Is Property In Mumbai Overpriced?

For years, analysts have been anticipating a correction in property prices in Mumbai. The Mumbai Metropolitan area is said to have a large number of unsold inventory. A healthy market typically maintains an inventory of eight months. Still, real estate in Mumbai continues to be very expensive. Is property in Mumbai overpriced?

In residential property markets, excess inventory can happen because of a change in market psychology, demographic pressures, falling income, rising unemployment or a rise in home prices compared to income. Even though the Indian economy is slowly recovering, with a growth rate faster than the Chinese economy for the second consecutive quarter, it is still weak, with slow corporate sales and industrial production. In Mumbai, for instance, newspaper articles on the sluggish economy and a glut of homes, discounts and freebie could have led to a shift in consumer psychology, leading to a decline in demand.

The performance of the residential home market also depends on the conditions in the credit market and monetary conditions. The affordability of homes depends on the monthly mortgage payment, which in turn depends on the interest rate. The Reserve Bank of India, for instance, did not cut the repurchase rate at which it lends to commercial banks for very long since May 2013. The RBI has raised the repo rate by 75 basis points from 7.25% to 8% from May 2013 to January 2014, and started slashing it only since January 2015. Since then, the RBI had slashed the repo rate by 75 basis points, to its earlier rate of 7.25%.

Unlike in other markets, in residential property markets, when there is excess supply, prices do not quickly fall. Sales and new launches might decline, but prices are less responsive. When sellers or developers are unable to sell homes for the price they consider fair, they are more likely to not slash the price but wait for sales to pick up. If this fails, they might lower the price slowly till sales recover. Individual sellers are more likely to lower the prices than developers. It is very unlikely that they will lower the price till they find buyers. More importantly, individual sellers are more likely to lower prices than developers. But, even they are not likely to lower it till they eventually sell off their home.

In residential property markets, excess inventory is absorbed when new households are formed. Families still migrate to the city and buy apartments in Mumbai, absorbing the unsold inventory. It is the new launches that slowed down, and might rebound when the unsold inventory is absorbed. This is a common pattern across the world.

More importantly, across the world, the event of unsold inventories is usually followed by a quick recovery. For decades, economists have observed that the prediction that prices will fall after reaching peaks is a safe prediction, but does not say much. It is hard to explain why some bubbles end when homes have been overvalued by a few per cent, while others persist until they are overvalued by more than hundred per cent.

Residential property markets across the world are heterogeneous, with great variance in prices. Average price trends are hard to measure. Mumbai real estate rates widely vary. In 2013, when home sales were nearly half from its peak in 2009, with an excessive inventory pile up, home prices in Mumbai's slum Dharavi more than doubled from 2011. In 2013, an 80-sq ft home in Dharavi cost over Rs 25 lakh (over Rs 31,000 per sq ft) , while a new project of Lodha in Lower Parel, a posh area in central Mumbai, cost Rs 23,000-25,000 per sq ft.

It is often argued that Mumbai real estate prices will decline when the market prices start reflecting the fundamentals. In real estate, as long as the wealthy are willing to bid for land, a locality becomes more and more attractive to live in, and hence expensive. In other words, fundamentals reflect the willingness to buy. It is hard to tell when this would stop. According to some estimates, even when demand was weak in the Indian real estate markets in the financial year 2014-15, Mumbai was the only large market that grew by 3%.