Can Mumbai realty prices crash by 50%?

Saurabh Mukerjea of Ambit Capital sure thinks so.

In an interesting report, Ambit Capital lays out the bear case for real estate prices and makes this startling remark:

In a fairly-priced real estate market, the rental yield tends to be somewhere close to the cost of borrowing. Instead, Mumbai has a rental yield of close to 2% (this is gross of tax and maintenance charges) whilst the lending rate hovers around 10%.

The difference between lending rates and rental yields is one of the highest in India (see the exhibit on the next page). Even if one assumes that buyers are willing to live with only 5% rental yields (as they might have an extremely bullish view of capital gains arising from real estate in India), this would imply halving of real estate prices in Mumbai.