Rational reasons for real estate prices to be high…..

If you believe that all bubbles are created by RATIONAL reasons and causes taken to IRRATIONAL HEIGHTS, welcome to the post.

Is Mumbai real estate terribly high and unaffordable? Yes.

Let us come to some RATIONAL reasons why people buy:

1. If we do not buy NOW we will never be able to buy in the future.

2. How else can we beat inflation – our kids need a roof over their head. Is it wrong to want a roof for our children?

3. Yes prices have gone up, but hey at Rs. 1.5 crores it is only 4-5 years CTC for me / my spouse…so why not?

4. Come on Subra the equity market has gone nowhere in the past 5 years, look at Real Estate we have got 25% p.a. return for our flat at…………….(any Mumbai or Delhi Suburb) (my comment: forget the numbers that is called innumeracy)

5. RE prices in Mumbai HAVE NEVER GONE DOWN why should I put my money in equities.(who wants to remember bad things from the past?)

6. Whatever you say Subra the past 5 years has given MINUS 14% RETURN in $ terms – this is unsustainable I know, but still why risk in equities.

7. When we retire we will have 2 houses – one we will give on rent and one we will use. The rent will increase at 10% annually thus taking care of inflation to meet our day to day expenses.

8. You know RE prices may fall in other places…but near our house there is Jain Mandir and that will ensure that prices in our BUILDING will not fall below xxxxxx Rs. No chance.

9. Last week a 2 bhk was sold in our building for Rs. 2.4 crores, that is the MINIMUM price I think I will get for my flat.

and many more…….

However what they forget is the following:

1. Thanks to technology, for most companies there is no need at all to be located in Mumbai. Baroda, Baramati, Coimbatore beckon.

2. High people intensive work like call centers, data processing, etc. have already moved out / will move out to cheaper locations. Even at the higher end people are refusing to take up jobs in Mumbai. One can even see a typical Mumbaikar choosing to leave Mumbai as it is too crowded and has poor infra.

3. Many banks and insurance companies have their back offices outside Mumbai.

4. Internet is likely to crush the volumes of many shops – recently heard of somebody buying a shoe from Jabong for Rs. 3k. It was available in a local shop for Rs. 4600. Paper shredder retail price Rs. 8590. Flipkart 6500. With collapsing margins and volumes, retail rentals and prices will come down.

5. With Infra worse than Bangladesh and prices upwards of New York, Mumbai prices are difficult to sustain – using the ‘past’ as an indicator is almost stupid, but hey it has worked so far…..

The problem is all arguments are RATIONAL, but prices are IRRATIONAL. In a country where the rental yield is so damn low, high prices are not sustainable. …..compare the ratios of Singapore….with Mumbai’s….hey that is another post, right?

 

Related Articles:

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

9 Responses to “Rational reasons for real estate prices to be high…..”

  1. You succeeded in confusing me again 🙂
    Tough choice – few arguments on both sides look valid.

  2. The argument of RE prices have never gone down is a wrong statement. In 1996, i know friends who have bought houses in kopar khairane, Navi Mumbai for Rs.14 lakhs, which became around 6 lakhs by 1999. It started picking up from 2000-2001 onwards and then came to the 1996 level in 2002-2003. Its a different story that it did not look back subsequently.
    But, this shows that “REAL ESTATE CAN FALL”.

  3. Waiting for that another post 🙂

  4. Thank You Subra.Its Here we learned what is innumeracy !We learned how Renting is Better than owing.What is Important on our part is to execute and some of us did it ,THanks to you.

    Waiting for another post

  5. Sir,
    Your point no.5 is always in my mind. Most of the places in south India(Chennai/Coimbatore/Trichy…)has poor infrastructure. No water,No electricity,Terrible heat..But the RE prices are very much comparable to Singapore or other western countries. How both can command similar prices? Is the salary levels have reached so high? What is the big reason for this? Is it demand? Can it sustain? If there is still upside I want to buy property.

  6. I guess similar arguments can be made for prices in each city ? For example, Bangalore and Pune can’t go down because of IT. Doesn’t matter that IT companies are not doing bulk hiring or giving 20-25% increments. Each year few lakhs join IT, doesn’t matter that they start with 3-4lakh p.a. and wont be able to afford the pricey 1crore 3BHK for quite some time.

  7. Prices are high only because of nexus between politicians , builders and banks .
    All talk of less land availability is in vain – you can increase FSI and build cities vertically . Government itself doesnt want prices to fall due to vested interests of all stakeholders ,except the end user .
    There is demand but at much lower prices as current salaries cannot afford these prices . Prices dont fall because black money can sustain them for longer periods .
    For the common man , there is an illusion created that there is no other avenue other than property to invest .

  8. We have cartels for land price, building materials, manpower wages and bank lobby. With Cobrapost, black money route would once again find favor with RE. There is a lot of scope for cash disburmenets without any receipt or accounting in RE industry. I am sure much of the payments to labour force, supply of certain materials and tips to officials goes totally unaccounted and this industry can absorb any amount of black money. I do not think there would be any respite for common man and it is foolish to expect correction.

    Although we have seen RE minor price corrections in certain pockets here and there, Indian public is yet to see collapse of RE prices enmasse.

    I support common man thinking that RE can never fail him unlike equity & other instruments.

  9. I like to read your posts about RE. I am in my late 20’s and on fence about buying RE. One reason why i may be compelled to buy RE is to get married!

    I hope point 1 comes true soon, right now i believe it’s about attracting good talent, companies prefer cities because of large talent pool.

    About point 2, I am from Mumbai and have lived outside Mumbai since age of 21 due to my employment, only compelling reason to move to Mumbai is parents and relatives.

    Also i agree that internet will act as a great leveler to do business but still we are yet to see the potential of high speed internet in India.

    I hope RE prices stay stagnant in coming years.

Leave a Reply

This blog is kept spam free by WP-SpamFree.