By Dezan Shira
Mumbai and Shanghai, as the financial centers of the world’s two biggest emerging economies, have witnessed their property markets go through a similar path over the past decade – seeing an astonishing price surge, experiencing the turbulence during and after the Global Financial Crisis, carrying the similar concerns over housing bubbles that exacerbate domestic inflation, and facing the social sentiment of the masses that cannot afford the expensive properties.
Mumbai is turning into one of the most expensive cities to live in among all the cities in the developing world. And as the Indian government has started to take measures to curb inflation, many property developers are now faced with fund shortages. A number of analysts and economists believe Mumbai’s property market will see an oversupply between 2012 and 2013, and predict that real estate prices will go down in the near future. Similar with India, the Chinese government has also issued a series of restrictive regulations recently in a bid to suppress property prices. However, both the Chinese people and the Shanghai local government do not seem to be very confident that the measures can thoroughly clear the bubble in the housing market. Whether Shanghai’s property market will finally become more affordable to people still remains a question.
Property market cap growth in Shanghai and Mumbai – a similar pattern
Both cities have experienced significant property price increases stepping into the 21st Century, and witnessed two major rounds of prosperity before and after the recent financial crisis. Although Shanghai’s property market started its boom a bit later than Mumbai’s, the price increases over such a short period have been just as intense.
Along with the strong economic growth and rapid urbanization, Mumbai’s real estate market started the price surge in 2000. By 2002, residential property in Mumbai was already worth 85 times of the city’s annual average income; while by 2006, the property value reached 100 times the average income.
A slightly overheated property market emerged in Shanghai in 2004, when house sales surged by 22 percent from a year earlier. However, some new government regulations released in 2005 restrained such an upward trend right away. The restriction that made buyers “wait and see” led to a strong growth in housing demand later in 2006 and 2007. Total house sales soared by 47 percent in 2007 from a year earlier, and average prices almost doubled the levels seen in 2000.
The Global Financial Crisis in 2008 hit both India and China’s property markets, but did not totally stop the market value growth in Mumbai and Shanghai. In India, although the domestic demand for luxury housing decreased by 50 percent, and demand for affordable housing fell by 10 percent that year, the Indian National Housing Bank’s property price indicator Residex still showed a moderate price index increase of 4.5 percent in Mumbai in the second half of 2008, compared to the first half.
Property prices in many major cities in China dropped during the second half of 2008, according to the China Real Estate Index System, but Shanghai’s prices still went up by 2 percent in nominal terms and remained at the same level if the inflation factor is counted.
The two cities’ property markets welcomed their second spring that came with the economic recovery and government stimulus packages to revive the economy. Residential property developers in India were encouraged to build large land inventories and by the fourth quarter of 2010, Rs.120 billion (US$2.7 billion) has been spent on such projects. In 2010 alone, property prices in Mumbai picked up by 60 percent. A rate like US$5.1 million (or US$17,000 per square meter) is typical for a 300 square meter luxury-used apartment in the city’s prime areas.
After the financial crisis, the Chinese government launched an RMB4 trillion (US$585 billion) stimulus package with allocations for housing and infrastructure projects, various favorable tax treatments to property buyers, and relaxed lending policies to both buyers and developers. The Shanghai market thus experienced a quick recovery, seeing an average 19 percent month-on-month increase between March and July, 2009.
How big is the housing bubble?
The soaring housing prices have been blamed as a major contributor to both India and China’s high inflation rates. India reported its inflation rate at 8.82 in February while China’s stood at 4.9, with concerns that its April consumer price index may exceed 5 again.
Property markets in emerging economies like China and India are also ideal destinations for speculators. The massive amounts of cash that have been invested into the market considerably lift property prices and exacerbate inflation.
While Mumbai’s property market was ranked as the 10th most expensive worldwide and Shanghai’s ranked 35th last year, the housing affordability in the two cities – if measured by income to price ratios – is typically low compared to other developed cities in the list. Disregarding the lending rate factor, an Indian citizen that earns an annual income at Mumbai’s average 2009 level of Rs.125,000 (US$2,812.8) will theoretically spend 369.3 years without any other consumption to afford a 75-square meter apartment that is worth US$1 million in South Mumbai. Shanghai’s houses are more affordable compared to Mumbai, but a Chinese citizen that makes Shanghai’s average 2010 annual income of RMB31,383 (US$4,868.6) still has to save 52 years without any other consumption to afford a 75-square meter apartment, according to 2010’s average per square meter house price level RMB22,261 (US$3,404.1) released by the government.
The low rental yields can be another indicator to show the size of the housing bubble in both cities. Statistics for 2010 show that Mumbai’s rental yields stand between 3.5 percent and 4.6 percent and Shanghai’s only 3.7 percent. The numbers that are usually tied up with the supply – demand conditions also revealed – to some extent – the real affordability of the market.
About the Author
Read the rest of this article about property prices in India and China at 2point6billion.com. The site is contributed to by the China fdi experts at Dezan Shira & Associates.
The site was established by Chris Devonshire-Ellis.
