Living beyond your means….?

Mumbai has a peculiar problem- exhorbidant real estate prices. However this does not mean economics is at work. I would know of many people who live far, far beyond their means. How does this happen?

Well their parents are cash-flow poor, but asset rich. The children are asset poor, but have some cash flow. Take an example of 2 people. One lives in Santacruz – he lives with his parents in a house which has a market value of Rs. 100 lakhs. He works as a clerk in a large company and earns an annual salary of Rs. 240,000. It makes no sense at all for such a job to exist in Mumbai – simply because of the stupidly high real estate prices. However, his father earns about Rs. 400,000, he earns about Rs. 240,000 and their household expenses are held down at Rs. 20,000 per month for all the 6 of them. This happens because there is an old school nearby – again subsidized by the state government – where his 2 children study.

It actually makes a lot of sense to sell off this house in Santacruz for Rs. 1 crore, buy a house in say Kandivili for Rs. 40,00,000 and put the balance Rs. 60,00,000 in the bank.

However, this cannot happen because there may be no subsidized school in Kandivili (it is a newer suburb) and the simple inertia or resistance to change. However such low paying jobs in Mumbai will ensure that these jobs can be held on to only by a Mumbaikar – it is very difficult for a new comer to Mumbai to work on a salary less than Rs. 400,000 -even just staying as a bachelor.

The same thing overflows into the business also – shops cannot afford to be in prime locations, but continue to be there. Imagine a watch shop in Bandra or Santacruz – which is over 30 years old – and selling grocery. The margins do not allow one to consider ‘replacement cost theory’ of pricing. However since the shop owner knows only selling ‘kirana’ he continues to sell that. It may actually help if at least the children of the grocer learn new skills and some kind of ‘making a living’ education rather than the simple Bsc. and an MBA!

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One Response to “Living beyond your means….?”

  1. Subra, a house in Kandivili for 40 lakhs is a pipe-dream which may never come true in our life time (again)!At that price you will not get a 1 BHK south of Dahisar! This tid-bit of course reinforces your case further.

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