Real estate prices are determined by supply and demand


What a true statement! Just remove real estate and replace it with “oil”, “gold” or “shares of Hdfc” – it does not matter. Asset prices fluctuate and is determined by demand and supply.

Only thing is that this is a true statement – however the following conditions have to exist.

1. Uniformity of the asset

2. Long run

3. Many buyers and many sellers

4. No one person (or group) with an ability to influence prices

Let us look at what is the situation in Mumbai (or Navi Mumbai).

1. Many builders have bought land at ridiculously low prices, so can hold on to their property for say 20 years without worrying.

2. The rental yields are about 3-4% and many flats are kept locked.

3. There is a huge demand for “service apartments” however a law says that only a full building can be given like this – this is a clear case of inhibiting supply

4. Uniformity of the product – the price in Mumbai changes (dramatically) depending on the broker, builder, and location – in an imperfect information market (unlike share markets) buyers and sellers work with incomplete, inadequate and sometimes wrong information.

5. Builders have bought a lot of land in Mumbai and will construct only when the existing stock gets sold. So if Ghatkopar (a suburb of Mumbai) is currently selling @ 13,000 a sq. foot, the builder will wait for the price to catch up with Powai and then sell, say @ 23k. Big builders have increased their ability to wait by holding on to land rather than constructed property.

So if you believe that in the long run real estate prices are determined by demand and supply – you also have to remember that market can be irrational far more than you can be solvent. So if you want to buy a house, go ahead and buy, or wait for a loooongggg time!

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2 Comments on “Real estate prices are determined by supply and demand”

  1. Amit Singh Says:

    But many builders have also paid astronomical prices for slum land. For e.g. any building starting in 2006, when the property boom was out in the open, would have paid quite a high price for land. Most of Parel falls in this bracket. These buildings will be done in ’09 – and lotsa supply coming. If builders dont lead the correction, investors surely will. -Amit

  2. sukumaran Says:

    are you trying to say that prices in Mumbai will correct? If so when? Should I wait to buy or should I wait to sell?


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