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What Happens to Property Prices When Mumbai Disappears?

Jul 26, 2016

In this issue:
» Can Real Estate Prices Fall?
» Railways' Debt Will Be Greater Than GDP of Some Countries!
» ...and more!
00:00
Ankit Shah, Research analyst

Last week, I was with my wife at Nehru Centre in Mumbai for a book launch for renowned Indian author Amitav Ghosh. His latest work bore a telling title - The Great Derangement: Climate Change and the Unthinkable.

In this latest venture, Ghosh examines our collective failure to reckon the elephant in the room - the immense risks that climate change poses. What perplexes Ghosh is the mysterious silence around climate change in contemporary literature, arts, and politics.

To many, the risk of climate change is still very abstract. But whether we like it or not, the threat of climate change is real, massive, and fast accelerating. We are already witnessing its disastrous consequences the world over. While the public discourse may be dominated by political and religious conflicts, climate change is the common thread behind some of the biggest global problems today - droughts, crop failures, extreme heat waves, floods, mass migrations, extremist violence...

One thing that Ghosh said struck me the most...and it concerns the future of Mumbai. And it just occurs to me that today is 26 July...the eleventh anniversary of one of the most devastating floods in Mumbai.

As many of you know, Mumbai was originally an archipelago of seven islands. The islands were gradually connected through land reclamation projects.

Now, what if rising sea levels reclaim portions of the city back into the sea?

Shocking, isn't it? But it's a very real threat.

And there's more to worry about. The east coast of India has had a history of cyclonic devastation. But Mumbai, sitting on the west coast by the Arabian Sea, has been lucky not to face much trouble in the last century.

But things are changing...and fast. As per Ghosh, new research suggests increased cyclonic activity in the Arabian Sea. Citing instances of recent cyclones that formed in the Arabian Sea and hit Yemen, Ghosh points out that these weather patterns are completely unprecedented. More cyclones had formed in the Arabian Sea than in the Bay of Bengal.

Now, can you imagine the scale of destruction if a high magnitude cyclone were to hit Mumbai? South Mumbai, in particular, would be at great risk because of its vulnerable position.

Are we prepared to deal with such disasters? Do we have evacuation plans to safely evacuate millions of Mumbaikars if faced with a calamity?

Since we are talking about Mumbai, let me talk a bit about Mumbai's real estate. How should a real estate buyer factor in climate risks?

Well, I am no property expert. But do consider one important fact: Climate and ecology are the metastructure within which all other things become possible. If sea levels rise and parts of the city get submerged under water, all economic logic goes for a toss.

One may ask, aren't the plush buildings lining Mumbai's seafront, inhabiting India's super rich at grave risk? Why is nobody talking about it? Why do these places still command the most premium prices?

Here's Ghosh in a Livemint interview:

  • So, for example, one of the parts of the world that is disappearing most rapidly is Florida, most of all Miami beach. So they already have regular flooding, many buildings on the seafront actually see the floods advancing, yet every year, more and more buildings go up right on the sea, and they command extraordinary prices. The same is true of Mumbai, or Chennai. When I see this happening, the first question that comes to my mind is who is doing this, who is pushing this? Presumably they must know what's happening. You see at once that these are very powerful industrial lobbies, that is construction lobbies, cement, and they are the ones who are actually creating this forward movement. So if you are talking about climate adaptability, the question really that arises is are the people who are buying these properties aware of the risks?

One of my dear friends stays in plush seafront building, a short, five-minute walk from my apartment. As a teenager, I was a frequent visitor to his home. I have fond memories of studying and chatting with my friend amid magnificent sea views...the sound of waves hitting the shore...and coconut trees swaying to the rhythm of the breeze.

I remember a conversation I had with him many years ago about global warming and the risk of rising sea levels. I told him, almost jokingly... 'I think you should sell this seafront apartment and move to Ghatkopar before it's too late.'

He dismissed my apprehensions with a brave, indifferent line: 'Hone ko toh kuch bhi ho sakta hai, aise thodi na ghar chhod denge...' (Well, that way...anything can happen. But that doesn't mean you flee your home...)

This is one argument where I pray I am never vindicated. And I hope to keep enjoying my post-lunch strolls around Nariman Point.

Do you think climate change threat is mere hype or real threat? Are you doing anything to safeguard your life, savings, and investments? Let us know your comments or share your views in the Equitymaster Club.

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02:35 Chart of the Day

The latest data coming from the realty sector is clearly not encouraging. People made huge gains in realty between 2002 and 2013. Realty prices multiplied many times over. However, as per an article in the Economic Times, the good times in real estate are over. The reason is simple. There are no buyers anymore. Today's chart highlights the cost of owning real estate. It is indeed very steep. It should come as no surprise that Mumbai comes right on top.

High Cost of Ownership keeping Buyers Away


This merely confirms what Vivek Kaul had been alluding in his posts regarding the unaffordability of Indian real estate.

  • What this number tells us is that most salaried class in 2011-2012, were not in a position to buy a home to live in, across large parts of the country. There is no reason to believe that things would have changed since then.

    The point is that the demand for real estate is in the below Rs 20 lakh market price segment. But what is being built across large parts of the country is clearly above that price. As RBI governor Raghuram Rajan said in a recent speech: "I am also hopeful that prices adjust in a way that encourage people to buy."
03:50

A recent article in Livemint about the Indian Railways caught our attention. Did you know that the railways has plans to raise Rs 2.5 trillion in debt over the next five years? Yes, that's right. Apparently, the railway ministry has planned to invest a mind-boggling sum of Rs 8.6 trillion for the modernisation plan for the railways. This would be greater than the GDP of some countries! A lot of it will be funded by debt.

The private sector is supposed to cough up Rs 1 trillion. The railways has outstanding bonds of about Rs 692 bn. Thus, the fund raising plans seem to be very ambitious in our opinion. The contribution of the private sector over just five years also seems difficult. This plan would be far more realistic if it were spread out over ten years instead of five.

04:40

After opening the day flat, the Indian stock markets failed to make any headway and were trading around the dotted line at the time of writing. The BSE Sensex was trading higher by about 9 points (up 0.05%), while the NSE Nifty is trading down by 6 points (up 0.07%). Sectoral indices were trading on a mixed note with metal stocks leading the gainers.

04:55 Today's Investing Mantra

"You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ" - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Ankit Shah (Research Analyst).

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6 Responses to "What Happens to Property Prices When Mumbai Disappears?"

CARLOS DESOUZA

Jul 29, 2016

I think Ghosh should read up a bit more on this scam called CLIMATE CHANGE :-)

Actually, a lot of people really need to READ MORE on this issue.

For starters, check out Christopher Booker. Google and see for yourselves.

Like 

Rajesh patra

Jul 27, 2016

I m surely not a property Consultant. But still I think we cant predict future.why property price increaseing? Bcoz people find it safest investment & it's a basic need.so price of property will increase in my opinion. If u look at near past real estate plyers are willing to Create posch property then a affordable one & they are able to sale it.if see level increase then whole Mumbai will affected not part of it. Secondthing our avg people does not understand or don't have faith on other investment then traditional one like property & gold.surely the property price is now seems more UN affordable to middle class but I m sure nothing in this world will go upward indefinitely, there should be a saturation point from where it has to be come down, may be it will be a lower comparative price. Count the educated middle-class who want a home for him in place like Mumbai & the emotion behind it.

Like 

Sachin

Jul 27, 2016

If that is the case & even if Mumbai stars sinking then the better option is to invest in Thane or titwala sort of area. These will be in high demand in that case as these are away from the coastal zones.
ON the contrary what I fell is people pf Mumbai are smart enough to find out a solution of every problem. But if the problem is created by nature then is the real test of Mumbaikars.

Like 

p ganesh ram

Jul 27, 2016

Nothing to worry. We will have our own Venice. Automobile companies will start the productions of Boats.

Like 

P.R.RAVINDRAN

Jul 27, 2016

So long as ,Greed ( greed to bet and make more money ) and Fear ( to save us from raising inflation )remain as fundamental weakness of all Human beings , Property prices will keep going up ( though there will be short term knee jerk reactions. Otherwise how would you explain cost of a 800 Sq.ft flat in Mumbai at a whopping Rs.137 Lacs ( Ref ET Article-source Magic Brics). Unfortunately all our Govt Bapus are shutting their eyes , because they also join the loot with real estate land sharks .Further real estate is the No.1 route for all the black money hoarders. I really wish India faces the type of crash that USA faced in 2008 - loan defaults setting off a chain reaction

Like (2)

P.M.Babu

Jul 26, 2016

mr.the threat is real and unless awareness is created among nations and people all over the world ,we will face the drastic consequences.We need to take the right steps on priority basis and save the earth.
Mr Ankit shah deserves praise for his splendid writing about it.

Like (2)
  
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