When the economy seems to be needing some crutches, it is surprising to see the resilience of home prices in Mumbai. The GDP growth rate of India for Q1 slowed to 7.7%, which is the slowest growth rate in the past 6 quarters. But the slowing of the economy is not reflected on the ground where consumers seem to be focused on generating more demand than what the Government or the Reserve Bank of India would desire it to be.
Demand for real estate in Mumbai is soaring (as always) due to the fact that supply was limited – I say “was” since that is the real fact. Supply is no longer limited with over 30K apartments remaining unsold. Supply is available but the demand cannot be met.
Have you encountered such a situation ? It is possible of course.
Supply is available at a price which keeps rising every month in Mumbai. Demand is perceived to be strong, and the holding capacity of the bigger players in real estate is pretty strong. So, you have a combination of factors in which supply seems to be deciding the price – more the supply, higher the price. What kind of economic logic is this ?
The actual fact on the ground is that demand has fallen significantly as reflected by the drop in new apartment registrations by over one-third (or more). So, actually the demand is weak, given the high prices charged by the builders and the very high interest rates of some 11 to 12%. The EMIs (equated monthly instalments) payable by the loan-takers has risen substantially over the past 6 months due to repeated rises in interest rates by banks.
So, why are the builders not loosening up and capitalizing on the pent-up demand by reducing prices ? They can easily drop the prices by some 30% and still make significant gains, and their exposure to banks will come down by more sales realizations.
But that is not happening either.
All in all, we are at a dead end in Mumbai. No buyers, no sales, high interest rates leading to higher EMIs (some 40 to 50% of disposable incomes for most families), and so there you have it – a housing recession. Yes, that is what is happening in Mumbai of late.
This is just ridiculous. Everyone is waiting and watching for someone else to blink.
Who is going to blink first ?
I guess that this time it will have to be the builders.
The average capital rate per square foot for good quality apartments in the Western suburbs of Mumbai has now more than doubled in less than 2 years. Given that the Mumbai builders take the buyers for a solid ride by charging for the common areas of the apartment block, one can expect to pay not less than INR 10K to INR 25K per sq ft in the Western suburbs.
This cannot last, as the buyers are now running away. The pool of buyers who can shell out USD 400K for a 1,200 sq ft apartment (which actually provides only 800 sq ft) is shrinking rapidly at a higher interest rate of 12% on a 20 year loan………this apartment is just a 2 BHK (2x Bedrooms, Hall and Kitchen). If you wish to have a 4 BHK apartment, expect to pay close to USD 1M in the suburbs – forget the island city, wherein the prices are atleast twice of that.
So, Mumbai is headed for a rapid housing recession very soon.
Buyers should wait. Don’t believe what your read in the newspaper supplements which encourage you to invest immediately. That would be real stupid in the current environment.
3rd Sep 2011