Property prices in Mumbai

Property prices in Mumbai:

Economic crash

Till about a year back a lot of investors, big or small committed millions of dollars in the property market, and were richly rewarded because of ample liquidity in the system and a general belief that Indian economy will continue to clock 8% plus growth.

Things have changed since then. Most of the analysts are arguing if the GDP will grow at 5% or 3.5%. It is sure that it will not grow by 8% plus. U.S. is in recession and sub-prime crisis has crippled the banking system in US and most of other countries. Equity and property markets in India since then have corrected.

Mumbai property market is influenced more since it is the financial capital of India and a lot of prospective property buyers are directly engaged with finance industry through banking and broking.

Expensive loan:

The biggest impact of the crises was on liquidity and risk premium attached to lending. I was amazed to see some of the Indian corporate raising cash at 12.5% to 13% from the retail investors. What this suggests is that even toady when call market yields have come down significantly; lending rates are still pretty high.

Even for retail investors it has become difficult to get a home loan, barring SBI which is giving home loans at 8% that too for loans below 20 lakhs, for most of the banks lending rates are in double digits. The other problem is down payment, most banks are asking for a higher down payment of about 30% as the margin money for property. Last but not the lease is eligibility for the loan which has also gone down from a high of about 60 times your monthly salary to about 40 times your monthly salary. All these factors put together have drastically reduced a person’s ability to buy a house. Understandably credit off take has come down significantly.

Demand supply:

One more thing that has influenced property markets is a few changes in the regulations that have increased land supply in Mumbai.

ULCA has been scrapped: an expected 25,000 acres of land should be free for development.
Approval of construction on salt pans: total area covered is about 5500 acres in Mumbai.
Auction of defunct land mills in Mumbai: total area covered about 900 acres.

(60% of Mumbai lives in slums which is about 6% of total area, that’s why redevelopment of slums may have a limited impact on the overall supply)

All of this put together give access to more then 11,000 acres of land in Mumbai. I understand that construction will not start on all the land and most of the land might takes years or may be decades before construction starts. But the land is available and even if 5% of this land is made available every year a healthy supply will keep coming to Mumbai for construction.

Parel in Mumbai is a good example of this, where a lot of supply came because auction of defunct textile mills. The total area which is being constructed there is expected to be about 16 million square feet. This is roughly 11 times of the total office area at Nariman point. If all this is occupied, BMC will have to ban cars in the area other wise traffic congestion will ensure that one never reaches his/ her office.

Investors not willing to take a plunge:

Typically property market is made up of first time home buyers, who buy a house to live in it, and investors who give it on rent or sell it for a profit. I significant number of houses are bought by investors but due to the recent correction in the property market and economic slowdown the expectation of a price correction in property is keeping these investors away from the market, this significantly reduces the number of transactions and put pressure on real estate companies who are sitting on huge inventories and expensive debt.

Tier ii / iii cities:

If you are looking to buy a property in a tier iii city, this may not be a bad time to start looking at buying opportunities. In last one year or so Indian government has done many things to put money in the hands of Indian middle class. Some of the examples are

Sixth pay commission
Farm loan waiver
Increased tax exemption limit
Treating home loans below 20 lakhs as priority sector (this has reduced the rate at which bank give these loans)

Also traditionally investors in smaller Indians cities prefer investing in bank FDs or other secure investment options. This also helps to keep property prices steady in such places