While the rest of the world struggles to find footing in downward-shifting housing economy, housing prices in Mumbai are rising. The financial capital of India has experienced price increase of 40% in the last two years, and the Indian government has raised interest rates nine times since March 2010. Although this has done little to slow the rise in costs, analysts believe the market is on course to slow down, citing a drop in home registrations of around 35%. This combined with an anticipated rise in construction costs is likely to cause a correction in the market. For more on this continue reading the following article from PropertyWire.
Residential property prices in India’s financial capital Mumbai have surged 40% in less than two years, even surpassing peaks reached in 2008, according to real estate consultants Jones Lang LaSalle.
Properties in Mumbai’s prime locations are selling for up to $2,000 a square foot but there are signs that the market is slowing and that a correction might be around the corner. The firm is warning that prices could fall 10 to 15% by the end of the year.
According to industry experts, home registrations are down 30 to 35% in Mumbai compared with the previous year, which shows that investors and homebuyers have moved to the sidelines. ‘Rapid rise in property rates in Mumbai have acted as a dampener for residential demand in the city, primarily in the premium and mid to high income segment,’ Jones Lang La Salle said in its latest report.
The recent slowdown in activity in the residential space is hurting both property developers and home sellers. ‘I have a two bedroom apartment in central Mumbai, it’s a very nice building with a garden and a gym. I put it on the market three months ago and haven’t received a single inquiry,’ said Rajesh Jogani, a Mumbai based real estate investor.
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Transaction volumes are unlikely to recover in the coming months, according to Shobhit Agarwal, managing director, Capital Markets at Jones Lang LaSalle. He blames a lack of affordable housing and rising lending rates.
India’s central bank has been one of the most aggressive in Asia in tightening monetary policy, raising interest rates nine times since March 2010, and analysts expect more rate increases to come despite a slowdown in the economy. Gross domestic product (GDP) grew 7.8% in the first quarter of 2011, the slowest pace in over a year, and lower than the 8.2% forecast in a recent Reuters poll.
‘Mortgage rates have gone up from around 8.5% to 9.5% two years ago, to 11.5% now,’ said Ramesh Jogani, managing director and chief executive of Indiareit, a real estate private equity firm, which manages funds worth $890 million in domestic and offshore markets.
As a result, mortgages that once took homebuyers fifteen years to pay back are now taking over twenty years to service. Jones Lang LaSalle’s Agarwal says the wide disconnect between the expectations of buyers and sellers are also contributing to a drop in activity in the market.
The increasing construction costs are expected to hit the real estate sector, says PropEquity, an online data and analytics search platform covering the Indian real estate industry, in a recent study.
‘Taking into account price increase of the four key construction components, steel, cement, labour and bricks, there is an 18% gross rise in construction cost over the last two years. This escalation will corrode the profit margins significantly,’ the PropEquity study said.
The impact of increased delivery commitment along with escalating costs will affect the delivery of residential units on time. It is estimated that delivery of 480,000 residential units across affordable, mid and luxury housing segments, scheduled for completion during 2011 to 2013, will be delayed in 11 cities, the study also showed.
As a result, developers are likely to lose interest in projects, making delays in project execution inevitable, it adds.
This article was republished with permission from PropertyWire.