Home prices in Mumbai will continue to remain high

New home prices in Mumbai are unlikely to decline this year, Crisil Research, India's largest independent research house, has said in a report.

Despite a 40 per cent dip in sales of new homes since mid-2011, a sharp rise in construction and funding costs, in addition to amendments to the Development Control Regulations (DCR), will increase costs for builders and prevent a reduction in home prices.

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Through 2012, Crisil Research foresees cement prices in Mumbai rising by 5 per cent, steel by 7-9 per cent and labour costs by 10-15 per cent.

Funding costs too will remain high. Given constraints in obtaining a significant increase in bank funding, builders' dependence on costlier alternative funding will continue, the report says.

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Recent amendments in the DCR will increase costs for builders further by 15 per cent, on an average.

DCR norms govern land development in Mumbai.

The modified rules, which came into effect from January 2012, have revised the method of calculating the floor space index (FSI).

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With regard to the 40 per cent slump in sales of new homes between April 2011 and February 2012, Sudhir Nair, head, Crisil Research, says, "Through 2011, even as the number of enquiries from buyers remained strong - implying healthy latent demand - only a few enquiries translated into actual sales.

Higher interest rates, slower economic growth, inflationary pressure and expectation of price correction led most buyers to defer buying decisions.

In 2012, the latent demand is likely to spur a moderate 10 per cent increase in new home sales."

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While new home prices will remain steady, across Mumbai, the southern and central parts of the city will stand out as exceptions.

Prices are likely to decline by 6-7 per cent in South Mumbai (Nepean Sea Road, Tardeo, Opera House, Peddar Road), and 8-10 per cent in Central Mumbai (Worli, Prabhadevi, Lower Parel).

"Although prices fell by 20 per cent and 10 per cent in Central and South Mumbai in 2011, new homes in these areas will still remain unaffordable for most buyers," says Nair.