There are many ways to describe Mumbai. India’s financial capital. Maximum city. The city of dreams. The city of seven islands.
And as most who’ve lived there would surely know: India’s most expensive housing market.
What’s peculiar about this market is that despite huge unsold inventory and overall slowdown in India’s real estate sector, property prices continue to spiral up. The cost of a Mumbai apartment is estimated to increase by 6% in 2016, according to property consultant JLL. It rose 3.3% in 2015.
But JLL believes the rise in prices is still slower compared to the pre-2008 period. Since the global financial crisis, growth has been in single digits, its blog post said on May 10.
“It demonstrates Mumbai’s maturing residential real estate market. This is definitely good news for the scores of end-users who wish to own a house in the city that has India’s priciest real estate,” the blog said.
But affordability remains a problem in Mumbai.
The house price-to-monthly income ratio—the average number of monthly incomes required to own a house—in Mumbai is the highest among major Indian cities, according to a study by the Reserve Bank of India (RBI). For the third quarter of fiscal 2015, this ratio for Mumbai was at 67 times, compared to the national average of 60. In Delhi-NCR, this ratio is 63 times.
Even compared to the poshest central Delhi enclaves, housing prices in India’s financial capital hold their own.
“The central Delhi locations are the most sought localities. However, there is very limited new supply and only a handful of transactions take place as large swathes of the central prime city are occupied by government or institutional buildings and green areas,” Amit Oberoi, head of valuation and advisory at Colliers India, a real estate consultancy, told Quartz.
Apartment rates in central Delhi typically range between Rs55,000 and Rs75,000 per square foot (sq ft), Oberoi said. In Mumbai neighbourhoods such as Malabar Hill—which can be compared to Delhi’s tony Lutyens—they hover between Rs75,000 and Rs100,000 per sq ft.
Generally, housing prices—besides construction and land costs—depend on demand and supply, along with factors such as access to transport networks, proximity to schools, and good public amenities.
But in this city, these don’t exactly hold true.
“Mumbai is a basket case and very different from other land markets in the country,” Vaidehi Tandel, a junior fellow at the IDFC Institute, a research and policy think-tank, told Quartz. “There are many distortions.”
Here are some reasons why prices are always on the rise in Mumbai.
One of the major distinguishing traits of Mumbai is its geography. A peninsula bound by the Arabian Sea, there isn’t much scope for expansion or land development in the city.
“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,” Anuj Puri, chairman and country head at JLL, said in a research note.
This limits supply. And when demand overtakes supply—almost always the case—prices rocket.
“In Mumbai, much of the demand is left unmet due to both natural and artificial supply constraints. Because it is an island city, there is limited scope for expansion. Reclamation is the only option to increase the supply of physical land,” IDFC Institute’s Tandel explained.
Greater Mumbai—from Colaba in south Mumbai to the western suburb of Dahisar—has a total land area of 437 square kilometres (km), of which 139 sq km is habitable. Population density is over 29,000 persons per sq km (pdf), compared to Delhi’s 11,050.
Government policies, too, bolster prices. For one, the ready reckoner rates for Mumbai have been steadily increased. That’s not surprising because any such increase means more revenue for the government.
Ready reckoner rates are set by state governments to calculate stamp duty and registration charges. These, in turn, determine the floor price—the lowest value at which the property can be sold at. Each geographical area—clearly defined by boundaries—has a different ready reckoner rate.
This fiscal, Maharashtra increased the ready reckoner rate by an average of 7%, which is expected to result in revenue of over Rs15,000 crore for the state.
While other states, too, hike such rates, the increases in Mumbai and Delhi are highest among cities.
Besides, the floor space index (FSI) regulations laid down by the Municipal Corporation of Greater Mumbai (MCGM) haven’t changed much since 1964. FSI regulations determine the vertical length and size of a construction and vary with location and municipality.
In a research paper (pdf) in March, urban planner and architect Bimal Patel explained why Mumbai needs to revamp the FSI rules:
When FSI limits were first assigned to different areas of Mumbai, limits were set higher than current demand. The ‘FSI’ was merely an innocuous and unobtrusive, technical specification. Soon however, on account of mounting demand for floor space and restriction on supply, a scarcity of floor space emerged. Since FSI limits remained static and demand continued to mount, scarcity also mounted. This started driving up the prices of property to higher and higher levels.
The MCGM has now proposed a Draft Development Plan 2034, which recommends some changes to these FSI limits. The draft is still being revised.
Mumbai is also a magnet for immigrants from all over the country because of rapid urbanisation and high employment opportunities. “The constant need-based migration to Mumbai encourages landlords to hold on to high prices,” according to JLL’s Puri.
Mumbai’s population has shot up by 983% since 1911, according to census 2011. In the rest of the country, the population has grown by about 380%. In 2001, 26% of Mumbai was accounted for by migrants from other states who move here for jobs. Migrants, especially daily wage labourers, have fuelled the rise of slums (pdf).
Simultaneously, non-resident Indians (NRIs) looking to invest also contribute to demand.
A 2014 survey of 850 developers by the industry body ASSOCHAM said that enquiries from NRIs were expected to increase by 35% that year.
“There is a lot of demand from NRI investors since rupee is in a free fall mode for the last several years and people believe housing prices in a country like India will never fall,” Ritesh Kumar Singh, a corporate economic advisor and a former assistant director of the Finance Commission of India told Quartz.
A dozen builders own about 70% of the transferable development rights (TDR)—rights to develop land that can be transferred or sold—in Mumbai, the Business Standard newspaper reported in 2010. This means pricing power is concentrated in the hands of a few.
Additionally, developers have often expressed concerns over the huge payouts to the government, which in turn forces them to push prices up.
“Mumbai has among the highest payouts to state government and still the end user does not get what he deserves. Out of every Rs100 that a consumer pays, Rs38 goes to the government. This has resulted in a price squeeze for a developer and he has no choice but to keep raising prices,” Boman Irani, chairman and managing director of Rustomjee Group, said during the Forbes India CEO Dialogues in October 2014.
Of course, the other reason why real estate developers tend to be averse to lowering prices is huge debt obligations and the need to cover the costs. That’s something even RBI governor Raghuram Rajan has nudged real estate firms to consider.
“If real estate developers, who are sitting on unsold stocks, start bringing down prices, that will be a big help to the sector because once there is a sense that the prices have stabilised more people will be willing to buy,” Rajan said at a conference in August 2015.
That, however, is easier said than done.