The Dysfunctional Property Market

Jul 28, 2012


- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
If we take a look at the property market in Mumbai, we'll find all sorts of impressive numbers. Annual growth of property prices is extremely high, despite the slowing economy, high interest rates, and other hurdles. The world's most expensive property, valued at USD 1 billion, lies on Mumbai's Altamount road.

The property market in Mumbai is one of the most expensive in the world. The price one pays for a flat is comparable to prices in large Western cities like London or New York. This is despite the fact that per capita income in India is less than 10% of what it is in the USA or UK. In fact, when we examine house prices relative to incomes, Mumbai's property is more unaffordable than anywhere else in the world for locals.

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The extremely high house prices are the sign of a dysfunctional property market. A good indication that prices are too high is that if most people had to buy their own house at market prices today, they would probably not be able to afford it.

Most of us naturally assume that higher economic growth and higher incomes means that we are much better off that before. It means that we can afford more than we could before. And this is true for nearly all goods except housing. Though we are much richer than we were 20 years ago, houses today are more unaffordable as compared to back then.

The real culprit for the high prices is the lack of new supply. Due to the high cost of acquiring land, excessive red tape and corruption, and financing constraints, it is difficult to build new homes that are affordable. Recent reports suggest that there is still a large stock of unsold flats in Mumbai. How is this possible when so many people want to buy a home?

Those unsold flats are all luxury flats and are very expensive, out of reach of most people. And this comes back to the supply problem. Due to the high cost of building homes, it is not economical to build homes that are affordable. It is only worthwhile to build homes that are very expensive. As a result, we end up with a situation whereby there are large numbers of people who want to buy a home and large numbers of flats that go unsold.

The good news is that steps are being taken to make home building cheaper. Over time, we should expect that supply will increase at a better pace, and prices will start coming down. It will be some years before it becomes economical to build affordable homes, and we should be doing what we can do make this process as quick as possible.

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Kind Regards,
Asad

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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