Real estate in Mumbai is not high….
Here is a completely different perspective on real estate costs!! For a typical middle class person – say earning Rs. 6 lakhs at age 43..obviously houses look damn expensive in Mumbai.
However when you look at the salaries in the BFSI space – banks, mutual funds, life and gen insurance companies, brokerage….it is common to find 30 year old and well qualified guys/gals earning about Rs. 10 lakhs. Now if you stretch this, you also find a few earning as high as 30L.
If a 30 year old guy earning Rs. 28 lakhs is married to a girl aged 27 earning Rs. 22 lakhs, the take home income is about Rs. 50 lakhs. This really puts them in the RICH class – but their requirements could be higher!
When such a couple goes and sees a 3 bhk for buying, they do not bat an eyelid when they hear a figure of 2 crores. Let us say they make a down payment of Rs. 50L….then it is just an EMI of Rs. 1.5L per month.
I met a few such couples – in the BFSI space..- and all of them are either buying houses in the range of 2-2.5 crs….and all are in their late twenties or early thirties. The assumption that they make is that the job / similar job will continue for the next 20 years. This is not an unfair assumption – and the only KNOWN interruption is for having a baby/ babies.
The risk of course is that the salaries may not go up too much, but surely it will beat inflation. And even if the salary does not go up too much, they can be sure that they will get similar paying jobs. However there is a funny risk of both incomes stopping! Imagine when the wife is on maternity leave, the husband loses his job/ is downsized.
Well most of these kids have prosperous parents – so flying back to the original nest is a perfectly nice option possible. (I may do a separate post saying why parents should not allow this, but that is a different matter altogether!!!).
So for many of these 28 -35 year olds Mumbai prices do not look as intimidating as it looks to a person earning Rs, 5-8L and wondering whether it is advisable to work in India 🙁
In fact one of the kids said that his income has gone up so much that salary: housing prices have moved in HIS FAVOR…NOT against him! all d best !!
pravin
usually out of the 50 lakhs, 50-70% is variable salary for those earning high salaries.these folks are betting on a permanent upward bias to their salaries which anyone who has been thru one complete business cycle would know ,is a bad assumption.
variable salaries,in boom times seem to be not so variable with 100% and above payouts.in downturns (arent bfsi the first to be canned anyways),the payout can easily be zero.
subra
no Pravin NOT TALKING ABOUT VARIABLE salaries…talking about fixed salaries…yes, I have not considered taxation, but not considered bonus too
Jayant
I exactly know 1 couple like this. Both earning well, bought hugely expensive house. Wife goes on maternity leave, guy gets downsized. Both jobless wondering what to do with monthly EMI. :'(
Sanjay
Seems like I am only underpaid person in Mumbai. I should start looking out for better paying job.
Sanjay
@Jayant,
Can’t they simply sell house and move to a house on rent?
subra
Sanjay
it is a cruel world. You could be a good BE(Mech) with a fantastic job as Head of Maintenance in a steel / auto plant. Age 56. Salary 10L and your son MBA with a foreign brokerage firm age 25yrs salary 10L. 1800 people reporting into you..and 1.8 people reporting to your son…well that is life!
subra
No Sanjay they CANNOT..after all ‘what will people say?’..LOL. Now throw a 30% fall in real estate prices..it will mean that what the paid as a emi ..is lost. Best in such cases is to RUN…!!
IsItPossible
Unfortunately, today’s young generation in India have yet to see a REAL recession. The moment it occurs, housing bubble will burst. It is NOT a question of “IF” anymore, it will happen in time when MOST are NOT expecting it and are caught unguarded.
Also due to high salaries, young generation is in a habit of following western culture and has become spendthrift. Habits are damn difficult to change and once you get used to a certain lifestyle, it is extremely painful to change it.
Its ONLY matter of time when this will happen but ironically this might be needed for our countries better future, HOW?
1. Collapse of housing bubble
2. Economic recession
3. Less to minimal job growth or might be massive layoffs
4. High inflation
This may drive educated/talented young people (for most part they are in dormant state about politics and countries future) to be activist and in turn this might force the government at that time to act and DO some good things…..
Wishful thinking…. 🙂
MRHDK
I know several such people in financial sector of the type Subra has described.
The dooms day scenarios are applicable not only in financial sector but in all walks of life.
Also, recessions hurt lower income people more than the people in high income bracket.
prabee
Subra,
Every time you write a article on real estate and post in public domain that has higher traffic like yahoo or rediff you get a response saying that how real estate prices never come down or how its all black money of politicians etc etc.
Can you do a post on
what will be the scenario when the real estate actually falls down. I mean like in US the sub prime which caused systemic risk(as put in movie “inside job”).
What will be the systemic risk in India if there is one?
pravin
real estate is still the domain of the relatively well off in india.in the US,as defined by subprime -even those earning the equivalent of 7 lakhs per year were buying houses worth 4 crores.so that was a clear sign of risk.back here,most banks still require 20% down for a home loan and dont give out loans to all and sundry.plus there is no securitization of those loans in india.atleast it is at a very small scale compared to the US.finally,we dont have fannie mae and freddie mac type risk hiding monsters -so the taxpayer in india is still not on the hook that much.
people arent using their home equity to go on vacation etc either.
in short,we are nowhere closer to the American situation.if real estate falls in india,it will be similar to the fall in the late 90s.good for economy
PrAvEeN
The same situation in the article is applicable to bengaluru too. In bengaluru there are many IT working couples who both combinely earn 1.5 lac p/m as take home i.e some 18 lac p/a as takehome. If you say to them that the 3 bhk apartment costs only 80 lacs they won’t hesitate to buy.
& recession in IT is not dependent on Indian scenario but the country where these guys work. So if US or Europe or Japan sneezes we will catch cold. But upto now Indian IT is more benefitted by downsizing in Europe as more and more jobs are moved here. So when or how can we expect real estate reverse atleast in bnglr????
P.s: I won’t hold any real estate in bengaluru and in a serious thinking whether to buy one????
Prav
Agreed there might be few such blessed people earning 40-50 Lac CTC. But there are majority of people in the range of 5-20 Lac. Why Subra, each time you write articles catering to people earning in the higher end of salaries. Sometimes think about small fish like me also.
Maru
@subra, salary definition has changed over a period of time. If a person earnings 28lacs it may be because of special skill he/she possessing. No company will give away huge salary to every tom and harry. The risk which you have mentioned is applicable to a 2.8lacs earning person as well there is no difference.
In my experience, real estate prices in mumbai/pune are on rising side, and it is just sheer because of demand. If there is no demand then prices should have come down, but that is not the case. I have visited many projects and most of the good flats are already sold out ( the only one left are 1st and top floor). Earlier i used to think this is all builders marketing strategy, but i was completely wrong.
If you are looking for a dream house, i would suggest go ahead and buy do not wait for correction in Real estate.
krish
Recently one of my tenent of 4 yrs bought a flat at fancy complex and moved out at B’lore. There are lot of these DHINK (Double High Income No Kids ) and DHISK (Double High Income single Kid) couples in BFSI and IT sectors buying luxury properties in late 20s and early 30s.
Unfortunately our builders are focussing on this segment (DHINK and DHISK) only. It could be that turnover and margins are high. Added to this, HNIs & Rich brokers who invest in such properties to flip as soon as the prices rise.
All said & done the high end market is getting saturated with economy woes. The current supply far outstrips the demand at least in this segment. At the same time not sure whether the MIG and budget flats would come back. Considering Nano example, I doubt it.
Sanjay
@Maru,
This is simple waiting game. This is game of patience. Investor has decent holding power. They wont sell flat at loss.
You feel that this is seller’s market but if buyers wait for 4-5 years then sellers will lose patience and sell at same price at which they have bought.
Reality is buyers are not waiting. Transaction count is decreased but not reached 0. So the price will not come down. It may remain same for 5 years but wont come down.
john
So are you saying the real estate market in Mumbai is fairly priced or even cheap? How about comparing it with the prices across the world?
Compare it with the top developed nations with excellent infrastructure and with average income at least 5 to 10 times higher than that of an average Indian (or even average Mumbaiite). The prices are almost the same if not cheaper for similar sized properties.
I don’t even have to start about the problems that the city faces in terms of infrastructure including electricity, water, roads, parking, etc. We can say that even comparing them at a basic level with the developed countries would be completely unfair. So why doesn’t that hold true for the prices then?
So one really has to question when you say it is cheap and people are able to easily afford it. You said there are many couples and individuals of the type you gave an example of in your post, but even with a very far stretched optimism, those many would not fit the 0,1% of the general population of Mumbai and its extended suburbs. But on the other hand the prices for the real estate are the same for everyone.
And even if you go more and more out of Mumbai into the suburbs, the prices don’t really start to drastically reduce. So when you write that real estate in Mumbai is not expensive, one really has to take it with a pinch of salt.
I guess when its even difficult for a highly qualified working guy to afford a decent flat, who would even want to think of the non-educated unqualified workforce who have their own aspirations as well. Just pray that the situation improves, else the social unrest would give rise to many more riots and angry young people on the streets.
Vandhana Karthick
Subraji Is it right to do with a clear plan with an fixed income of Rs.1.5L per month..As of my concern we should not take that much big risk with a complete earning which we earn to invest in real estate..We can do a part of 30% only..
Sanjay
Hi John,
There is no social unrest because the apartments are available on annual rent which is just 2% or 3% of cost of apartment.
Dont worry. It is only people who have black money or who are earning in dollars are putting money in real estate. It is because they have too much money (in case of NRI) and dont have any better alternative (in case of black money).
Eventually, salaried people will stop owning apartments. Once the indian culture of “owning” a home start decreasing then real estate prices will stay at same levels for a long time (for around 5-10 years). This wont bother to NRI or black money owners because it is just a small matter to them.