Thursday, September 20, 2012

Those 80,000 unsold flats

Those 80,000 unsold flats

The onset of rains, and the end of a hot summer, means no more alphonso mangoes. During peak season those mangoes fetch Rs 1,000 for a dozen. But at first sign of rain, their market value drops to less than Rs 200.

The same is true of onions. When there is onion shortage, prices shoot up to maybe Rs 100 a kilo, and post harvest, typically in January when there’s a glut, prices crash to less than 5 rupees.

In the wholesale market yard of Lasalgaon, Asia’s biggest onion market, there have been farmers’ riots due to onion glut.

Onions and mangoes signify the extremes of price variations, but those price movements also illustrate the law of supply and demand. When there is excess supply prices have to drop.

Sounds almost like a tautology. Why does this law not apply to housing? A simple answer is that fruits and vegetables are perishables, hence their value declines rapidly.

Even a toothpaste or a mobile phone has finite shelf life. If there is a glut, prices will fall sooner or later. A glut in houses however seems to defy the law of demand.

A report by real estate consultant Knight Frank revealed this week that Mumbai has more than 80,000 flats lying unsold. This is in addition to maybe another 50 to 100 thousand flats which are vacant, but not available for sale.

The value of the unsold inventory is a staggering 1 trillion rupees. (This figure is also roughly equal to the entire annual income of all Mumbaikars).

The average price of those 80,000 flats is Rs 1.2 crore. That’s hundred times the income of an average Mumbaikar. A flat is affordable to those, whose annual income is at least 20 to 25% of its price.

How many Mumbaikars earn more than Rs 30 lakh annually? This is a tiny number, and most of them already own flats. So then who will buy those 80,000 unsold flats? Speculators from Hong Kong, Dubai or Singapore? If speculators bought, would they rent those flats? Not really, because there is already a glut of flats available for rents of about Rs 40,000 to Rs 50,000 a month.

Rentals are falling. So speculators prefer to simply buy and wait, till prices zoom up again, so that they can sell and encash a profit.

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