No bubble, Mumbai Property Appreciation 66% in Four Years

Over the last four years, property valuations in the financial capital have increased by an average of 66%. All 'expert' predictions over the last three years of an imminent correction in property prices in Mumbai have proved to be wrong, says Ramesh Nair, Managing Director - West, Jones Lang LaSalle India.

It is true that going by all known market dynamics, a correction was inevitable. Lack of affordability over an extended period is a known catalyst for downward revisions in any market category, including real estate. Another globally accepted precursor of a property market correction is a surfeit of unsold inventory. If these two indicators would have held true in Mumbai, the city's residential real estate market should have corrected three years ago.  

Ground Reality

Residential property prices in Mumbai have increased steadily after the correction seen post the Lehman debacle. In the period from the second quarter of 2009 to the same quarter in 2013, residential real estate prices in Mumbai have increased by 66%. In Thane, the increase has been even higher at 70% while Navi Mumbai has seen a staggering escalation of 74%.

Even within Mumbai, some locations have crossed the 66% average increase in the same period. The Malad–Borivali belt has seen an increase of 85%. The cumulative price escalation figures for Mumbai, Thane and Navi Mumbai represent the highest among all cities in India. During the period in question (2Q 2009-2Q 2013), Gurgaon and Bangalore - undeniably two of the hottest real estate markets in India, saw increases of 52% and 46% respectively.

From an end-user's perspective, Mumbai's astronomical residential price increase is undoubtedly irrational. Below the surface, however, there are market forces at work which cannot be mitigated.

Escalation Triggers

One of the primary reasons for Mumbai's 'unreal' price movements is the limited supply of ‘clear’ land. Other factors at play are the reduction in new launches over a 1.5 year period from 1Q 2011 to 2Q 2012 - caused largely by a slowdown in approvals for new projects - and the high interest rate scenario in 2010-2011. In this period, the Government - in its efforts to curb inflation - raised lending rates around 12 times.

 Every time this happened, developers' input costs for their projects rose in tandem. The matter was further compounded by the pressure on developers to give assured return to investors who had bought into their projects at the pre-launch stage. Meanwhile, there was a high rate of price volatility in other asset classes such as equity. This, along with the increasingly high cost of debt, brought about a massive liquidity crunch - as a result, developers' backs were to the wall when it came to purchasing the massively priced land parcels limiting new project launches. The historical title disputes attached to many of these plots did not help matters much, either.

In the midst of all this came the new DCR rules, which caused many projects to come to a grinding halt midway as developers and architects struggled to adapt projects at various stages of development to a completely new set of mandatory guidelines.

 Finally, we need to consider the phenomenon that is, in degree if not in principle, more or less unique to Mumbai - that of developers as well as buyers adopting the dubious philosophy of benchmarking prices in an particular locality based on one or two high-profile transactions or over-hyped launches.

 Demand Remains Steady

 Through it all, the demand for investment residential properties and end-user homes in the country's financial capital has remained stable. The ever-increasing number of second home buyers within the city and the firmly entrenched - and admittedly vindicated - mind-set that real estate prices in Mumbai will never go down will ensure that the stability of Mumbai residential real estate market will continue