Home prices in Mumbai are headed for a sharp correction, while others may remain stagnant due to rising unsold stock, says a report from Bank of India Merrill Lynch.

The unsold inventory in the megapolis is the highest in the last nine quarters and will take at least 13 quarters to exhaust, says the report. Mumbai saw 1,700 units sold in third quarter of 2011 as against the total launch of 3,000 units during the quarter.

"Mumbai island city continued to maintain its quarterly average of 2,000 units sales.... However, we believe the city will struggle to maintain similar run-rate from first quarter of calender year 2012, if prices do not drop by then," say BoA Merrill Lynch analysts Abhishek Kiran Gupta and Gagan Agarwal in the report.

Though developers give five to ten per cent discount on a select basis and are offering privileges such as free parking and furnished kitchen for over a quarter, Gupta and Agarwal believe this is a beginning of an "inevitable correction in prices which has been temporarily postponed for Diwali".

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As for Noida in the National Capital Region, they saying there is a "waterfall drop" in the absorption rates, which have fallen by half in the city mainly due to agitation with land acquisition.

The number of quarters needed to exhaust unsold stock has gone up from four quarters in the second quarter to five quarters in third quarter.

Similarly, the absorption rate in Bangalore has fallen from 11 per cent in the third quarter of calendar year 2011 from 13 per cent in second quarter as the infotech hub is witnessing a steady supply of residential units, the report says.

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The unsold inventory in Bangalore rose from 27,000 units in the second quarter to 31,000 units in the third quarter of 2011. The city requires eight quarters to exhaust the unsold stock, it adds.

Saying that Bangalore developers do not have pricing power, the report says the projects launched in the third quarter of 2010 have seen a price of less than 10 per cent in the last one year. Also, the projects launched in the current year have seen no price hikes.

The only exception among its study was Gurgaon, also in NCR, where absorption has remained stable at 5,000 units as compared to previous quarter.

This shows the "strength in the market", Merril Lynch says. In Gurgaon, prices have risen 30 per cent since the bottom in 2009.

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However, developers denied that there will be any big correction in prices. "There is no completed inventory in developers whatsoever, hence I do not see any major correction in the Mumbai market," says Vimal Shah, managing director, Ackruti City, a Mumbai-based developer.

"Prices are stable in under-correction properties. If the approval scenario improves, I think prices will move up."

Adds Paras Gundecha, president of Maharashtra Chamber of Housing Industry: "No new project is getting approval in Mumbai. Till land prices and input costs come down and supply increases, I do not think prices will come down."