Have you ever felt when searching for a home in Mumbai, 1 BHKs charge a premium on the property rate in that very area? That is if in a area, the property is at 10000 Rs. per sq. ft for 2 and 3 BHKs. My guess is, it is a Giffen Good.
Here is the
investopedia definition:
Giffen Good: A consumer good for which demand rises when the price increases, and demand falls when the price decreases.
(Read more:
http://www.investopedia.com/terms/g/giffen-good.asp#ixzz1rBy0aMMa)
Real Estate in India, particularly in cities like Mumbai, has typically risen manifold in price terms. So much so that it has gotten out of reach of most middle class people with usual career curves.
So about 10 years ago, a young couple of around 30 years of age in Mumbai would be stretching but being able to eventually buy a 2 Bedroom Hall Kitchen apartments ranging from 800 sq. ft. to 1100 sq. ft. depending on location, rates therein, their budgets. While that was a tough one to achieve, it was somehow managed with financing by loans, parents / friends helping and savings done in their 10 odd years of working life.
If I am not wrong the average price of such a flat would be 5 to 6 times their combined gross incomes.
Today, time has changed
radically.
The apartment prices have shot through the roof. Completely through the roof. In fact,buying just the roof has also become quite difficult these days. Across board rates have shot up.
Many many of today's 30 year olds are today preferring to stay in rental homes rather than buying them. Yet, in India, as in most countries, property remains one of the major aims of life. In fact, it brings a lot of prestige for those buying one early. Home loans are easier and not frowned upon by the society. Yet, homes today are that much out of reach especially in tier I and II cities.
So the aspiration of these 30 year old pairs have moved down from 2 BHKs to 1 BHKs. 1 BHKs are generally anywhere from 500 sq. ft. to 700 sq. ft.
These 1BHKs ask for a premium in most areas, especially in areas like Borivali, Thane, Mulund etc. Yet their demand is going up.
One simple explanation I find is that the 1BHK is a Giffen Good. Because of the steep increase in rates, with incomes not rising with the same slope, 2BHKs have gone out of hand. The premium comes simply because real estate developers have virtually stopped creating 1 BHKs. Thus limiting the supply. So because 2 BHKs, which seem to be in oversupply, are beyond people's reach. Thus we have our own Mumbaikar Giffen Good, the equivalent of Potato during the Irish famine.
Update:
I requested Prof. TT Ram Mohan to comment on the above post. Here are his thoughts on the above post:
"I read your piece. I am not sure this is a Giffen good phenomenon. Demand for 1 BHK apts would be high in the face of rising prices because they would still be cheaper than 2 BHKs. The question is why then builders don't build more 1 BHK apts. The answer, unfortunately, is that they find there is still enough demand for 2 BHK apts on which they, perhaps, make better returns."
