Why is Mumbai Real Estate So Expensive?

Everyone keeps on talking about Mumbai real estate being extremely expensive and beyond the common man’s reach. There are umpteen number of articles chronicling the affordability of Mumbai real estate – but I don’t see a single one discussing why Mumbai real estate is expensive and unaffordable. There are some basic reasons behind such unaffordable prices. Here is my take on them.

Mumbai is and will always be an island. Compare it to New York – the island of Manhattan.

This is the closest comparison one can make. I am not talking about the infrastructure or the sky line. Simple similarities – they both are financial capitals, they both are island cities and they have sea view. In any island city, land is not available. Expansion happens only in one direction, the other direction is simply water. Mumbai is nothing different.

As population increases, demand for housing increases. What happens when there is demand and no supply – Prices go up. Those who can afford buying a house in Mumbai survive. The others look for cheaper options in new cheaper supply locations. This causes migration further away from the city center. Once this migration happens, there is demand for housing in those farther away places.

Let’s learn from history. In the 1960’s, Worli was the edge of Mumbai, nobody even thought of Bandra as a part of Mumbai. The upscale suburb of Juhu was a jungle – Marshlands, Woods, the Boon Docks. However, the scenario now is completely different. This expansion is now moving towards Navi Mumbai. After all the population burst has to go somewhere. In the next few decades there are going to be satellite cities. Just like New York – Jersey City, Queens, Bronx are all Satellites.

Government Policies

Every little change in Mumbai’s real estate pricing is directly proportionate to the government policies. The gradual increase in property prices from addition of Service Tax, Value Added Tax, Education Cess makes a huge difference. Taxes are always a burden on the end user, especially when the end user doesn’t see the returns. Government charges the developers, who pass that burden on to the end user. The end user is anyways stretching to purchase his/her dream home now has to stretch a little bit more.

This year itself, Maharashtra government has increased the ready reckoner rates, below which it is not possible to sell the house. IN 2013 the ready reckoner rate in Juhu was approximately Rs. 17,500. Ready reckoner rates in Juhu right now are around Rs 22,000 (last reviewed). Mumbai real estate reckoner rates have gone up almost 13% annually. This is a significant jump where the prices are anyways high. Major cities increase it 2% to 5% annually – 13% is unheard. If that was not enough, now there is additional burden on the TDR (Feb 9th Times of India). Redevelopment just got more expensive. These are all costs borne by the developer. Guess What! Mumbai real estate developers are not charitable foundations. They will charge you for it and make a profit on it.

Where is the Land that Columbus Found? It was turned into Slums!

(Please no comments about Columbus – this was just to bring a point across) OK! Not to be to dramatic but there is NO land in Mumbai. Search South Bombay – called SoBo lovingly or North Bombay (I call it NoBo lovingly) or Central Mumbai (let’s call it CeMu just for kicks). There is simply no land parcel. They are completely occupied by slums everywhere. Acres and acres of land is occupied by slums – Dharavi, Vikhroli, Worli, Dadar, etc. There are either slums, old dilapidated mills, chawls or ancient Mhada housing boards. These need to be completed torn down and made new. However, the older tenants are greedy and want to fleece the developers for every penny. They will NEVER stay there. They will take every penny and go stay further away in a different slum. The builders pay for it. Guess What! At the end of the day the end user pays for it.

In prime suburbs, there are no open land parcels. It’s just older buildings and bungalows. These need to be redeveloped, it costs money to relocate the existing members, pay them additional money, pay the government to get all the approvals, account for delays, account for government policy changes, account for bank loan interest charges, account for construction charges, etc. These are not nominal amounts.

Investor Funds

Mumbai has several Harshad Mehta’s and Jhunjhunwala’s. These are investors with hoards of money. They know where to invest their money. They can put only so much in stocks, mutual funds, equities, hedge funds, foreign exchange speculation, etc. Any property portfolio manager will tell you to diversify and real estate is part of diversification.

NRI’s all over the globe have become wealthier by 12% since the last 1 1/2 year just because of foreign exchange value. NRI’s always have a connection to their home land. They dream to own a home in Mumbai. Even if they own one, they want to own another one as an investment. The returns are much more in Mumbai, then in their country. Mumbai sees tons of wealthy NRIs ready to invest in off plan projects, pre launches and soft launches. Developers make special trip to these countries to entice them. Once again, half of their inventory is sold even before brokers know about the launch.

Here’s the Bottomline

Mumbai is an island city. Land is scarce, Demand is More! It’s the Financial Capital of The Country! Population is Migrating in the City! It will always have Higher Prices! Even if there is correction, it will be a max of 4% to 6%. That’s not a price correction – PERIOD!

One Response
  • Pintolal
    Mar 3, 2015

    It will not be fare to say that Mumbai real estate price will stay up with max correction of 4% or so.

    Kindly check back the Mumbai real estate history of the year 1995 slump,real estate prices came down up to 20% and market remained very very sluggish for about 5 years or so.

    Pintolal Mar 3, 2015
    Reply

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