Home prices may fall as Mumbai real estate slows down

The boom in Mumbai realty was over in early 2023, which I pointed out in my February 2023 column, The slowdown in Mumbai real estate is here. Thereafter, sales have just chugged along at a modest pace, of about 10,000 registrations per month on average. Expectations were high in the festive season of October – December 2023, but that turned out to be a disappointment. Why?

There are multiple factors at play. The pent-up demand for homes got soaked up between August 2020 to December 2022, and was followed by a 5X jump in the number of launches in many micro-markets. In a trust-deficit market like Mumbai, selling under-construction projects is a challenge, but the matter has been compounded with excessive competition and inflated prices. That’s resulted in slow sales for an industry which largely depends on customer advances for funding almost 40-50 percent of the project cost.

What next?

1) Branded players in under-supplied markets will succeed: harsh as it may sound, the average Mumbai home buyer has terribly low expectations. He wants a lot, but knows that expecting anything more than smooth delivery of his home is unrealistic in most cases. Branded players offer him the hope that all his dreams will be fulfilled, on time. Hence, branded players in under-served markets will thrive even at elevated prices. Example: Godrej’s project in Raj Kapoor’s bungalow plot in peaceful Chembur, Rustomjee’s sea-facing project at Bandstand (Bandra), etc.

In micro-markets that are competitive, branded players will need to price attractively to garner sales. On the other hand, developers without a credible record and history will struggle to sell their under-construction units even at lower prices.

2) Luxury market to tumble: ‘luxury’ is an abused term in the real estate business. And at no other time has it been abused to the degree as it is today. Yet — even with the assumption that a luxury project means one with a ticket size of at least Rs 8 crore, or about a million dollars — there are too many options from too many first-timers catering to too few buyers.

Besides, the ticket size alone doesn’t define ‘luxury.’ That needs a combination of home size, plot size, design, amenities, finishing, etc., — a mix that remains elusive for a majority of players. Property consultant Vivek Bathija points out that, “Over 50 percent of projects are not luxury, but pseudo-luxury projects, which have priced themselves out of the market. Price cuts of 20 percent are needed for them to attract buyers.”

3) Payment plans to become popular: we are at the beginning of the payment plans cycle. It’s common to see schemes of “Pay 20 / 30 percent now, and the rest on possession.” The schemes are designed to ensure that skin in the game for the buyer is limited if the project stalls. Chintan Vasani of Wisebiz Developers says, “Builders who do not price it right or give the right payment plan are struggling, and they will continue to struggle as more projects get launched.”

4) Slow project acquisition: it will be an understatement to say that project acquisition by builders has been hot in recent months. Developers have gone all-in making generous offers for land acquisition, especially in the redevelopment market. Small and mid-size players are treating the current cycle as their opportunity to jump into a higher orbit. There are many builders who are doing more projects today than they have done in their entire career. With the market slowing down, project acquisition will moderate, although I suspect that land prices will not.

5) Aggregate volumes to remain steady: supply creates its own demand, hence, home sales at an aggregate level will remain steady (reflected in the registration numbers), although the demand will be spread over a larger number of projects.

As for a price correction, I anticipate a large section of builders will be in denial initially, but eventually bite the bullet.