Real Estate in Mumbai going through a Market Correction & Why Worst is Yet to Come.

In terms of real estate Mumbai is the costliest city in India and is ranked 12th in the World. Over the past few years there has been noise in the real estate market in India that property prices have gone over the roof in certain cities and the market needs price correction; and in the last 2 years it has happened so.

 

One method which is used for valuation of property all across the world is the rental yield. Rental yield in USA ranges between 7.5 to 9.8% which is very healthy. In India Bangalore has the highest rental yield of 4.0%, whereas Mumbai is much lower at 2.4%, much lower than the normal average rate. This implies that property in India cities like Mumbai is overvalued. Though, one argument which is given against this analogy is that India is a growing market; where there is surplus real estate inventory; the end user has choice between taking rental accommodation or buying a property; he prefers to buy a property, as interest rates are low and in the rental costs one is able to clear the EMI; thus the rental yields automatically are lower.

 

The fact is that real estate prices in cities like Mumbai increased exorbitantly from 2008 to 2012, defying all economic logic; further though the property rates increased, the rentals did not increase in accordance with the price hike, thus further defying the valuation model. Property rates in localities like Malabar Hill are beyond a lakh of rupees per square feet, which is mind boggling; On the other hand the per capita income did not increase commensurately; in simple economic terms this created a huge gap between the cost v/s purchasing power of an end user; the property prices were finally out of the reach of a common man; forcing the real estate, market in cities like Mumbai to set-in corrections.

 

Market corrections take place in all domains and sectors. However, real estate has its nuances; it is a slow moving, inventory based market and any reversal takes time, that also in years. Mumbai real estate is a peculiar case in itself; as smaller developers sensed an opportunity they shifted focus towards satellite towns of Navi Mumbai and Thane, which could offer reasonable alternatives in terms of affordability. Over the past couple of years, Navi Mumbai and Thane have become cost effective alternatives for the real estate crisis of Mumbai.

 

This has further increased the problems of real estate property in Mumbai; with end user market shifting to affordable towns of Navi Mumbai and Thane, there are no buyers for the existing surplus inventory, as also which is under development in Mumbai.  Mumbai real estate sector would have to seek divine help to bail it out of this crisis. One thing is for sure that by the time dust settles down after the revival cycle is over, Mumbai real estate would be the biggest looser.

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