With 70% unsold flats priced Rs 1 cr in Mumbai, RBI rate cut won't boost demand

In a recent interaction with media , finance minister Arun Jaitley urged the Reserve Bank of India to cut interest rates. According to him, a cut in interest rates, among other things, will fuel growth in the real estate sector, which is witnessing a crippling demand slowdown. [caption id=“attachment_2443172” align=“alignleft” width=“380”]  Reuters[/caption] “Real estate, for example, can give a big push to India’s growth and this is a sector which is impacted by high policy rates. Therefore, if the policy rates come down over the next year or so, certainly this is one sector which has a huge potential to grow,” he said in Hong Kong, explaining the rationale behind his argument. However, real estate consultancy JLL on Tuesday published a note that effectively questions the basis of the finance minister’s argument. According to the study, a whopping 69% of the overall unsold flats within the Brihanmumbai Municipal Corporation limits are worth more than Rs 1 crore each, which is out of bounds for an average Mumbaikar whose household income stands at just Rs 7.5 lakh per annum (as per the Economic Survey for 2014-15). In absoulute terms, 30,501 units out of a total number of 44,032 unsold inventory fall in this price bracket, said the note.  Accroding to the note, at this income level, it will take 13 years for a person to find an apartment that is affordable for her. Interestingly, the weighted average of house prices in the Mumbai city is much higher - it is slightly above Rs 2 crore. To buy a Rs 2 crore house, an average Mumbaikar will have to wait for 27 years, the note said.  Precisely, the key reason for the demand slowdown in the sector, which has resulted in a rise in the number of unslod flats with the developers, is that the prices of the houses are unaffordable. According to an earlier note by JLL, the National Capital Region (NCR) had the most unsold homes in the country, followed by Bangalore and then Mumbai as of the second quarter. While NCR had nearly 1,80,000 homes yet to be sold, the corresponding figures for Bangalore stood at more than 84,000 and Mumbai around 80,000. Mumbai most pricey Unaffordability of the houses is extreme in Mumbai. According to JLL, the share of Rs 1 crore houses in the overall unsold inventory has fallen sharply during the second quarter from the first quarter. But that offers no respite. “Although the share reduced from 90% at the end of 1Q15 due to some new launches in suburban locations, it is still overwhelmingly high for a city where only a limited percentage of residents are able to afford ticket sizes of over Rs 1 crore,” said Ramesh Nair, COO & International Director, JLL India. Of the launches that happened in the second quarter in Mumbai, only 3.21 percent of the houses fell in the Rs 31-65 lakh ticket size. There were none under Rs 30 lakh. “Compared to pan-India figures, the numbers are highly skewed towards the higher ticket sizes in Mumbai. Very few units in the affordable range were available from all these launches and mostly were in the suburban locations. Even if the overall inventory is considered, there is very little stock in the affordable range (INR 65 lakh and below) in the city,” the note said. In comparison, houses in the price range of Rs 35-80 lakh are sold off quickly in Bangalore. Units with ticket sizes of Rs 1 crore and above take longer to sell, JLL had said in the earlier note. Most of the projects in the city are in the price range of Rs 75 lakh to Rs 1 crore. The situation in Mumbai is only getting worse because of an expected increase in land prices, said JLL. “All the launches expected within the city limits in the future too, will largely consist of units priced above INR one crore and above,” it said. According to the consultancy firm, of the new launches that happened in the second quarter within BMC, a high 83 percent were priced over Rs 1 crore each. Now let’s return to the finance minister’s argument. As this article illustrates , a 25 bps reduction in RBI policy rate (if the banks are kind enough to pass on the cut, that is) will bring down the EMI by a paltry Rs 800 for a Rs 50 lakh loan, an estimated minimum loan amount required for a Rs 1 crore house. To hope that such a marginal fall in EMI will encourage somebody to go and buy a Rs 1 crore house is wishful thinking, to say the least. The key factor that will revive demand in the sector is a fall in prices. Until that time, the dream home of an average Mumbaikar is likely to stay just that.