Does the Mumbai Property Market Make Sense? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 24 March 2012
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Does the Mumbai Property Market Make Sense? A  A  A

- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
In addition to investing in stocks, commodities, and currencies, people also invest in property. Real estate has become an asset class of its own, as investors look to buy property and sell it later for a higher price. In Mumbai, the price of property has nearly doubled in the last five years.

Over the last decade, the price increase of property is astonishing. Prices have gone up so much so, that now the price per square foot of property in Mumbai has surpassed the price per square foot in both New York and London. Despite problems in the markets recently, property prices in Mumbai remain at extremely high levels.

So just how unaffordable is property? The per capita annual income in Mumbai is approximately Rs. 5,00,000. While property prices range in value significantly, an average property can cost around Rs 10,000 per square foot (and often much higher than this). Now imagine a person of average income wishes to buy a 1,000 square foot property? How many years of income would it take?

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It would take 20 years of one's total income to afford such a property. In actual fact, it is impossible to devote one entire income to purchase a property, so let's assume an individual can devote one-third of their economy towards purchasing a property. In that case, it would take 60 years to afford a property.

60 years is an extremely long time, and is not a sustainable number. If we start work at age 20, and retire at age 70, we have only worked for 50 years. If we have this situation whereby the average person can't afford an average property, something is clearly wrong in the market.

The unaffordability of property is a result of prices rising much faster than incomes. Whenever this has happened for a sustained period of time, the end result is usually the bursting of a property bubble, and prices coming down. The UK property market is a good example of this occurring.

From 1997-2007, property prices in the UK rose on average by 10% per year. At the same time, income was growing by 2-3% per year, clearly unsustainable. Sure enough, after 2007, house prices crashed. Over the long term, property prices can only rise by what incomes go up by; otherwise we have a bubble.

An interesting phenomenon that occurs is that most people who bought property some years ago, often wouldn't be able to afford their own house if they had to buy it at current market prices. If you live in a city that has experienced a rapid increase in house prices, chances are you'll fall into the category of those who wouldn't be able to afford their own home at current market prices. In that case, the market is probably overvalued, and then it is only a matter of time before the bubble bursts.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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26 Responses to "Does the Mumbai Property Market Make Sense?"

Ragtag

Aug 20, 2016

We are in 2016, I guess most of the below comments in 2012 referred to the bubble burst in coming months. Is there any revision in thoughts? Or we still waiting for the bubble burst, as I am aware no one has reduced a percent of price and still the house prices are out of reach. Additionally with India shining in near future, it's seems unlikely that something might burst. Ofcourse the bank rising NPAs might put some stress, nonetheless we have generous govt to cushion each of them.

Like 

Roy

Dec 4, 2012

for the last four months, i have been hunting for a small house in navi mumbai. good that i did that for i realised the extent to which the bubble is getting formed. i don't know when it will burst, but it will. one thing is for sure, whoever is buying the houses, they are not genuine buyers. most of them are speculators, masking under the name of 'investors' and the transactions are happening between themselves. aiming them are the property consultant research firms who every now and then brings out research reports stating prices will double in less than five years in this this and this areas. immediately the prices jump by 1000 per sq. feet. after seeing this, i am convinced that the market has gone to the speculators and unless they are out, there is nothing a common man can do to buy his house. i just gave up my effort in buying even a 1bhk flat here, but i have not given up hope knowing fully well that it has to burst and burst real loudly. one small example, in Ulwe village, where the new airport is scheduled to come, property rates are rising by 500 psf every now and then with every research report put out. the area looks like a chinese ghost village with buildings getting constructed all around but not even a single paan shop is there. the rates there are worth in gold and builders are claiming their entire projects are sold out. my research tells me that not even a single genuine investor has bought a property there as that place can be habitable only after five years. and guess what? it is at least 40 kms away from even central mumbai like Dadar. now guess how people are going to commute from there to office and you get a heart attack.
interestingly, if there are three hundred buildings, there are three hundred developers. almost all of them are building a project for the first time (all G plus 4 buildings are of those kinds). it's all investor driven. as long as investors with their deep pockets are there, we salaried ordinary men cannot be there. we can only move in when all these speculators have burnt their hands and are bed-ridden. trust me friends what i saw is that there is an abundance of supply, so don't fret.
for now dream house will remain in dreams, the common man is not even able to buy a small shed to protect his family. i agree that mumbai is costly, but then the income here is also higher. i am decently paid individual. if people like me cannot buy a house, 90% of salaried people can't. wake up developers, or you all will die an untimely death.
for now, we live on rent.

Like (4)

Avinash Chaudhari

Nov 21, 2012

Property developers are digging their own graves.
Properties in Mumbai are highly overpriced. The builders are working against laws of economics. They are increasing prices even when there are no buyers in the market. In the process they are digging their own graveyard. Any new investment decision by business depends on the rentals or land price. Since in Mumbai both residential and commercial properties are overpriced many of the corporates are shifting their base to the cheaper locations. Take a look at IT companies in Mumbai or even mfg companies, they have shifted their base out of Mumbai. So naturally employees will migrate to cheaper location and demand for properties will go down further. So the question is who will stay in Mumbai - Only Riches and Rags

Like (4)

tintin

Nov 18, 2012

It was hard to buy a property in Bombay 50 years back , it is hard now too and this will always remain , so property will never come down exept for slowdown but it will always b unaffordable , so buy when u can

Like (4)

Imran Shaikh

Oct 30, 2012

Sales registration of property have fallen nearly about 60% from last year. Many projects are on hold due to shortage of investments. In fact there is huge shortage of money in the real estate market which will get drown the mumbai real estate market very soon in upcoming 6 to 8 months.
This year andheri rto has only 56 new vehicle registration in dassera falling nearly about 70% from previous years.

So hold on to buy new property and save your as well as your closed one hard earned money

Like (4)

Prashant Lalka

Aug 13, 2012

Real Estate in mumbai will not correct but crash infact in terms of Rupees from now. However Gold is the only real currency and if you peg mumbai house to gold, u will see that mumbai property prices are falling since 12yrs i.e 2000. Note that Rupee is a fiat currency and not backed by Gold. Its printed by government and so far hold its value till we trust it and one day rupee will crash and other fiat currency as well and thats been happening since 5000 yrs and new currency will again come in effect with Gold standard.

Now lets see how Mumbai real estate lost value from 2000 to 2012:


Yr2000- 1 median family house 20Lacs- Gold Price 3500 tola

Yr2012- 1 median family house 1Cr- Gold Price 30000 tola

Now we convert the house price in gold by dividing the value of gold price to the house price in rupee and you get house prices in terms of real currency i.e. Tolas.

Yr2000 - House Price 20Lacs/3500per tola = 571 Tolas

today the cost of the same house is

Yr2012 - House Price 1cr/30000per tola = 333 Tolas.


Now this stunning Gold pegging system shows that House prices have reduced to 45% since last 12 yrs but has increased 5 times since last 12 yrs in terms of paper currency which shows that how much government devalues your money by causing an inflation caused by Fiat currency.
Final Call, House prices will now fall in terms of paper currency as well from now and have been falling since a decade on gold standard.

Like (3)

rajesh

Jun 19, 2012

Property rates increase or decreases due to demand and supply.
The mumbai property rates have increased like hell. We bought in 2001 in kandivali at 1600 per sq ft and the same is 12000 per sq ft in 2012. Our salary was Rs.8000 in 2001 and now it is Rs.35k. Compared to increase in property rates the salary has not increased to that extent. Unless the land rates are reduced property rates will not come down as builders cannot sell.
Further due to higher rates the pace of development slows down as only people with deep pockets can buy.
In third scenario middle class people will have to go further inside the suburbs like panvel,dahisr etc. Only rich people and very poor people will be staying in mumbai.

Unless, land prices are reduced, increased FSI property rates will not fall.

Like (3)

rangan v

Apr 5, 2012

Bombay is the only place in india where you get appreciation for a flat .no other place in india

Gets an appreciation of similar nature .now having said that I was just comparing the share mkt

With real estate in by from 1990.my friend had bought a flat in raheja vihar paying 1500 per sq ft in the year 1990 and today I think it may quote 15000.now for the same period the index was 1109 and as on march 2012 was 17500 now if we calculate cagr for real estate at Mumbai it was only 11.03 percent whereas for sensex it was 13.36 plus all the dividends you getand in the house you may have topay society charges manintaing the flat and allother things and same shares you don’t spend anything .

Majority of buyers are it people with loans running for 25 years and every year the a commn is recd which states that emi period has been extended and a man who uys flat will not be able to pay in his life time .it is certain

I think for every km development it takes 7 years and india has huge surplus land and supply is unlimited

Like (1)

Deepak Bhavnani

Apr 4, 2012

I do agree that the prices have gone up too much. This bubble will burst. Only, when? is the question. It may take a long time.What are the real estate developers gaining by unnecessarily holding on to the prices with low sales volumes?

Like (1)

UDAY SHANKAR MISHRA

Apr 2, 2012

People are migrating to big cities like Bombay & Delhi. The simple economic law of demand and supply will ensure that price of properties in these two cities will go up and up unless Govt. does something for the development of other major cities which could stop people migration. See the case of Delhi. There was problem in Punjab, then Kashmir because of which people migrated to Delhi and prices went up. Then industries and development in U.P., Bihar, Bengal stopped. People started migrating to Delhi. Now Delhi property prices are touching sky. If other States improve, people will start migrating their. Unless this happens, prices will not go down. No use comparing Mumbai and Delhi with New York or London. Problems are entirely different here. And above all BLACK MONEY. Who wants to get rid of it really ? No hope.

Like (1)
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