Replies to comments on Mumbai real estate

I didn't expect so many comments on my earlier post. And since most of these are detailed comments, it makes better sense if I post my replies here.

Prakash: Thanks for the comment, I agree with most of the points you mentioned.

Realty Rider: My post isn't about Mumbai's potential. And none of the projects you mentioned have been 'successfuly completed'. From what I hear retail (mall) space is being converted to commercial, not the other way around. Thanks for the comment.

Lekhni: Thanks for such a detailed comment. Here are my views on each of the points you raised.

1. The level of buying from speculators/investors in Mumbai's real estate market has crashed, and this isn't a new phenomena. A decline of interest from these speculators/investors, has been happening for the last six to nine months. That's the reason why transactions have taken a hit.

I agree with you when you say that an external shock might drive investors (who have been waiting it out) to sell - in fact, I even mentioned it point #5. Now whether that shock is in the form of a US recession or something else is a different matter. I mean, a shock in the form of a US recession will hit many more sectors (not just in Mumbai but in other countries, most notably US itself!) so real estate is bound to be a casualty.

Interestingly enough, since I wrote this post, we've already got a new shock - inflation at 11.05% (thanks to the oil surge - again a global phenomena) and the prospect of a sharp rise in interest rates. Now that should logically impact Mumbai's real estate prices. Let's wait it out and see if it does.

2. I already mentioned this in point #3. And builders haven't 'started throwing in stuff', they've been doing it for almost a year. But like I mentioned, headline rates have not fallen as yet. Sure, your effective cost reduced with these so-called freebies but the impact on your overall cost of purchase isn't huge and prices still remain too high.

3. I never made the point on stock markets financing the real estate bubble. And I can't agree with you that Mumbai's real estate boom has been financed by easy lending. That might be true to a some extent for HNIs and large investors, but not for the majority.

In fact far from it, banks started going slow on mortgages about a year back. This happened after the RBI pointedly took note of the speculation in the real estate sector (Gurgaon and Bangalore being good examples) and then increased risk-weightage on mortgages which made life tougher for banks - some of which had indeed gone over-aggressive on home loans. (If you know anyone in ICICI Bank ask them why they drastically cut/transferred their staff from their mortgages division).

The RBI woke up to the asset bubble in real estate much earlier as compared to the Fed which waited for a crisis to put them in action. Try getting a home loan now in Mumbai 'with little or no documentation' - you might be surprised how difficult it is here from the US - even today ;)

I understand the call you're taking and like I said I'd only be too happy to be proved wrong. In fact from the way things are going (after 11% inflation and a rising interest rate scenario), there might actually be a sense of panic among builders which might drive down prices. And if this does happen, it will not be because of speculation, greed and dodgy lending practices by banks. It will be because inflation drove up interest rates, which in turn stifled India's overall GDP growth - thanks, in no small measure to the oil shock, i.e. an event that affects almost every country in the world and not just the city of Mumbai.

I think both of us are in agreement that Mumbai realty prices will fall. It's just a question of how much and how soon.

Anon - not sure if that has anything to do with my post, but thanks for the comment.

Manoj - Some factual errors in what you said - prices never crashed 50% in the early 90s. They fell 50% from the mid-90s when the RBI raised interest rates (my guess is probably around 1994-95, sometime after 12th Sept 1994 when the stock markets touched an all-time high of 4,643) all the way to about 2002-03 (which annualised is an 8% decline - not exactly a 'crash'). So, as you correctly pointed out real estate typically crashes in slow motion and lasts longer. Will it happen this time? Let's see. For Mumbai prices to go into a similar downward spiral this time for the next 5 years, a lot would have to go wrong - and if that does happen, I think there'll be much more to worry about than just the real estate market. Thanks for the comment and I wish I could make such a handsome return on my investment!