Property prices in Mumbai have always been above average as compared to other cities of India. Scarcity of land and ever increasing demand are the two main reasons behind it. However, price rise has not affected the affluent class. Builders know that demand elasticity does not get impacted in the luxury segment. Hence, luxury segment has been their main focus area. In fact, as per an article in First Post, about 29% of the property which is under construction in Mumbai has crossed Rs 10 m mark. Compare this with the 11% and 5% figures for National Capital Region and Bangalore respectively. (Source: Knight Frank report). In short, builders in Mumbai are focusing on the luxury segment where buying patterns are less receptive to changing prices. This has increased the average property prices in Mumbai.
Now let us take a glance at the pricing scenario in the city. As per Knight Frank, a real estate consultancy firm, weighted average price in Mumbai is at about Rs 14,400 per square feet (sq ft). Including suburbs the weighted average price falls to Rs 5,900 per sq ft. However, this is considerably higher than the prices that are prevailing in other cities of India.
Such a huge difference in pricing and unit value makes Mumbai one of the most difficult cities in which to own a home in India. Considering that prices are high, the absorption rate in city has declined. Despite this, builders are unwilling to relent and have held on to their prices. They know that demand in the premium category is unaffected by pricing. Hence they are holding on to their rates. This has effectively created a pricing bubble in the market.
So, when will the bubble burst?
It seems that we are right at the tip of the ice berg. Builders have been holding onto prices and offering discounts to buyers since long. But sales have refused to pick up since affordability is not there. Even the mid income housing is affected due to lack of volumes. Banks have also become more conservative in lending to builders. External source of finance has become costly since execution risks have increased. With builders having limited access to finance the only option is to reduce prices. It is true that they have been avoiding the inevitable for long. But it seems that the end is near now.