Mumbai Realty Slump Becomes Very Real

They may have appeared unfazed, but they now have begun to face reality.

It is good to know that Times Property of April-12, 2008, mouthpiece of Mumbai's housing industry, has acknowledged that there will be a correction, after months of writing that there is no such thing in Mumbai.

The usual suspects quoted in the article also sheepishly accept a correction will happen, albeit they say it will be 15-20% ; at least this is 5% more to their usual cliche of 10-15%. This is a far cry from February 2008, when none of them accepted that a correction is possible.

Now, one can safely assume a expect a 50% correction in the Mumbai real estate markets -- over the next 1-2 years.

Bubbles, housing or any other, are not caused by demand from the consumers, or affordability or the existence of genuine buyers, although these are the oft-attributed reasons for any manic rise. While these factors can be contributors, the single-most reason for bubbles is too much cheap money floating in the markets, with nowhere to go. But money is going to get very expensive in the next 3 months.

The RBI will have to hike the interest rates, because there is no other way to beat the 7% and still growing inflation. The other option is to make the rupee stronger, which the RBI has always been reluctant to do. There is a view that this time both options could be used by the RBI, which can be a double whammy. With interest rates rising, more speculators would exit the markets, and builders would have to pay more on their borrowings, and consumers more on their home loans. Further, a rising rupee would hit US investments in India.

This may also be a reason for a flurry of PE investments in real estate and others in India, rather than being a mad rush for property investments, it may just be a concentration of a closing pipeline of investments, before the RBI raises interest rates and allows the rupee to further increase.

The RBI is in fact facing a piquant situation, where rising import costs are creating havoc for Indian consumers. Already the rising prices of steel and cement are hitting the roof, and those of rice and wheat are hitting the bellies.

Suddenly, the talking heads at real-estate brokers, builders and developers, as well as those who have purchased expensive homes, are now saying the correction is certain, but it will be of a shorter term nature. All of them sound more like a mother comforting her crying baby.

None of us can say how long this correction will last, and none of us know what shorter term means. We have been introxicated with 50% gains in stocks within months, so it is unlikely that our shorter term is going to be more than 3 months.

Essentially this means we are looking in the face of a longer term correction in real estate.

However, irrespective of what the yardstick may be, now not a single builder or broker is denying that we are set for at least a 18-24-month decline in property values. While all are keen on talking about the time, no one is certain about the depth of the decline. At most 20% is being quoted as the outer limit.

The general reasons why builders and brokers are putting on a brave face in Mumbai is that they believe there is a genuine shortage of supply. Fact of matter is, there is no genuine shortage. The shortage has been created by builders hoarding properties. Do a round of any builder in the Andheri-Goregaon belt, and you will see lots of flats which have been "pre-sold" to investors.

Builders also apportioning credit to the High Court order on the private forests issue for creating a shortage of homes. This is completely untrue.

The acute rise in the cost of Mumbai's real estate, as it would be in any other state, is due to a unholy nexus between Maharashtra's politicians, most of whom own swathes and swathes of property, the builders and brokers, and uncontrolled hoarding and cartelization.