Mumbai is synonymous with exorbitant real estate prices. The average residential price in the Mumbai Metropolitan Region (MMR) is one of the highest in India. If we observe closely, the residential prices increase exponentially as we move from north to south. In fact, the increase is more than 25–30 times as one travels from extreme northern precincts such as Virar/Karjat towards the southern-most tip of the city such as Colaba/Cuffe Parade.

Although residents of Mumbai on an average earn more and have exposure to greater employment opportunities than their counterparts in other cities, their position in the housing Affordability Index is the worst amongst the top 8 metros of India. As per Knight Frank’s Affordability Index, the ratio of average house prices to average annual household income for Mumbai is 7.2. Ideally the ratio should be 4.5 or less. This is one of the main reason for slower residential sales in MMR.

Banks generally give loans of up to 80% of the flat value, provided the flat value does not exceed 4–5 times the borrower’s annual income. Considering the high apartment prices in Mumbai, the eligibility of most buyers falls short of the 80% threshold. This implies that a buyer who intends to purchase a house in Mumbai must contribute a higher equity contribution from his/her savings to make up for the gap.

In order to bring the apartment prices closer to the affordability threshold, developers have 2 levers at their discretion – chargeable price per square feet and size of apartment. Developers constructing apartments in the MMR region cite higher land, construction and compliance cost as the reason for higher real estate prices. Moreover, despite the poor sales velocity, they are reluctant to compromise on their profit margins and hence refrain from reducing prices. Thus, the leeway to change chargeable price per square feet is lower compared to changing apartment sizes.

Over the past few years developers across MMR have been reducing size of apartments in new launches to bring the final price of apartment closer to the affordability benchmark. If we refer to the image, the average size of apartments in new launches across MMR has shrunk by 25% over a 5-year period between 2014 and 2018. The quantum of reduction/shrinkage is higher in the more expensive BMC regions. The peripheral markets are still relatively affordable in terms of pricing; hence, the quantum of shrinkage is lower than BMC markets.

Source: Knight Frank India Real Estate Report

Apartments launched during 2018 in South Mumbai, Central Mumbai, Central Suburbs and Western suburbs were smaller by 52%, 41%, 36% and 25%, respectively, as compared to launches in these markets during 2014. If a 2 BHK apartment in MMR had a carpet area of 74.32 sq m or 800 sq ft in 2014, now the 2 BHK apartment in new launched project in 2018 would be less than 55.7 sq m or 600 sq ft. The reduction is equivalent to removing a bedroom or fitting an extra bedroom into a smaller area (offering 2 BHK in the space suited for 1 BHK).

While a few years ago this started as a BMC-specific phenomenon, it has caught up in other markets of MMR too. In Thane, Peripheral Central Suburbs and Peripheral Western suburbs, apartments today are smaller by 22%, 21% and 22%, respectively.

At present, in certain markets within the BMC region, a buyer can get a 2 BHK flat in the Western Suburbs and Central Suburbs at the price of a 2 BHK available in the peripheral suburbs; however, the size would be considerably smaller. Developers are marketing such products as compact homes.

Unless apartment prices correct meaningfully, or income levels go up multifold in a short span of time, houses will still not be affordable for the masses. Thus, this trend of constructing compact homes would continue.

It is amply evident that market forces eventually take care of asymmetries and imbalances. The elements have begun to fall in place. The only remaining question is that of timing. A large section of aspirational homebuyers is increasingly hopeful that its time will arrive soon.

(By Arvind Nandan, Executive Director-Research, Knight Frank India)