Average cost of a Mumbai flat is Rs 3.03 cr: Affordable housing remains a myth in India

The BJP government’s promise of affordable homes has remained just that for now as the real estate market in India continues to remain sluggish thanks to high prices and slow sales.

A new report by real estate research firm Liases Foras shows that property sales have fallen 8 percent across the top six cities— Mumbai,NCR, Bangalore, Chennai, Pune and Hyderabad— in the quarter to December but it did not prevent prices from rising. Average prices rose 7 percent in these cities during the period.

Total unsold inventory across the six cities stood at 832.09 million square feet, or 39 month’s level against 31 month’s a year ago, while new supply in the third quarter of FY15 declined by 9 percent, said Liases Foras.

Of the six cities, Chennai was the worst affected with sales falling a whopping 48 percent year on year, followed by Bangalore, which saw sales dip by 25 percent in a  year and 27 percent over a quarter. This is rather disturbing because both these southern markets have conventionally been a buyer’s market where properties were mostly being lapped up by end-users. However, with investor interest pouring in prices in both Bangalore and Chennai have now peaked, which is why the two cities are witnessing a decline in sales, said Pankaj Kapoor, MD at Liases Foras.

NCR saw sales dip by 15 percent while Mumbai Metropolitan Region saw a marginal 1 percent rise in sales volume. Hyderabad was the only city to register a 33 percent growth in sales on year.

On a quarterly basis, home sales saw a 31 percent rise, with the National Capital Region posting a 60 percent increase over the previous quarter, the highest among all cities as several developers offered a slew of discounts which also caused prices to effectively dip 2 percent.

However, in Mumbai Metropolitan Region (MMR), where the unsold stock stands at 1.62 lakh flats against 1.48 lakh units in the previous quarter, prices have actually risen by 10 percent year on year. However, on a quarterly basis sales have dipped by 3 percent while prices have remained stagnant. What this means is that inventories are piling up and it will take over five years to sell the existing stock at the current pace of sale in Mumbai, according to Pankaj Kapoor, MD of Liases Foras.

The average weighted cost of an apartment in Mumbai is Rs 3.03 crore or Rs 20,449 per square foot. Who can afford it? And with the recent increase in ready-reckoner rates, the little hope for correction has also been shattered. Add to this Chief Minister Devendra Fadnavis’plan to increase the rates for fungible FSI paid by developers for their building projects.

The premium, that was until now charged as per cent of the 2008 ready reckoner (RR) rates, will now be linked to the 2015 RR rates. Builders are crying foul as the move will lead to a doubling of the premium amount paid by them and the higher costs will have to be ultimately borne by home buyers. The BMC charges a premium at 60 percent of the ready reckoner rates in exchange for allowing an additional 35 percent FSI in residential projects.

According to Sunil Mantri, President of the industry body MCHI-CREDAI, the state government’s decision to link the premium to be paid by developers for the 0.33 extra FSI to ready reckoner rates of 2015 as against current base of 2008 rates will increase the premium amount by 100 to 250 percent and push up costs for home buyers in Mumbai’s suburbs.

As per industry estimates, Mumbai Metropolitan Region has an immediate demand of around 1.4 million homes, of which around 80 percent is expected to originate from people with annual income of Rs 3 lakh to Rs 5 lakh and the challenge for developers  lies in earning sufficient margin returns. So because these homes typically generate low returns, builders have hardly shown much interest in them. Moreover,affordable housing hardly forms a part of the core business of developers, especially when there is  enough demand for luxury homes in the city. Why would a developer bleed money on purpose?

Affordable housing requires support from the government, given high land cost. Without a proper policy or a regulator in place, the role of state agencies in facilitating affordable housing is limited by the sheer pressure from the politician-builder nexus. Another bias that creeps in is vested interest-bias as the sources of disseminating price information are none other than real estate brokerage firms or property brokers who earn a commission as a percentage of the sales value and benefit from over-reporting prices.

So what the government needs to do first is to check the flow of hot money into real estate as well as implement stricter laws to check related party transactions. Thirdly, there must be a limit on how many residential properties can a single person own. Fourth, builders should be penalized for poor construction quality, construction delays and other such issues as it amounts to fraud and erodes the buyer confidence in the market and finally, more needs to be done to free up government-owned land if the BJP government is serious about reducing the the risk of a bubble in the residential property mark.

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