Aim for the moon, not a house in Mumbai

A 2BHK house with a balcony opening to open space. Is that your big Mumbai dream? Well, it might take you a lifetime to get there. It still won’t be easy.

Rs 40 lakh! That’s what you need for a house in greater Mumbai. No, we are are talking the amount you need to pay to secure the house; you need to earn that much per year to just dream the dream.

Picture this: No house of your specification - 1,000 sqft, which actually comes to 650 sqft of living area, with two bedrooms and a hall - comes at less than Rs 1 crore. And you still haven’t added Rs 5 lakh or more for the stilt parking to your estimates. The house won’t be located anywhere close to the heart or thereabouts of the island city. Even in the suburbs it is difficult to find one. You manage to find a house of choice in a good location in Navi Mumbai or Thane. Then your real problem starts. It’s money. You prepare to spend a lifetime repaying the loan you have taken for the house.

According to a study conducted by research firm Liases Foras, the average weighted cost, or the median cost of houses in Greater Mumbai (from Colaba to Borivili) is between Rs 1.4 and Rs 2 crore, while it is Rs 98 lakh for the entire MMR region, which includes New Bombay, Thane and Raigad. Market experts say, to be eligible for a home loan, your annual disposable income should be at least one fifth of the total cost of the house. That is, for a Rs 2 crore house you need to earn a minimum of Rs 40 lakh, and for a Rs 1 crore house, you need Rs 20 lakh in your pocket after taxes. Add to this the ever-increasing home loan rates, which have gone up 50 percent in the last 18 months - from 8 percent in December 2009 to 12 percent now. What’s worse, you have to pay at least 20 percent as down payment as banks will refinance only 80 percent of the cost.

[caption id=“attachment_115120” align=“alignleft” width=“380” caption=“In the last four years, incomes across verticals have gone up 11 percent while real estate prices have gone up 33 percent.Reuters”] [/caption]

For Ishan Agrawal, an MBA from Nirma, Hyderabad, who is now working with a leading software company in Andheri (East), a 2BHK in the locality would cost Rs 1.7 crore. His wife works as well. After enquiring from several banks, he was told that he needs to make a down payment of Rs 34 lakh to be eligible to get a home loan at a teaser interest rate of 12 percent. That is, for the first three years his interest rate will be fixed, after which it will fluctuate depending on the market rate.

“As a professional, it is very difficult to arrange so much on my own,” he said. Since his annual net salary is around Rs 18 lakh, he has only two options. One, either start worrying for the next 20 years by opting for a mortgage loan to pay for that home loan, or arrange the money in black. And if he does opt for that life-binding home loan, he’s surely going to be on a shoe-string budget, evaluating every dime spent on a BlackBerry or a holiday abroad. And his woes don’t just end here. He has to pay an additional yearly maintenance charge of Rs 15, 400 ( Rs 1,300 a month) and a property tax of Rs 10,000 a year.

“I am in a fix, I don’t know when is the right time to buy and where. And I clearly don’t want to be stuck with an EMI of Rs 70,000 a month for the next 15 years,” says Agrawal.

What Agrawal is saying is right. An average citizen, doesn’t want to spend the rest of his life paying off debt just so that he can afford a house in Mumbai.

And most market experts too feel that an average weighted cost of Rs 1- 2 crore is simply not justified. Says Samanthak Das, national research head, Knight Frank, “Mumbai is not catering to the needs of the middle class.” An average middle class person will probably earn around Rs 9 to 10 lakh a year. And with such a salary he can only afford of buying a one bhk house in the extreme suburbs.

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“If you want to buy a house within a budget of Rs 50 lakh, you have to compromise on location and space”. He added, that apart from a person’s net salary, owning a house depends primarily on how much one can save and what are his other expenses.

Take the case of Pankaj Vijayan, a lawyer by profession, who wants to buy a second house in New Bombay, where a 2BHK will cost you anywhere between Rs 70 lakh and Rs 1 crore. Get this: His house is one hour away from his office by train and two hours by road. But it was a compromise he had to make as nothing within his budget was available closer to Mumbai.

Even though Pankaj is self-employed and earns around Rs 25 lakh a year, after meeting his monthly budget, he can only shell out Rs 50 lakh for such an investment. “I want to buy this house purely for investment purpose but I will wait till there is a correction in the market.''

Pankaj had bought his first house in 2005 in Sanpada for only Rs 22 lakh, and is still repaying his loan. Even though the value of his house has more than doubled in the last five years, he has postponed his investment plans as the current market environment is not conducive.

Says Pankaj Kapoor, MD of Liases Foras, “In the last four years, incomes across verticals have gone up 11 percent while real estate prices have gone up 33 percent.” Clearly when the median income is Rs 20 lakh and a property in the extended suburbs of Mumbai is 90 lakh, one knows the prices are skewed. “According to the per capita income level in Mumbai and the construction cost of building, the price of a flat should not be more than Rs 40 lakh,” he said.

What this means is that for a vast majority of the population, buying a new house is next to impossible. Yet valuations are sky rocketing each day. In the last three years, home sales have dropped by a third in Mumbai. Currently there are 90,000 unsold flats in MMR, and 23,000 in Greater Mumbai, said Laises Fores. Yet the weighted average cost has gone up 50 percent in the last two years. “This is because realty is run by black money and PE players,” said Kapoor.