Property prices in Mumbai, one of the most expensive real estate markets in the world, have remained constant since 2014. But home ownership has increased only slightly. Many yearn to buy homes in the city, but are forced to navigate the vast formal and informal rental housing market.

Up to 87% of respondents in a investigation led by Noborker.com, a no-broker real estate portal, wanted to buy an end-use home, but prices, despite the stagnation, remained prohibitive.

This is the second part of the series where we try to explain why despite the many unsold apartments, prices are not coming down to make housing affordable in Mumbai. Read the first part here.

The affordability factor

Affordable housing is generally understood as housing that is priced at five times a household’s income. But Mumbai’s price to income ratio is 38, one of the highest in the world, according to the property price index for the country 2015, Numbeo.com.

A series of reforms aim to close the yawning gap between what is affordable and what is available.

In 2016, the Indian government demonetized the currency and broke the back of the real estate market which was mainly based on black money. Other changes were on the way.

Until 2017, the market was skewed towards those who could afford expensive real estate instead of the low-income buyer. If a buyer took out a home loan for a property they lived in, they would get a deduction of Rs 2 lakh from their taxable income to pay the interest on their self-catering home loan.

But if the property was not self-occupied, there was no maximum limit for the interest tax deduction. The full amount of interest could be deducted from tax. As a result, “many company employees have invested in second, third, fourth residences to reduce their taxable income. This has kept prices high,” said Sandip Kumar, Principal Consultant – Research and Advocacy Services at Liases Foras, a no-brokerage property research firm.

The owners of these multiple dwellings in an irrationally priced housing market not only obtained rental income, but also a tax deduction. In 2017, the tax deduction was reduced to Rs 2 lakhs for all home loans, which prevented people from buying property as an investment and assembling additional assets.

Regulate real estate

Another major change was implemented by the government of Maharashtra after forming the Maharashtra Real Estate Regulatory Authority (Maha-RERA) in March 2017. The RERA aims to rule over developers by requiring them to improve transparency and accountability through quarterly updates and documentation. It also establishes the rights of buyers in the event of delay in possession or insolvency.

One of the biggest benefits of RERA is that it prevents developers from engaging in their common practice of diverting funds raised from one project to finance the construction of another project. According to an explanatory report by KnightFrank. But despite the reforms, no significant change is yet visible on the ground.

Representative image. Photo credit: Hardik Joshi, Unsplash

Funding is changing

As the market grappled with demonetization, the goods and services tax and proposed RERA reforms, India’s leading infrastructure finance firm IL&FS defaulted on payments to its lenders and sparked panic in the market. . The collapse of IL&FS made investors nervous and subsequently led to higher borrowing costs for non-banking financial companies (NBFCs), which increased the liquidity crunch.

NBFCs are significant to the history of real estate in Mumbai as they mainly lend to property developers.

The crash helped the market discover that “a large portion of NBFC lending had been channeled into one particular sector, real estate,” write Arvind Subramanian and Josh Felman in an article titled India’s Great Downturn: What Happened? What is the output?

Real estate financing initially came from private equity funds and banks, but recently “most additional lending has come from NBFC,” the authors write. “NBFCs accounted for around half of the Rs 5 lakh crore of outstanding home loans “in 2018-19”.

A financial institution offers financing after being assured that the borrower would be able to repay. In the case of real estate, the assumption was that the developer would complete the project, sell the apartments and pay off the debt. But that didn’t happen. And despite this, prices have not fallen significantly.

Subramanian and Felman explain that “while developers could in principle attract buyers to the market by reducing prices, they could not do so in practice because lower prices would have destroyed the (notional) value of the collateral they had pledging to secure their loans.

Around 3 lakh apartments are unsold in Mumbai. Photo courtesy: Aditya Rathod, Unsplash

And now?

Over the years, the real estate market has stagnated. The prices did not collapse, but remained more or less the same. Real estate investment does not make anyone rich in Mumbai anymore, but houses have not become affordable either. Due to COVID-19, there has been a 15-20% price correction in luxury homes, but the price has not dropped as much for mid-range or affordable apartments.

“Manufacturers’ profit margins have also shrunk,” says Kumar. “They’re not making double-digit profits anymore.” But for prices to fall further, someone will have to take a deeper cut. They can be financial institutions or promoters.

Kumar recalls the huge profits made by developers during the 2009-2012 boom: “Now if they want to sell, they’ll have to cut prices,” he says.

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