If you believe that all bubbles are created by RATIONAL reasons and causes taken to IRRATIONAL HEIGHTS, welcome to the post.
Is Mumbai real estate terribly high and unaffordable? Yes.
Let us come to some RATIONAL reasons why people buy:
1. If we do not buy NOW we will never be able to buy in the future.
2. How else can we beat inflation – our kids need a roof over their head. Is it wrong to want a roof for our children?
3. Yes prices have gone up, but hey at Rs. 1.5 crores it is only 4-5 years CTC for me / my spouse…so why not?
4. Come on Subra the equity market has gone nowhere in the past 5 years, look at Real Estate we have got 25% p.a. return for our flat at…………….(any Mumbai or Delhi Suburb) (my comment: forget the numbers that is called innumeracy)
5. RE prices in Mumbai HAVE NEVER GONE DOWN why should I put my money in equities.(who wants to remember bad things from the past?)
6. Whatever you say Subra the past 5 years has given MINUS 14% RETURN in $ terms – this is unsustainable I know, but still why risk in equities.
7. When we retire we will have 2 houses – one we will give on rent and one we will use. The rent will increase at 10% annually thus taking care of inflation to meet our day to day expenses.
8. You know RE prices may fall in other places…but near our house there is Jain Mandir and that will ensure that prices in our BUILDING will not fall below xxxxxx Rs. No chance.
9. Last week a 2 bhk was sold in our building for Rs. 2.4 crores, that is the MINIMUM price I think I will get for my flat.
and many more…….
However what they forget is the following:
1. Thanks to technology, for most companies there is no need at all to be located in Mumbai. Baroda, Baramati, Coimbatore beckon.
2. High people intensive work like call centers, data processing, etc. have already moved out / will move out to cheaper locations. Even at the higher end people are refusing to take up jobs in Mumbai. One can even see a typical Mumbaikar choosing to leave Mumbai as it is too crowded and has poor infra.
3. Many banks and insurance companies have their back offices outside Mumbai.
4. Internet is likely to crush the volumes of many shops – recently heard of somebody buying a shoe from Jabong for Rs. 3k. It was available in a local shop for Rs. 4600. Paper shredder retail price Rs. 8590. Flipkart 6500. With collapsing margins and volumes, retail rentals and prices will come down.
5. With Infra worse than Bangladesh and prices upwards of New York, Mumbai prices are difficult to sustain – using the ‘past’ as an indicator is almost stupid, but hey it has worked so far…..
The problem is all arguments are RATIONAL, but prices are IRRATIONAL. In a country where the rental yield is so damn low, high prices are not sustainable. …..compare the ratios of Singapore….with Mumbai’s….hey that is another post, right?..
Source:Subramoney.com