Mumbai differs from Global property trend of increasing income and decreasing real estate growth

Last Updated: Wed, Mar 27, 2019 16:09 hrs
Mumbai property Market

The Maximum city has been known for throwing in surprises. And this time around it may have bamboozled a group of global property experts.

A team of economists and policy-experts at Knight Frank observed the trend in their first international property trends research titled "Urban Futures".

The team reported a growing disparity between average household income and real estate pricing. The research conducted across 32 global cities claimed that the average five-year real house price growth was at 24% while average real income grew by only 8% over the same period.

However, data from Maximum City surprised the researchers. Mumbai along with cities such as Moscow, Paris, Singapore, and New York differed from the conclusion of low income growth - high housing growth.

Conventional wisdom prompts one to think that rising income spurs buying behavior and thereby increases average landing price or ticket price. However, that has not been the case, at least as the example of Mumbai illustrates.

In Mumbai's case, property prices have reportedly increased by 8 percent while average household income has increased by 20.4%. Should one consider the conclusion that buyers could be either postponing investments in the real estate market?

Knight Frank uses the term affordability to explain this curious phenomenon. Knight Frank believes that a higher household income and lower than expected housing growth could be symbolic of being an affordable market. And this means that Mumbai, India's expensive property market is also the most affordable one.

Mumbai has been categorized under Knight Frank's more affordable quadrant, placed with peers such as Brussels, Cape Town, Madrid and Paris. There are no Indian cities in the most affordable quadrant. Dubai, Istanbul, Manila, Rome are included in this list.

Average Price Trends:

Consistent reduction in apartment sizes has also lowered the average ticket price for Mumbai.

It is estimated that on an average, newly launched homes are smaller by 25% between 2014 - 18.

Maximum launches, in the two years (2017 and 2018) have been in the affordable and mid ranged segment with ticket prices below Rs 7.5 Million (75 Lakhs).

Why Mumbai is becoming affordable?

The report cites Vivek Rathi, Senior VP at Knight Frank as saying that policies such as Credit-linked Subsidy Scheme[CLSS], Pradhan Mantri Awas Yojana, and GST revisions may have made buying property buying an affordable proposition.

Speaking about CLSS, Rathi explains in the research document, "First-time buyers earning up to Rs 1.8 million [Rs 18 lakhs] (US$24,685) qualify for the incentive, which is worth around Rs 267,000 (US$3,662). Given that average household disposable income is Rs 1.1 million [Rs 11 lakhs](US$15,085), the majority of residents will qualify for the subsidy. In addition, under the Goods and Services Tax (GST) regime, buyers who access property through the CLSS are only taxed at 8%, down from 12%."

Rathi further adds that such schemes have an impact in the outskirts of Mumbai and not the city. "In the Mumbai city area, where prices are upwards of 10 million rupees (US$143,500), they [schemes] deliver no meaningful benefit,"

Elaborating on why Mumbai could be becoming affordable, Shishir Baijal, CMD at Knight Frank India, said, "Mumbai has seen a steady increment in average incomes based on its economic growth, while the reduction in property prices has further enhanced affordability. The city has seen a drop of close to 7% in ticket prices for new launches in 2018. With the recent announcement on reducing GST on under construction projects, the effective payout by the buyers is expected to reduce by a further 6% - 7%.

Baijal further added that the development should be viewed positively, as it "indicates a further possibility of growth of Global and Indian organisations in the city, who are always looking at locations that are strategic and yet within the affordable range."

Here is a look at the average increase in household incomes vs the growth recorded in housing markets for the 32 cities.