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Housing market favours the wealthy

Metropolises in developing countries are generally characterisd by several “contradictions”.

mumbai Updated: Nov 20, 2011 01:37 IST

Metropolises in developing countries are generally characterisd by several “contradictions”.

This is exemplified in the case of Mumbai, where on the one hand, nearly 64% of the population lives in slums, while on the other, we have more than 30,000 vacant dwellings.

It is necessary to add the caveat here that the housing market comprises several sub-markets and it would be incorrect to compare the situation of excess supply in the housing market with that of the slums, which are essentially an informal housing market.

The point being made, however, is that the supply of housing is skewed in favour of the middle- and upper-middle income groups in the city, where the profit margins are high. In recent times, one has witnessed an excess supply of such housing in the market while the prices continue to rise. How has this situation come about?

Economics tells you that when supply exceeds demand the price will move downwards to equilibrate the two. However, Mumbai’s housing market has several anomalies that defy such economic logic.

The increase in house prices can be attributed to several supply and demand factors such as restrictive FSI policies that impede development of land, soaring land values owing to their inefficient utilisation, growing incomes of households and ease of access to credit.

But since the mid 2000s, the house-price to income ratio has been increasing, albeit with some corrections during the recession. In other words, housing affordability has been declining over the years.

The continuous instability in the international markets coupled with interest rate hikes have affected the purchasing power of the population. Thus, the decline in affordability as well as purchasing power has adversely impacted effective demand.

On the other hand, 32,000 flats in Mumbai remaining unsold points clearly towards excess supply. The fact that the markets are not correcting this instability points to hoarding and speculation by many developers, builders as well as homeowners.

For instance, one of the families in my neighbourhood, which had been hoarding a vacant dwelling for several years without leasing it out, finally sold the flat for an extravagant amount. The hoarding points not only towards the inclination of private players to make speculative gains but also to the conspicuous presence of black money in the economy.

It is clear that such an unsustainable situation is unlikely to continue for too long and the market will soon correct itself as the pressure for the downward movement in prices —owing to an absence of a stimulus for demand and the increasing interest rate hikes — increases.

One hopes that the excess supply and the general stagnation that is likely to set in in the upper-middle class housing segment would encourage developers to shift towards building affordable housing for the vast sections of the population belonging to the lower-middle and low income groups.

In addition, measures to bolster effective demand by providing access to credit through micro-finance housing schemes, and by augmenting the livelihoods of the poor, would also make provision of affordable housing lucrative for developers.

(Sahil Gandhi is a PhD student in the economics department of Mumbai University.)