Building for the Rich - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 8 December 2012
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- By Asad Dossani, Author, The Lucrative Derivative Report


Asad Dossani
The Mumbai property market is like no other. Despite a recent economic slowdown, prices are up 180% in three years. Most individuals face extremely high property prices due to the fact that the supply of flats cannot meet the demand. Yet, at the same time there is a large stock of unsold flats.

According to analyst reports earlier this year, Mumbai has around 80,000 unsold flats. This is shocking number. How is it possible that there is such a large stock of unsold flats, and yet property prices keep rising to record levels? Normally, rising prices would be associated with a very low stock of unsold properties. If there is a supply glut, prices should come down.

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    So what is going on here? It comes down to the fact that the unsold properties are at the luxury end of the market. These flats tend to range in size from 4,000-7,000 square feet, and the average price of each flat is Rs. 1.2 Crore. The percentage of individuals who can afford such properties is very small. And most of them already own flats.

    What has happened over the last few years is a significant fall in demand for luxury flats. Much of that demand is for investment purposes anyway, so buyers are holding out in anticipation of a fall in prices. Sellers would prefer to hold out for buyers who can afford the high prices, rather than lower prices.

    So we end up with many unsold luxury flats due to lack of demand, and a significant shortage of property for the rest of the market due to a lack of supply. How do we fix this situation? What is needed is a better approach to planning, and a drive to build housing that is more affordable.

    Imagine that instead of having 80,000 flats of 5,000 square feet each, we had 4,00,000 flats of 1,000 square feet each. Prices would be much lower for such properties, and it is very likely they would be bought and occupied, instead of remaining unsold. Rather than housing catering to the super-wealthy, it needs to cater to those actually facing a shortage. Then we'll see a real improvement in housing affordability.

    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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    9 Responses to "Building for the Rich"

    Rahul

    Dec 10, 2012

    I hope you have got your facts right when you say average size is 4000-7000 sq feet with cost of INR 1.2crore. Even when you consider super built basis average 3bedroom, hall n kitchen flat would be 1800-2500 sq feet so I dont know which properties you referring to are unsold because 80,000 are definitely not the ones you referring

    I would genuinely appreciate if you could find me a flat of this size at this cost anywhere in Bombay upto Borivali/Thane!!!! INR 3000 per sq feet!!!!!!!!

    Kindly correct your stats and ideally apologize to your readers. No harm in accepting whats wrong.

    Also, you forgot one essential point. Bombay realty market has lot of black money involved especially of politicians. Politicians only need money at time of elections so probably you will actually see a price correction in 2014 once they start liquidating their assets to fund campaigns

    Even if you dont agree with my latter view, you have still got the prior wrong.

    Like 

    krisham511

    Dec 9, 2012

    very true.But the paradox can be easily explained if we consider amount of black money floating around.Most of it finds it way into properties and gold.not to forget the 'swiss money " coming back through P notes etc and getting laundered in the process.

    Like 

    Rohit

    Dec 9, 2012

    Pls recheck your numbers. 4,000 - 7,000 sq ft for 1.2 cr is clearly unrealistic. Perhaps you mean 12 cr

    Like 

    r v iyengar

    Dec 9, 2012

    The cost of flats in Mumbai are hitting the sky. The statement that the 4000- 7000 sq. Ft flats cost 1.2 crores totally wrong. The cost of a 1500sq ft Superbuilt up area with a load of 20 % costs well above a crore - in the region of say 2 or 3 crores depending upon the location. The price of 4000 sq Ft flat should cost 4 crores at a moderate price of 10000 Rs per sq. ft. These rates are not available anywhere in Mumbai.
    Mira Road and beyond on western line, beyond Kalyan on the Central line and Panvel and Ulwe in Navi Mumbai are perhaps the places where one should look for in that price range.

    Like 

    RK77

    Dec 9, 2012

    Isn't that a fallacy? Tata Motors discovered it when Nano bombed in the market. A house, like car (in fact more than the car) has an aspirational value in the minds of Indians (may be all human beings) and any one would like to buy/build or get the biggest and the best sized house with the latest facilities possible. Building small sized houses may be a social necessity but does not make economic sense. They will be similar in size, design and economic value and therefore will have lesser appeal. The luxury houses have an appeal that attracts all actively earning people who aspire to conquer the world and want to leave a legacy behind. They act as incentives for people to work harder, earn more and grow in life. The inventory will lesson as soon as the recession fades away. There is a market for small value shares /flats/ diamonds etc but there will always be an unmet demand for big value shares (MRF, BOSCH, OMDC etc)/ big houses / big diamonds/ big cars and so on.

    Like 

    SIVARAMAKRISHNAN

    Dec 9, 2012

    The average price of Rs 1.2Cr divided by even the minimum available of 4000 Sqft works out to only Rs 3000/- per sqft. I think that is quite reasonable even if the flats are in outskirts of Mumbai but generally Indians are conservative and would go for such type of flats with a wealth of atleast 6-10 times the flat and an income of Rs 35-50 lacs/month.

    Only the Software executives can afford and it is no surprise the supply side is more than demand for the luxury flats.

    Like 

    anuj

    Dec 9, 2012

    1.2 crore for a flat of 4000 sq ft where do you see these flat - something is wrong there.
    Many flat are small yet priced about that figure - there is no cost control at all on 75% of an inviduals income for life not a year - cant the govt include this under pricing control given that the prices are unreasonable --so like pharma, sugar etc bring them under BICP or let them publish the cost of each flat even if the sale price is left free from control so that one knows the truth !!

    Like 

    Dalip Singh

    Dec 9, 2012

    No flat on an average large enough as a three bedroom hall costs less than 2 crores now.what talk of 1.2 crores,now a one bedroom hall flat in Malad West,palm court costs around one and a quarter crore rupees.

    Like 

    C K Vaidya

    Dec 9, 2012

    The analyst report on which Assad has relied seems completely wrong. For starters, where are these 80000 flats measuring 4000 sq ft available at only Rs 1.2 Cr. The rate works to only Rs 3000 sq ft. Where in Mumbai can you book a luxury flat at Rs 3000 per sqft?
    Are all these flats beyond Virar or Dahanu? Even in New Bombay, you cant get these rates. Maybe one should try Panvel but very clearly thats not Mumbai.

    Like 
      
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