Real estate prices are rarely rational! It is just that there is not enough information available in a well organized manner, and people are resistant to change.
Take a city like Mumbai. It is impossible to set up a barber shop, an inexpensive eatery (I mean selling dosa at Rs. 50), a general practice or even a specialized practice for a doctor…
However the older businesses continue – simply because the owner believes that he is earning well. The old owner is right, and a little wrong.
If you are sitting in a house with a market value of Rs. 4 crores, an office with a market value of Rs. 3 crores, a factory that will fetch Rs. 4 crores, and you are earning a GROSS income of Rs. 40 lakhs (pre tax)…YOU ARE FOOLING yourself?
Just sell off all your assets and move out of Mumbai. You would have got cash of Rs. 11 crores. Use 2 crores to buy a nice decent house and put Rs. 9 crores in a bank. You will earn Rs. 90 lakhs, GROSS.
Thus if all the real estate people in the expensive cities were to arbitrage the opportunities, the people remaining will find it very, very difficult to live! WHY?
Simply because all the low cost service providers will be forced to go out. A guy who buys a house for Rs. 4 crores will want to give it on rent of Rs. 15 lakhs a year…not Rs. 7 lakhs as the current owner is doing. There will be a lot of pressure on all fronts. Lower end jobs will not be created in Mumbai – no business house can pay astronomical costs to cater to Mumbai and Delhi’s prices. So the businesses will shift to less expensive areas, people will refuse to take transfers to these cities, …
Will all this actually happen?
NO. Not in the immediate future. What happens to the balance sheets of home finance companies? What happens to bank balance sheets? (SBI alone has a Rs. 100,000 crore housing loan portfolio). How can the politician allow a builder-mafia nexus to go away? Big ‘reputed’ builders who have usurped ‘school’ reserved land and ‘play ground’ ground reserved land could not have done it without political patronage, right?
So you will hear ridiculously funny stories like a school auctioning parking space in Mumbai and the whole parking lot getting sold out (at Rs. 4.5 lakhs per parking) in 10 (TEN) MINUTES, ……sure something is stinking…but cannot put a finger on the solution!!
Source:Subramoney.com