Mumbai property: Will prices fall in 2012?

Here we go again: more predictions about residential property prices in Mumbai - the most expensive property market in the country - coming down in 2012.

This time, it’s from Bank of America Merill Lynch (BofAML), which forecasts that residential property prices in the city could fall by 15-25 percent over the next six months.

The brokerage says Mumbai’s residential property prices jumped 14.6 percent (compounded annual growth rate) over the past decade, higher than the estimated 9-10 percent growth seen in earlier decades. “This growth appears unsustainable and prices should undergo mean revision over the next 1-2 years,” it predicts in a report.

To support that view, its analysts also visited some building sites in Mumbai and discovered that developers were offering 5-8 percent discount to buyers depending on the project.

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[caption id=“attachment_195277” align=“alignleft” width=“380” caption=“BofAML predicted that given the financial difficulties being faced by developers, they would offer higher discounts in 2012.Reuters”]  [/caption]

BofAML predicted that given the financial difficulties being faced by developers (high debt loads, high funding costs and limited access to funds), they would offer higher discounts to push sales in 2012.

BofAML is not the only one that believes a price correction is around the corner.

Jones Lang Lasalle, a real estate consultancy, also noted in a recent press release that there is already a price correction of sorts happening “below the radar”. “While official prices have remained firm in ready-to-move-in projects, prices have fallen by at least 10-20 percent in under-construction projects which are less than 30 percent complete,” it said.

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The consultancy also expects moderately revised rates to be made official in several suburban residential projects in the next few months, which, it said, should spur a slow but steady recovery in demand.

To be sure, record home prices and higher interest rates have hit demand badly: Mumbai’s residential home sales dropped to a three-year low in the quarter ended December, according to a Bloomberg report.

According to data provided by Liases Foras Real Estate Rating and Research, sales fell 17 percent from the previous quarter to 7.59 million square feet, the report added.

Unsold inventory, or the number of months needed to clear stock at the existing absorption rate, also climbed to 44 months.

The figures elicited a rather predictable response from the founder of Liases Foras, Pankaj Kapoor: “The likely scenario looks like we will see a dip in prices seeing the dismal sales and as liquidity remains tight,” he told Bloomberg.

Unfortunately, we believe there is no guarantee that property prices will fall, no matter what the experts say.

When home prices soar and demand from buyers falls, developers tend to cut back on new launches to save on costs, but don’t slash prices on their existing/ongoing projects. Sometimes, they might even start a new project offering limited amenities or smaller units to attract buyers, but continue to sell their existing/ongoing larger projects at current prices.

Sometimes, a buyer could get lucky and get a minor discount. It’s rare, however, for developers to cut home prices sharply in response to dwindling demand.

There are three good reasons for that.

One, as Firstpost has already pointed out, the real estate market is driven mainly by investors and not end-users or consumers. These investors demand good returns on their investments. That means that even if a developer can’t find buyers for his flats at a certain price, he can’t reduce prices because that would lower the returns for these investors, who might then not invest in another project of the developer again.

Two, a falling rupee has stoked demand from non-resident Indians, according to some experts, who are also buying real estate primarily as an investment. Since there is a fair bit of demand right now from this segment, there’s really no compulsion for developers to lower prices for real home buyers.

And three, interest rates are expected to start coming down this year, which should get at least some home buyers back on the market as loan repayments become easier.

So, why on earth should developers bring prices down?