thane, the increase has been even higher at 70 per cent while Navi Mumbai has seen a staggering escalation of 74 per cent.

Even within Mumbai, some locations have crossed the 66 per cent average increase in the same period. The Malad-Borivali belt has seen an increase of 85 per cent. The cumulative price escalation figures for Mumbai, Thane and Navi Mumbai represent thehighest among all cities in India. During the period in question, Gurgaon and Bangalore saw increases of 52 per cent and 46 per cent respectively. From an end-user’s perspective, Mumbai’s astronomical residential property price increase is undoubtedly irrational. Affordability has never been more compromised, and this fact has ensured that the city’s property market continues to make news. Below the surface, however, there are market forces at work, which cannot be mitigated.

 

 

Escalation Triggers

One of the primary reasons for the ‘unreal’ price movements is the limited supply of ‘clear’ land (without encumbrances and with clear titles). Other factors at play are the reduction in new residential project launches over a 1.5 year period from first quarter of calendar 2011 to second quarter of 2012 — caused largely by a slowdown in approvals for new residential projects — and the high interest rate scenario in 2010-2011.

Developers’ input costs for their projects rose in tandem. The matter was further compounded by the pressure on developers to give assured return to investors who had bought into their projects at the pre-launch stage. There was also a high price volatility in other asset classes such as equity.

This, along with the increasingly high cost of debt, brought about a massive liquidity crunch. As a result, developers’ backs were to the wall when it came to purchasing the massively priced land parcels limiting new project launches.

In the midst of all this came the new development control rules, which caused many residential projects to come tohighest among all cities in India. During the period in question, Gurgaon and Bangalore saw increases of 52 per cent and 46 per cent respectively. From an end-user’s perspective, Mumbai’s astronomical residential property price increase is undoubtedly irrational. Affordability has never been more compromised, and this fact has ensured that the city’s property market continues to make news. Below the surface, however, there are market forces at work, which cannot be mitigated.

 

 

Escalation Triggers

One of the primary reasons for the ‘unreal’ price movements is the limited supply of ‘clear’ land (without encumbrances and with clear titles). Other factors at play are the reduction in new residential project launches over a 1.5 year period from first quarter of calendar 2011 to second quarter of 2012 — caused largely by a slowdown in approvals for new residential projects — and the high interest rate scenario in 2010-2011.

Developers’ input costs for their projects rose in tandem. The matter was further compounded by the pressure on developers to give assured return to investors who had bought into their projects at the pre-launch stage. There was also a high price volatility in other asset classes such as equity.

This, along with the increasingly high cost of debt, brought about a massive liquidity crunch. As a result, developers’ backs were to the wall when it came to purchasing the massively priced land parcels limiting new project launches.

In the midst of all this came the new development control rules, which caused many residential projects to come to

 

 

 

 

 

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