Why are homes in Mumbai so expensive?

Anuj Puri, chairman and country head at JLL India explains the dynamics of the city's real estate.

Mumbai's real estate prices are never out of the news. From the sale of spectacularly expensive trophy properties in South Mumbai to the ever-widening affordability gap for middle class home seekers, the city's residential real estate market is under a constant jaundiced limelight.

What are the factors that have been driving Mumbai's real estate prices so high over the years?

To understand this phenomenon, one needs to examine it from the two primary real estate variables of demand and supply.

Supply-side factors

Geography

Geography is one of the primary factors responsible for Mumbai's astronomic real estate prices. The city is surrounded by water on three sides; as a consequence, Mumbai has never seen circular development like most other Indian cities. Development was always linear (or one-directional) from the South towards the Northern suburbs.

A combination of factors such as distance from the prime South city centres to the suburbs, coupled with lack of robust infrastructure connecting these places, has led to prices surging in the prime city centres and the immediate peripheries such as prime North (Bandra-Juhu) and South Central (Byculla-Chembur).

Government policies

Government policies with regards to ready reckoner rates can also be seen as one of the responsible factors. For instance, in the recent years of 2013-2015, the Maharashtra government has been increasing ready reckoner rates by 15-20 per cent across the city. This is a significant jump for a city whose prices are already on the far side of high -- and considering that in other major cities, the increase was relatively moderate.

For instance, Gurgaon witnessed an increase of merely 10-12 per cent during the same period. These factors limit the market's ability to bring in new supply at speeds that matches with the rise in demand.

Locked land

A significant chunk of Mumbai's severely restricted land is currently locked in slums and dilapidated buildings. This land needs to be released by offering viable incentives to interested developers. However, the many attempts by the state government to rehabilitate dwellers of such homes in the prime city centres have met with very limited success, either on account of poor implementation or because slum dwellers cannot be brought to agree on what constitutes a good deal.

Slow infrastructure deployment

Meanwhile, the slow progress on infrastructure has not allowed the city authorities to open up new land parcels for development. Major projects such as the Mumbai Trans-Harbour Link (MTHL), coastal road network, the Navi Mumbai international airport, various phases of the proposed Metro links, etc. have made very slow progress in decongesting the city.

Consequently, end-users still prefer living in established localities where they have access to necessary transport infrastructure -- and ignore the upcoming locations which do not offer this benefit.

Demand-side factors

Investor activity

High investor activity always plays a big role in driving up real estate prices, and Non-Resident Indian investors comprise a significant chunk of residential real estate buyers in Mumbai, since it offers better returns for property investment when compared to cities in their countries of residence. Another reason for high demand from NRIs for a property in Mumbai is the fact that Mumbai, as a global city, offers a standard of living that can match what they have grown accustomed to in developed countries. Inhabitants of the city's far suburbs would contest this -- but those who can afford homes in the central locations would not.

Indian developers are constantly courting NRI and PIO investors in their countries, and many even have permanent offices there for this purpose. Often, as much as half of their inventory is sold to such investors even before local brokers get wind of the launch.

Heavy inward migration

While many Indians aspire to move to first world countries in order to increase their income as well as lifestyle quotient, this is an option only for those with the right education and skills. The relatively low-skilled would find it almost impossible to 'make it' there. For the latter class, the more feasible option is to move to big cities like Mumbai, where per-capita income is nearly double of the national average even if quality of life is poor. The constant need-based migration to Mumbai encourages landlords to hold on to high prices.

Increasing local nuclear families

Mumbai has been India's commercial capital for more than a century, and has attracted droves of the country's educated population for several years. The city's current inhabitants, who may be the second or third generation of its residents, comprise of people that are now require additional homes because nuclear families are on the rise. For such inhabitants, the high property prices are not as big a deterrent as they are for outsiders, given that they already own property in Mumbai and are well-entrenched in their professions.

The preferred route is to sell an apartment in a prime area and purchase two apartments in a relatively sub-prime area with some additional investments in order to accommodate two families. In other words, inherent demand from Mumbai's local inhabitants is always rising -- and this naturally reflects on property prices.

In short...

The ever-increasing clamour for a rationalisation of Mumbai's extremely high real estate prices notwithstanding, the above factors cannot be wished or argued away. The fundamentals that drive demand for homes in the city are the reason for Mumbai developers' apparent ability to defy gravity and keep residential prices so high. The fact is that sales are happening for all the above reasons -- and they will continue to happen.

Photograph: Premshree Pillai/Creative Commons