Roof in Mumbai?? Too expensive!!!

The search for housing in mumbai is a pain. That too in spite of sites such as magic bricks which are supposed to help find a rented accommodation easy. I went to the same apartment block that I rented out 3 years ago and it now costs 14,000, an increase of 100% in three years. There can be multiple reasons for this.

1. There is a seasonal shortage of houses which has resulted in demand-supply mismatch. For example, its quite possible that December-march period there is an abundance of houses available to be leased out but not enough people wanting to take up the lease. In the period between May-August, most graduates are stepping out of college and have started looking for house. At this time, its quite probable that there is a shortage of housing. The evidence supporting this fact is that housing has turned to be 30% more expensive in the past 3-4 months.

2. There is a housing bubble in the making here. A 2 BHK near fantasy land costs 1 crore which is 250,000 USD. Apartments in Brooklyn start from 200,000 USD. Moreover in Andheri east, there is neither a mall and only one screen to watch a movie. And in no way, can New York prices can be compared with India. No MBA grad in NY would be paid 1,100 USD for a month!!!

3. Excess liquidity. This term keeps cropping up these days on news channels and papers. What it means is there is lots of money with the people and failing to find investment avenues has resulted in investments with lower returns. So for lower returns, as the future price is assumed to be fixed, will result in higher current prices. Though it seems intuitive, I seriously doubt whether excess liquidity alone would increase prices to such an extent.

4. There is a genuine shortage of housing in Mumbai. Mumbai has around 2 Crores(20 million) in an area of 400 square kms. Assuming a unit size of 4 per family and only 50 sq Kms available for housing, it works out to be 100 sq meters(1076 sqft) of land for a family of 4. By the way, in Mumbai, you would 2 BHKs with 1000 Sqft. Which might be too less if we consider only flat housing. But fortunately we can built multi-storeyed buildings.

5. The expected present value of future cash flows demands such a price. This assumption is easy to justify. Any discounted cash flow(DCF) analysis uses a lot of assumptions and if we take rent as an indicator of future cash flows, it would justify the current prices.
For example, a property that gives out rent of 24,000 per month would give out 28,800 per year. Assuming 20% tax rate with expense of 60,000 per annum for society charges, water, maintainece etc and a discount rate of 11% post tax, would give the value of the apartment to be 1.1 crs. But the rent is based on the price of the property. This serves nothing but as a self serving device!!!

Just for argument sake, if I buy 1 crore flat using a bank loan for a period of 20 years, the EMI would work out to be 80,000!!!

p.s:I still have to call up a bank and find out how much is the EMI.