CASE STUDY MUMBAI'S REAL ESTATE HOUSING PRICES STUBBORNLY HIGH DESPITE SLUMPING DEMAND
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Sona Global Management Review
Vol 12, Issue 1, January - June 2018
CASE STUDY
MUMBAI’S REAL ESTATE HOUSING PRICES
STUBBORNLY HIGH DESPITE SLUMPING DEMAND
A. A. Abhyankar
Senior Associate Professor, National Institute of Construction Management and Research
(NICMAR), Pune, Maharashtra, India
S. Sinha, A. Kulkarni, L. Pothen, A. Shirodkar, U. Lonare
Post Graduate Students of Advanced Construction Management,
National Institute of Construction Management and Research, Pune, Maharashtra, India
A country’s economic performance has direct repercussions on the
dynamics of various markets, especially real estate. Over the last few
years, various economic issues have declined the overall demand,
specifically in the residential sector. Absorption rates have stagnated,
causing high levels of overhang across all major cities, with Mumbai being
the worst hit. Customers are waiting for a more profitable scenario, whereas
developers largely remain in “wait and watch” mode without lowering
prices. Interestingly, this decrease in demand has not lead to decrease in
prices, which is otherwise suggested by the micro economic theory of price
demand and supply.
Keywords: Indian Real Estate, Demand-Supply Curve, Indian Metro City;
Mumbai, Microeconomics, Prices.
INTRODUCTION Mahesh is a 50 year old business head
of a successful construction company.
It’s a warm Sunday afternoon, and
In his long spanning career the pace of
Mr. Goel is enjoying a nice cup of tea,
development of real estate in India has
in his plush South Bombay Villa. A
jumped leaps and bounds, successfully
real estate regulator by profession,
luring the foreign investors on top
it is not very often that he has such
of the domestic investors, reasons
free time in hand. Skimming through
being the large population base, rising
today’s Economic times, an article on
income level and rapid urbanization.
current real estate scenario catches his
He has witnessed the metamorphosis
attention which reminds him of one
of real estate from being unorganized
of his most challenging and unique
to a charismatic, industrious and
ongoing case that rejected a well-
systematic sector. The regulatory
established theory. This peculiar case
policies have been contributory in
was presented to him by Mr. Mahesh,
envisioning the need for infrastructure
head of M&M Developers, Mumbai. He
development to establish better
remembers Mr. Mahesh being a strong
standards of living for the people [1].
hold person who came seeking advice
for a business problem.
January - June Sona Global Management Review 2018
He is optimistic that the sector would the fastest growing economy in the
grow further in near future due to huge world, and was estimated to maintain
number of Non-Resident Indian (NRI) the momentum with 7% plus GDP
investments. In his recent reads of an growth rates over the next five years .
industrial survey conducted, a 35% The real estate market was about 126
increase in enquiries related to NRI billion USD annually in the year 2014-
investments with property dealers 2015, and was estimated to be about
was noted. Also, attractive valuations 180 billion USD by 2019-2020. Share
have led to the advancement in Private of housing real estate sector in India’s
Equity funding. The survey concluded GDP being 5-6%.
that the real estate sector in India has
reaped sufficient growth over the He also came across the reforms
years, thanks to the induction of new introduced by the government of
Government policies that support India in this sector that bought about
investment in this sector . This positive transparency, stimulating foreign
scenario encouraged him to expand his direct investments (FDI) and hence
business. reducing the gap between supply and
demand. Reasons for high demand
THE REAL ESTATE SECTOR IN INDIA for housing real estate is attributed
to robust demand, increasing
It was primitive for him to study investments, policy supports and
the real estate sector in India for attractive opportunities. Some of the
business expansion. After reading major issues prevailing the sector for a
numerous articles and journals he slump in demand are unsold inventory,
understood that real estate is one the higher interest rates and credit growth,
most acknowledged sectors of all the weakening of Indian rupee, lack of
global sectors. After agriculture, it is credit, lack of transparency in the
the second largest employer in India. sector, land acquisition, lack of focus
He read that the real estate sector is on enhanced transit systems and green
subdivided into housing, commercial, construction practices etc.
retail and hospitality. The key drivers
for demand in housing real estate
The development in the sector has
include emergence of nuclear families,
been encouraged by the Government
rapid urbanization, rising household
of India by introduction of schemes,
incomes, government schemes, policy
policies and regulatory reforms. Some
initiatives and regulatory reforms.
of the schemes were affordable housing
(Pradhan Mantri Awas Yojana),
He found that the Indian economy Smart city mission, AMRUT (Atal
slowed down during 2012-2014 and Mission for Rejuvenation and Urban
the GDP growth rate stagnated, and Transformation), HRIDAY (Heritage
gross fixed capital formation (GFCF) City Development and Augmentation
and industrial production slowed Yojana). The various policies included
down. This downturn contributed to REIT (Real Estate Investment Trust),
inventory “overhang,” in which supply its implementation drew more
exceeds demand but prices remain investments in the sector, relaxation
high . Post 2014 it recovered to become
68Volume 12, Issue 1 Abhyankar, Sinha, Kulkarni, Pothen, Shirodkar, Lonare 2018
of FDI policy etc. Implementation of would work well for both the buyers
such schemes and policies lead to an and the sellers. Factors that determine
improvement of customer perception the supply in real estate are supply of
about the sector and thus lead to an real estate property, price of property,
increase in demand. availability of land, efficient builders,
easy accessibility of credit and skilled
In his opinion, real estate is a labourers. Changes in the supply are
complex and an opaque market, which caused by cost of production, new
depends on several price factors technology, new construction and
like interest rates, rental yield and demolition.
transaction volumes etc. Demand
in general is one of the key factors in According to the studies, in the year
increase or decrease of the prices of 2014, a sharp decline of about 30% was
any commodity. The property demand observed in demand in the seven major
depends on positive economic growth, cities in India. This is mainly attributed
job and income prospects and lower to high prices, higher interest rates
property prices. The demand is high and cautious buyer sentiments. The
due to strong population growth, developers responded to the decrease
rise in nuclear families, continuing in demand by reducing the supply
urbanization trends and improved whereby there was a 25% decline on
regulatory framework. Over the years, a year on year basis. The decline was
economic growth has improved but the reported in the premium and high
property prices have remained high end/mid end business segments, was
and unaffordable to end customers, observed across all the major cities,
hence postponing purchase decisions, steepest in the NCR.
reason being increase in cost and
time incurred in land acquisition and A hustle on the street brought
increased construction cost. Hence a Mr. Goel’s attention back from his
decrease in demand was noted in this thoughts. Disturbed by the noise
sector. A decreased demand for Real around, he moves to his study room
Estate, will cause rents and prices upstairs. Dressed in a crisp white
to decline, move people into more kurta-pyjama, he comforts himself
spacious accommodations, cause on his favourite leather recliner and
market segments that cannot compete remembers the day when Mr. Mahesh
to abandon or demolish improvements, called him regarding his business
and will remain in this state until problem. He sounded worried for his
demand once again increases. business expansion venture. In their
meeting scheduled next week, Mr.
In housing real estate, demand for a Mahesh presented him with his study
particular area is inversely proportional of demand-supply and prices of real
to its supply. Limited supply in estate sector and observed unusual
housing real estate causes the prices behaviour wherein despite slumping
to increase. Conversely an oversupply demand, there was still a rise in the
leads to a decrease in the prices. A price of real estate housing sector in
balanced market, i.e. at equilibrium regions of Mumbai. This study came
as a surprise to Mr. Goel and promised
69January - June Sona Global Management Review 2018
to revert back after his analysis. There is a huge reduction in the new
project launches to overcome the
CASE STUDY: MUMBAI
slowdown in demand. In second half
The report stated: The study is of 2015, 23% less or 20,776 houses
carried out by formulating data for year were launched, compared to the same
2012 to 2015 for the Central Suburb period last year, demand shrunk by
and South Mumbai region of Mumbai. 6% to 34,135 houses in this half.
The demand supply quantities are Developers in the peripheral markets
obtained from Knight Frank report [8], are the most concerned. Many new
which specifies year wise launches project plans were stalled in second
and absorption in the market. The half of 2015. The Peripheral Central
prices of these demands are obtained Suburbs and Navi Mumbai are thev
from trends observed by 99 acres. worst hit, seeing launches lower by
com [9]. This when plotted with the 44% and 59% respectively, as shown
respective demand and supply leads to in Figure 1 and Figure 2 [8; 13].
the depicted plots.
South and Central Mumbai markets
The financial capital of India has a are critical for the industry because of
population of 12 million that is growing their value. Even though they represent
exponentially by +1.13% since 2011 just 3% of the Mumbai’s unsold
[10]. It is one of the top ranked cities in inventory volume, they contribute
the world for residential investments. a massive 29% to its value. Mumbai
Starting in 2012, India entered a period has an unsold inventory worth Rs.
of more anemic economic growth, with 2020 billion, of which Rs. 595 billion
growth slowing down to 5.6%, and this is in the Central and South Mumbai
eventually affected the demand supply markets and is shown in Table 1, Table
relations of the residential property 2 and Figure 1, Figure 2 [8; 13].
market.
New infrastructure projects such as
Between the years 2012 and 2015 roads and metro networks that were
the demand in the city decreased announced in 2015, couldn’t quite
by 27%. This decrease in demand, boost the residential market, due to
subsequently affected the supply of the weight of rising construction costs,
market, wherein supply exceeded the demand-supply mismatch and slowly
demand leading to a rise in inventory. paced infrastructure growth. The
The unsold inventory increased to festive season in India that includes
31% for 2015-16 wherein around September, October and November
85,000 flats remain unsold. The prices sees better sales as compared to the
increased by 27% between 2012 and rest of the year as they are considered
2015, with a decrease in demand from auspicious for property transactions.
85,978 units to 62,581 units [8; 9; 2015 was the third year in a row that
13]. This downward shift of demand the number of homes on sale fell
from the equilibrium, has incidentally [14]. A sluggish economy and fear
observed an increase in prices. of job losses resulted in uncertainty
and weak sentiment. New launches
depend on what kind of customer
70Volume 12, Issue 1 Abhyankar, Sinha, Kulkarni, Pothen, Shirodkar, Lonare 2018
response developers expect. Since
the sentiment remained weak for
more than two years, the numbers of
launches were fewer [14]. The city has
been witnessing an overall slowdown.
Mixed market sentiments, anticipation
of change in government and general
national economic slowdown
altogether affected the demand and Figure 2: South Mumbai Region Demand
supply in market. Supply Diagram 2012-2015 [8; 9; 13]
Table 1: Central Suburb Region: Demand SUMMATION
Supply Price 2012-2015 [8; 9; 13]
Mr. Goel identifies that Mumbai’s
Years Demand Supply Price real estate housing sector does not
2012 7738 12160 11135 follow the Demand-supply curve. He
2013 6668 7646 12450 educated Mr. Mahesh that according
to the demand-supply curve, the price
2014 6136 6858 13430
of a commodity whose demand is
2015 5784 4363 14520
decreasing should also decrease, but
the case studies depict the opposite
trend. The prices for residential
sector have escalated over the years
despite a decrease in the demand. The
price of the housing unit cannot be
determined using this micro-economic
theory. The price of a housing unit
depends on multiple attributes such
as geographic location of the city, local
land prices, resources and differing
Figure 1: Central Suburb Region Demand local government policies. Every city
Supply Diagram 2012-2015 [8; 9; 13] based on its geographical location,
has its own reasons to not follow
Table 2: South Mumbai Region Demand the price corresponding to a shift in
Supply Price 2012-2015 [8; 9; 13] demand. Proposing a unified theory
that would be applicable for all cities
Years Demand Supply Price encompassing the varying attributes is
2012 688 973 38590 challenging.
2013 593 874 41990 Deviation from the Demand-price
2014 542 498 44500 curve is questionable for affordable
2015 445 317 48110 housings, tier two cities, various income
groups or even all the metros. With
the memories of the case refreshed,
Mr. Goel sat on his chair wondering
if he would ever find answers to his
questions.
71January - June Sona Global Management Review 2018
QUESTIONS sandhiyasingh35/demand-and-
supply-of-real-estate-industry-
a) What factors influence demand
in (last assessed on 31st March,
and supply of Real Estate housing?
2017).
b) Whether all cities in India indicate
Grant Thorton (2015), “Indian real
the same deflection from the estate sector handbook” (last
Demand-Supply curve? assessed on 31st March, 2017).
c) If yes, can the same factors be Government of India (2013), GDP
attributed for the deviation in each of India and major sectors of
city? economy (last assessed on 31st
d) Is there any theory that can be March, 2017).
applied to such trends or is there a Indian Brand Equity Foundation
need for a new theory? (IBEF) (March 2017), “A Brief
e) Which of these commodities and report on Indian Real estate
consumer goods will follow the industry” (last assessed on 31st
Microeconomic theory and which March, 2017).
will not? Mangoes, salt, cars, Knight Frank (2015), “India Real
soap, phones, cosmetics, sugar, Estate Residential and Office”,
electronics, furnishing items, July-December 2015 Research
cooking oil. Report (last assessed on 31st
f) What are the factors that lead to March, 2017).
the deviation from the traditional Knight Frank (2014), “India Real
Microeconomic theory in Mumbai’s Estate Outlook Residential
real estate housing? and Office”, January-June 2014
Research Report (last assessed
on 31st March, 2017).
REFERENCES Property rates and price trends
ASA and Associates, (January 2015), in mumbai available at http://
“A brief report on Real Sector www.99acres.com 2017.
in India” (last assessed on 31st Price Water Cooper (PWC) journal,
March, 2017). “A brief report on Building the
Bain and Company, “A brief report economy block by block Real
on Residential real estate in estate and infrastructure” (last
India, a new paradigm for assessed on 31st March, 2017).
success” (last assessed on 31st Survey by Urban Land Institute with
March, 2017). input from Price Water House
Census Date 2011. Available at Coopers LLP (last assessed on
http://www.censusindia.gov. 31st March, 2017).
in/2011, last accessed on 31st.
Essentials of Real Estate Economics,
Chapter 5, “Important Economic
Features of Real Estate” (last
assessed on 31st March, 2017).
https://www.slideshare.net/
72Volume 12, Issue 1 Abhyankar, Sinha, Kulkarni, Pothen, Shirodkar, Lonare 2018
A.A. Abhyankar, Senior Associate Professor, NICMAR, Pune.
Email id: aabhyankar@nicmar.ac.in
S. Sinha, Post Graduate student in Advance Construction Management,
NICMAR, Pune.
A. Kulkarni, Post Graduate student in Advance Construction
Management, NICMAR, Pune.
L. Pothen, Post Graduate student in Advance Construction Management,
NICMAR, Pune.
A. Shirodkar, Post Graduate student in Advance Construction
Management, NICMAR, Pune.
U. Lonare, Post Graduate student in Advance Construction Management,
NICMAR, Pune.
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