Thursday, August 21, 2008

What is a bubble ?

There are many definitions of the term bubble and bubbling prices of real estate are known to everyone in India. We need to define what is considered a good price for buying property in India. There is the obvious "sour grapes" syndrome which people succumb to when they discuss property prices so an objective analysis is needed on what constitutes fair price for a given property. The guidance value is of some relevance but in Mumbai and other urban cities it has lost its meaning due to the high component of black money. Given the growth of money supply by rising incomes and accessibility of loans we have seen the steep rise in property prices. Some 15 years ago when I joined an IT company in Bangalore I used to get 5,500 rupees a month. That was considered a princely amount and it was more then 2,000 rupees then what my mother earned a school teacher after spending 25+ years. At about the same time in 1993 someone I knew bought a 4000 sq ft plot in Jayanagar for 4 Lakhs which is 100 rs sq/ft. In 2008, Infosys should be paying 25000 to a fresher, A teacher of the same experience will probably at 10k (my guess) but the plot in Jayanagar is now 8000 rs per sq/ft. The point of the story is that land appreciation is something which cannot be predicted, however apartments have a finite value and will not show the same stellar returns.
If an investment is to be made it has to done at a low entry point for maximum return. For those who had the money to buy land in 1993, they can safely plan for their grand kids retirement. For those like me who didn't we can debate.

28 comments:

Anonymous said...

To reinforce my previous exhortations, please take the following typical example in Bangalore. On craigslist, look at the following advertisements for a 3-bedroom apartment in Bangalore, Rohan Vasantha:

Sale price: 66 lakhs
http://bangalore.craigslist.co.in/reo/807822965.html

DO not forget you will have to pay registration costs + parking etc, so add another 7-8 lakhs!

Rental price: 20K per month
http://bangalore.craigslist.co.in/apa/808807950.html

The rental yield is just 3.2%!
For someone taking out a loan for 60 lakhs, along with a cash payment of 15 lakhs, EMIs will be approximately Rs 80,000 per month for a 20 year loan at 13.5% interest. You will have to sink all your life savings of 15 lakhs into the property. At the end of the loan tenure of 20 years, what will you have in terms of assets? Just a flat in your name and that is it! Think about this one carefully!

Now here is the real "right advice" for you, the home buyer, instead of the "right advice" for the real estate lobby. Take the same apartment for rent, and invest the remaining Rs. 60,000 per month in an ELSS scheme which is also tax-deductible. One can find some balanced funds which can yield approx 10-15% average annual returns. If it is true that it will take another decade for rental yields to approach 8-10%, then you can keep investing the remaining 60,000 per month and in 10 years, it will be approx 1.4 crores! Do the calculations yourselves! Do you want the real estate lobby to get the above 1.4 crores, and is this why you were born in life, to be wage slaves to your company as well as the real estate lobby? They are making money off of your sweat and blood, like a bonded laborer for 20 years, with all your savings gone towards the downpayment and only asset at retirement, just a flat in your name. Think about this carefully. With 1.4 crores, you can even start your own business and achieve freedom from your boss, as well as the real estate lobby. Also, do not forget about the initial amount of 15 lakhs that you paid as downpayment. In the same ELSS scheme, over 10 years, that 15 lakhs will become over 50 lakhs! Think about this carefully. The real estate lobby (builders, PE folks, brokers, investors etc) will be more than happy to help themselves to your 1.9 crores over 10 years, so they can lead a good life, while you work 12-14 hours spoiling your health at your job. Do you think your job is safe for the next 20 years? What if there is a lay off or a medical problem? If you rent, and you have a layoff after 10 years say, you have 1.9 crores in your ELSS account, which gives you enough financial comfort to wait and search for another job properly, or even start your own company.

Make no mistake, the real estate lobby makes money off wage slaves like you, and will say anything to get you to help make themselves rich. "Buy now or be priced out forever!". So use the following simple advice, do not buy until the average rental yield in your area approaches 8-10%. This simple piece of advice will save you a lot of money, and will help safeguard your future.

Observer.

Anonymous said...

The very fact that now desperate people like Ashish, realty rider, boss and others are now on here is exactly the point. They want you, the hard-working techie, the 12-14 hour wage slave, to part with as much of your money as possible, so they can lead a good life. While you spoil your health and develop high blood pressure, diabetes, stress-related problems, they will be happy counting the money and going on vacation to Goa or Singapore.

So all we wage-slaves should revolt and fight back. What can we do to help each other? We should spread the word among all our friends and colleagues at our companies. We should talk to our friends and relatives, and point them at this website or discuss this issue. We should try to form associations and even construct our own apartments and cut out all these middlemen and investors and brokers. We should call our ministers and tell them they will not get a vote in the next elections. We should write letters to newspapers saying they can choose between us, or the ad money from the real estate lobby. Publish letters to as many different magazines as possible, and also raise this issue with NRIs and others who are not yet investors. Information is power, and do not fall for the propaganda of the real estate lobby under the guise of "right advice". It sure is "right advice" for them to pocket your money. Stay firm and resolve to fight back.

Observer

mallapottell said...

anonymous, well said. The same situation applies to Mumbai where I live. Only difference is unlike Bangalore, most investors here are black market banias, gangsters and politicians. The real estate here will see a crash if the income tax department starts verifying the authenticity of transactions. Unlike Bangalore, the large portion of payment to builders is black.

Anonymous said...

Excellent insights from "The Observer" and Malpo*
Here in Delhi, the real estate market is infested by crooked politicians, uncouth and illiterate Jat peasants from the NCR and outer Delhi region who became millionaires overnight.
I'd love to see these fuckers go down :)

The Boss said...

The following assumptions don't make sense:

1. Anyone with 15L savings will buy a flat costing more than 70L. (They will more likely tend to buy a flat that costs 40-50L. Plenty of this kind are available in Bangalore, Pune, Hyd. etc)
2. The interest rates will remain high (13.5%) for the tenure of the loan and never come down
3. People are risk averse when it comes to buying homes, but will invest in 'balanced' funds and get 15% YOY returns. And this will be possible in the high interest rate environment!

If people are cringing to buy their first home because of economic uncertainties, they are more likely to park money in savings account, not in stocks. The whole notion that stocks will grossly outperform real estate over 10 year period is absurd.

And the 1.9 crore after 10 years we are talking about is a misleading figure. With a rate of inflation of 12%, that amount will buy you the same as 61L rupees in today's value. So if one follows observer's advice, this is quite likely to happen:

You will sink plenty of money in rent that would keep going up every year, a fact ignore so far.Due to high inflation, your balanced fund may slip and loose its balance altogether. Even if it gets you 1.4 cr, you still won't be able to buy a decent flat with that amount of money ten years from now.

In summary, if the inflation stays at current levels for 10 years, all the money you saved by not buying home i.e. 1.9 cr will undergo annual erosion of 12% and will have purchasing power of 60L in today's terms. So the chances are that you would buy a similar or even slightly smaller flat 10 years from now during which you lived on rent.

Now if you change the assumption that inflation would drastically come down, then it changes the rules of the game by lowering EMI. It could actually be good for real estate and the house values will start zooming up. Fence-sitters will be in big trouble then.

The best case for those needlessly waiting to buy their first home is a quick, drastic correction that would let them buy a home at a significant discount. Isn't that is something they are waiting for since 2005 without much luck?

http://rightadvice4u.blogspot.com

Anonymous said...

Boss, Why don't you buy some more properties and keep quiet. If your maths makes sense in this market going south, please go for it. You don't have to convince anyone here on this blog about your paid intelligence.

Kannan said...

Observer,
Your calculations are correct. This was I did when I was analyzing various options.Don't just stop at 10 years; project it over 25 to 30 years.Investor will get a awesome money for his retirement.

Anonymous said...

Boss: >> 1. Anyone with 15L savings will buy a flat costing more than 70L. (They will more likely tend to buy a flat that costs 40-50L. Plenty of this kind are available in Bangalore, Pune, Hyd. etc)

Observer: I was referring to flats which cost 60 lakhs, which are usually 3-bedroom flats from reputed companies near IT/ITES/BPO workplaces. After all most of these flats are targeted at these employees. Very few govt employees make more than 40K/month. Most flats which cost 40-50 lakhs are either 2-bedroom flats, or are located very far from the city, or have very shoddy construction quality. Just google that shady Frontline Builders for an example, where their flats develop cracks and leaks within a few years. Also, flats which cost 40-50L cost less to rent, so the rental yield is still low. Here are two more examples in another reputed complex next to IT offices:

Purva Heights: 2BHK rent 10K per month
http://bangalore.craigslist.co.in/apa/801812864.html

Purva Heights: 2BHK for sale 50lakhs + registration + car park
http://bangalore.craigslist.co.in/reo/799085874.html

For a rental yield of 2%. Now, unless the property is going to appreciate by 10% every year for the next 20 years, to account for the discrepancy in the rental yield, this is purely a robbery of poor unsuspecting techies. I hope some poor techies are reading this late at work at night and think about the implications.

The standard real estate lobby trick "Buy now or be priced out forever!".

Boss: >> 2. The interest rates will remain high (13.5%) for the tenure of the loan and never come down

Observer: I was referring to fixed rate loans above for predictability. Otherwise it is hard to make a simple comparison without an amortization table. Even if an average home loan rate of 11% is assumed, the EMI comes down from 80K to 70K. Still a substantial savings over the rental amount of 20K!



Boss: >> 3. People are risk averse when it comes to buying homes, but will invest in 'balanced' funds and get 15% YOY returns. And this will be possible in the high interest rate environment! If people are cringing to buy their first home because of economic uncertainties, they are more likely to park money in savings account, not in stocks. The whole notion that stocks will grossly outperform real estate over 10 year period is absurd.

Observer: I had written "One can find some balanced funds which can yield approx 10-15% average annual returns." For calculating the figure of 1.4 crores compounded over 10 years, I had used an average return of 12%. Please do the calculations yourself.

Also, I am not sure if you understand the meaning of balanced funds. Balanced funds invest in dividend paying stocks and also in debt instruments. So in high interest rate regimes, even though the stock portion does not do well, the debt portion does well, and vice versa. Compared to all-equity schemes, these are much more conservative. Here is the average return of a balanced fund from 1996, when interest rates were 18% till today, including the stock market crash of early this year, as well as the stock market crash of 2001-2002. It is very important to know what each term means before making flippant remarks. This is a forum read nationally and worldwide, and hence to be credible, one needs to backup assertions with facts. Of course, if the intention is to obfuscate and misdirect, as is wont of the real esate lobby, then the above remarks are understandable. I would then position my response to the home-bying public.

Home loan interest rates in 1995-1996 approach 18%
http://www.thehindubusinessline.com/2002/03/23/stories/2002032300060800.htm

Examples of balanced mutual funds operating for 10 years through the high interest rate regime of the nineties and the stock market crash of the 2000's.

Birla Sun Life India Advantage Balanced Fund: Opened 1996, Average Annual returns till date (July 2008) is 26%
MSCI India Index: 11.5% (All equity)

http://www.birlasunlife.com/BirlaSunLife/Mutual_Fund/BSLAMC_MP/BSLAMC_Downloads/IAF_Connect/IAF_Connect_July08.pdf

Franklin Templeton Hybrid (Balanced Fund): Opened 1999, Average Annual returns till date (July 2008) is 15.58%
http://www.franklintempletonindia.com/GeneralAccess/Mfs/balance.asp

HDFC Balanced Fund started in 2000 at the top of the market: Average Annual returns till date (July 2008) is 15.8%
http://www.hdfcfund.com/Products/SchemeDetails.aspx?SchemeID=7128c600-3c89-473c-aa93-e2ac8c5573ba#Ret

And there are plenty more examples. I would recommend reading a few good books on the stock market in general, and also on real estate and inflation in general to get a better understanding of these terms. When you make a statement that real estate always does well over stocks, and anything else is absurd, this shows a rather poor understanding of how economies and markets generally work. You may want to check out the period 1993-2002, when balanced funds handily outperformed real estate investments in India. As homework, you may want to pick up a book on mathematics which deals with compounding, interest rates, amortization and other such basic concepts to educate yourself. It would allow you to respond with a better command over the basic facts.


Boss: >> And the 1.9 crore after 10 years we are talking about is a misleading figure. With a rate of inflation of 12%, that amount will buy you the same as 61L rupees in today's value. So if one follows observer's advice, this is quite likely to happen:

Observer: Even if it is true that the flat will still cost 61L in inflation-adjusted terms after 10 years (highly doubtful, since bubbles do not last that long), the advantage is that you have cut your waiting period to own the flat in half. So instead of paying off the flat after 20 years, one can buy the flat in 10 years. This is a HUGE advantage by itself. There are more advantages that I will mention below.


Boss: >> You will sink plenty of money in rent that would keep going up every year, a fact ignore so far.Due to high inflation, your balanced fund may slip and loose its balance altogether. Even if it gets you 1.4 cr, you still won't be able to buy a decent flat with that amount of money ten years from now. In summary, if the inflation stays at current levels for 10 years, all the money you saved by not buying home i.e. 1.9 cr will undergo annual erosion of 12% and will have purchasing power of 60L in today's terms. So the chances are that you would buy a similar or even slightly smaller flat 10 years from now during which you lived on rent.

Observer: "Buy now or be priced out forever!". If you were to construct an amortization table, you would see that even if the rents do go up, by let us say 6-7% every year, the majority of the accumulated amount of 1.4cr is actually influenced by the 60K per month savings in the initial years. Even if that 60K per month investment shrinks to 30K per month by the 10th year, and we assume a 12% return on average throughout in a balanced fund through a SIP as before, the accumulated amount becomes 1.22 cr. Again, please do the calculations yourself after having picked up the mathematics book and familiarizing yourself with the formulas.

So the two advantages are:

1. You own the property clear and free in 10 years even if the flat still costs 60+L in inflation adjusted terms 10 years from now! It is highly doubtful if the flat will still be in that bubble price 10 years from now. Already transactions are slowing down, and buyers and sellers are entering a stalemate and watching each other. The advantage is that the buyer can wait, and rent instead, while the seller has to sell at some point in the next 10 years to fund continuing operations. It is a question of cash flow. Which is why probably the real estate lobby is desperately trying to push people to buy now by posting on this website as Boss, Ashish, realty Rider etc.

2. A buyer should be very very careful not to stretch himself too much financially. If the buyer commits to the 60L flat, that buyer has to be sure that he will be employed for 20 years without a single layoff since his entire savings have been sunk into the flat. If the buyer has to transfer to another city, or if he is laid off and finds a job somewhere else, will he be able to sell the flat? Even with their well paid marketing professionals and brokers like Boss, Ashish, Realty Rider etc, buyers are now becoming cautious and transactions have slowed down significantly. If he wants to rent the flat instead, with a rental yield of 2-3%, how is that going to cover the EMI? I should also mention that most home loans in India are not non-recourse loans. This means that the bank can, and will, come after you for the entire loan amount even if the property price goes down. They can attach your wages and take you to court to claim your other personal assets, including any shares in ancestral property in the future + lawyer fees.

My simple advice for people would be for them to do the calculations themselves like Kannan above. Do not trust anyone, neither Boss above, nor my post also. It is a personal decision to be taken very carefully after considering all the facts. As a simple rule-of-thumb, you know something is fishy when the rental yields are so low for equivalent properties. Just wait until rental yields approach 8-10%, and then even if you lose your job or have to transfer, renting out the flat will allow you to cover a substantial portion of the EMI. Unless of course Boss promises you in writing that he will cover your EMI if you have a medical problem, job loss, transfer etc. After all he is the one claiming to have the RIGHTADVICEFORU! :-)

Maybe it is the RIGHTADVICEFORMYPOCKET instead!

Observer.

sabbalseshu said...

Now, that everyone who reads this blog knows that 'The Boss' is a conman, it is worthless to comment on his recommendations/observations.

The Boss said...

Observer:

You know how to play tricks. The funds you mentioned have deliverd handsome YOY results due to outsized gains since 2003. The HDFC fund launched in 2000 was returning 4% annualized for first 2 years, then it took off.

http://www.thehindubusinessline.com/iw/2002/05/19/stories/2002051900681400.htm

Have a look at TATA's balanced fund. It has neatly underperformed the sensex, delivering much less . Have you seen FT's balanced fund performance till 2002? I can bust your myths about balanced funds with more examples, but it will be a waste of time for me.

If I were to employ your tricks, I will zero in on certain area of Pune where property prices were in 1000-1200 range a decade ago. Today they are anywhere between 5000 nd 6000. Now I leave it to you to tell me what is year over year gain for real estate investor. This makes sense as much as your balanced fund exmaples. With the advantage of hindsight, you picked few balaned funds and reported their performance to justify your future projections of 12% YOY gains. The fact is these so called balanced funds have delivered puny returns during stock market meltdowns. The only saving grace is they tend to be better than aggressive equity funds during market downturn, but that's not at all surprising. So why don't you recommend investing your 60000 per month in RIL? It has gone 10 fold in last 6 years. Isn't it a 'balanced' company with diversified business interests? One just needs to take a look at HDFC balanced funds holdings to see where all the performance in recent years is coming from. And yet it has 'handsomely' underperformed sensex in recent years.

So here are some of my observations:
1. The 12% assumption for so called balanced funds is unrealistically high. In high inflationary environment, the debt part will do better, the equity portion will sink. The annualized gains will definitely lag simple savings account returns.
2. If stocks are delivering such kind of returns in next 10 years, there is no justification for real estate prices to crash or even stay put at the same levels. Cleverly manipulating periods to conicide past real estate meltdowns (like 1993-2002) may fool some people, but not everyone.
3. Both stocks and real estate gains do beat inflation over the long term. Exceptions can always be found by manipulating the time periods.
4. For those who want to buy a house for living, comparing EMI with rental yields is a useless exercise. Even investors need not put too much value on this.
5. Rental yields approaching 10% is a fantasy scenario.

And observer, you need to take a course on 'Time Value of Money' concept. That will clear your understanding of what 1.4 Cr means 10 years for now, especially if inflation remains high.

Finally, nobody needs to believe me. Just go to an accredited financial adviser and present him your plan of not buying a house because of what you think are bubble zone prices. Tell him you plan to stay on rent and the EMI portion will be invested in 'balanced' funds with an assumption that you will get 10-12% annualized return. At the end of 10 years, you plan to have the booty and then buy a home. Let me know the reaction from your adviser :-)

http://rightadvice4u.blogspot.com

moti said...

The lessions of the property market boom of 1994-1996 are not learnt it seems

As CLSA put it in its white paper recently. Greed and Fear.

The markets have to correct. and Yes they will. I advise all to wait it out for 4 months.

Builders are holding on to the prices till diwali. But consider the following

High Inflation
High Interest
Low returns in stock markets in the short term

Will realty prices rise. NO WAY.

They will crash and crash big time.

Anonymous said...

What is a bubble ? See this

http://www.chrismartenson.com/bubbl
es

Anonymous said...

Umm, I thought the point of the exercise was to challenge the nonsensical statement made by Boss that

"The whole notion that stocks will grossly outperform real estate over 10 year period is absurd.".

If the Boss is really serious about not distorting facts, can this "absurdity" be proved by some actual facts? I showed a few examples where this was patently false. Also, in the case of the HDFC fund, it should be noted that the fund was showing 4% returns at the top of the stock market bubble. How come house prices are already showing a correction of 10%, rather than a gain of greater than 4% in places like Bangalore?

Secondly, I would recommend Boss buy a few good books about how stock markets work. Any financial adviser would recommend that one invest in these funds through a SIP, which means during periods of low performance, one buys more shares.

Homework for Boss for tonight: Take any of the major balanced funds from 1994-2008, and then model this through an SIP, and calculate the annualized return. The annualized return posted by many funds reflect the growth of an initial investment of some X amount of rupees after 10-15 years etc. I am somewhat reluctant to argue with someone who has such a poor understanding of how economies, real estate, and markets work.

Second, the reason stock market prices go up after inflation over the long term is primarily because of productivity increases. Capital is put to work more efficiently, and this is reflected in increased earnings. With real estate however, inflation-adjusted prices cannot increase forever because it means then that house prices will become unaffordable to the majority of the population. Again one sees the standard trick of the real estate lobby,

"BUY NOW OR BE PRICED OUT FOREVER!".

Rents, and rent equivalents are included in the components of inflation, not house prices. Another homework for Boss for tonight: List out the components of the inflation index as calculated by the Govt of India.

Rental yields were close to 8% for most areas in Bangalore and Chennai before the housing bubble earlier this decade. That is why buying property made sense for investors then.

And lastly, if someone is buying the property with cash, then of course rental yields may not make much sense. However, the majority of people buy an apartment/house by taking a loan. Can they say with absolute confidence that they will be continuously employed for an unbroken period of 20 years? How will they plan to cover the EMI if they suffer a job loss? At least if one misses a SIP payment, it is not like the fund assets are going to be forfeited. This leads to a lot of peace of mind. Also, if one has a job loss, or if one finds a better paying job in another part of India, or abroad, one can be quite flexible about it.

According to the ICICI Bank loan terms, if the loan recipient is late for an EMI payment by a month, he will get a warning call. If he is late by 3 months, then the bank can initiate proceedings against him. People like Boss will not magically appear to help you in this situation. Their job of separating you from your money is already done and they are laughing all the way to the bank.

"Buy now or be priced out forever!"

People should be very very careful during this period for real estate. As I mentioned earlier, buyers can afford to wait. They can rent instead of buying. The real estate lobby cannot since it is a question of cash flow. They cannot wait for 10 years. So hold on folks. The real estate lobby is getting desperate, and that is why you find people like Boss, Ashish, Realty Rider and etc desperate to convince people otherwise. "BUY NOW OR BE PRICED OUT FOREVER".

I would request all potential home-buyers like myself to wait, and not fall for their tricks. Think about this. Why are they so keen to give you "right advice"? What makes them so generous and leads to such an outpouring of their overwhelming desire to give you the "right advice"? Be very suspicious and question everything and really think about the motives of everyone. I would repeat that people do not have to believe my post above either. Everyone should crunch the numbers for themselves and look at actual data for themselves and their job security before deciding.

Financial advisers also are suspect nowadays. The Reliance Money adviser that I talked to recently was promising me 20% returns on investments in the next one year if I invested a sum of 20 lakhs with her. No one can promise that, and this kind of advice borders on criminal behavior. Later I found out that there is a 1.8% broker commission, in addition to the 2.25% entry load, which can be waived if you directly obtain the certificate from the Asset management company. There are a lot of parasites out there, and this being India, one has to be very vigilant.

You the poor techie, who is spoiling his health by working 12-14 hour days, neglecting family etc, you are the gold mine for the real estate lobby who plan to build their wealth off your backs. You, the bonded laborer for 20 years, have a choice. Were you born in life to make people like Ashish, Boss, real estate lobby rich? Is this why your parents gave birth to you? People cannot take advantage of you if you empower yourself with information and choose to control your destiny. If we home-buyers are not united, we will face a lot of problems. Just like the real estate lobby have their associations, we home-buyers also should form our associations and not give away all our hard-earned money so easily.

Observer.

Anonymous said...

Found this post by another user called Voyager on another board. Very true about the situation in Pune.


-----------------------------------
For all the analysis that’s written here, there are a few simple truths that can’t be refuted:-
1. I am perhaps amongst the top 5% of the 106 Crore people in the country as far as my income goes (Rs 50,000/- pm). In my late 30’s now, I can not buy a barely decent flat in a metro (even third rate ones like Pune) for it means losing my savings (about 20 Lacs) and also losing my life to EMIs till I retire. Just a flat to show at 60 with no savings whatsoever? Its scary.
2. When I look around the city I live in, there are a huge number of brand new towers in all sorts of obscure places and with imaginative names…60% of the houses are vacant. You can make out when you see no clohtes hanging out to dry in the day, no lights switched on at night.
3. The infrastructure (traffic, roads, water, electricity, pollution etc) sucks.
4. Things have become terribly expensive (not just petrol but school fees for the kids too).
5. Salary hikes (if they are occuring) are meagre compared to costs.
6. My stocks, mutual funds and FDs are all giving negative returns.
7. A 70,00,000/- Lac flat gets you a rent of 15,000/- pm in Delhi. That’s 2.6% per annum as per my calculator if you’re not paying taxes. Will it double to become 1,40,00,000 in six years? I doubt it. If it does, who will buy it? Moreover, who will buy thousands of such houses in each city?
8. I don’t see any NRIs who have returned back in my city to live in those 1 Crore flats. All one meets is people migrating abroad.

If this appears normal to some of you, I have nothing more to say. If this is what most of you feel like…I think we’ve reached the edge of the cliff.

srinivas said...

Why talk of balanced funds? Even Deposits in some banks are giving 10% yield. So if rent payment on property is 2-3%, I can put the money in risk-free deposit and make an extra 8% on investment. I will wait until interest rates come down to approach the rent payment. It does not make sense to enter property till then.

Also, if someone has 10L in cash, it would be foolish to put it into property now. That is because of leverage. If you buy a property worth 60L with 10L as downpayment, and the property price goes down by 10%, your investment of 10L goes down by 60%!!!!!!!!!!!!!!! With 12% Inflation, that becomes a loss of 72%!!

At least in a bank, that 10L will give 10%, for a loss of 2% after inflation. So which idiot will want to lose 72% now on their savings. Maybe they can give them to me instead :-). I think prices are definitely going to come down, because my real estate agent tells me half the properties in many complexes are for sale, and work has stopped in many other constructions because people are not booking flats anymore. The developer needs cash from bookings in order to keep construction going. Looks like the music is stopping and all those investors who got in the last 2 years will have an exciting time watching their money sit idle or shrink.

The Boss said...

Oberver said:
"Also, in the case of the HDFC fund, it should be noted that the fund was showing 4% returns at the top of the stock market bubble."

SO what's the point? The balanced fund returns are better than other aggressive funds when the market is down. They underperform in rising markets. They are fine as a small portion of one's portfolio. Relying on them to provide double digit returns year after year is quite absurd unless you have a rampaging market which significantly lifts their equity component overshadowing the debt portion. If you think we will have such a spell in next 10 years, then the real estate will also more likely see a spurt in prices. It is as simple as that.


"How come house prices are already showing a correction of 10%, rather than a gain of greater than 4% in places like Bangalore?"

OK, since when? Again you are manipulating the sample period. And you didn't even bother to find out the period during which the HDFC fund returned 4%. Now should I give you a homework in reading comprehension? Nah, that will be a cheap shot.

"Any financial adviser would recommend that one invest in these funds through a SIP, which means during periods of low performance, one buys more shares."

You are stating the obvious. Also, no serious financial adviser would recommend market timing for something like first home. You are obviously failing to distinguish between buying a home to live in and investing in a home.

"Take any of the major balanced funds from 1994-2008, and then model this through an SIP, and calculate the annualized return. "

Take any house, flat or piece of land in an OK locality of a tier 1 or tier II city. Find the appreciation from 1994 to 2008. Compare it with your favoutire SIP. Find the difference in basis points. If, by miracle, your SIP comes out slightly on top, that difference can be accounted for by the rent paid as well as the pain of living in a rented house (or many houses).
Rest of your post is a long rant asking me to read this and that and of course implying that I am an agent of RE lobby. That's hardly original. And then there's the silly emotional appeal about techies being enslaved by evil builders and more importantly their paid agents (like myself :-)). Get a grip!

http://rightadvice4u.blogspot.com

Gopal said...

Good points Observer. You are very much right. Looks like this Boss is a major loser. He cannot refute your facts. Everyone can see that. Do not bother responding to this shill.

Anonymous said...

Boss, Its easy to tell others that rates will not come down much and better buy at current rates.

Practise what you preach. You believe rates are ok. So I dare you to go ahead and buy a flat right now. If you don't buy, all you are doing is an empty talk so get lost!

mallapottell said...

Big Boss is trying to convince us that the notion of real estate bubble is a myth. His rants reminds me of that of stock broker Harshad Mehta in the '90s.

Shailesh said...

All valid points here so far. I would add few more.

The Speculator aspect can be easily removed. Government can make it must to pay percent of the registration / stamp duty (maybe 50%) when house is purchased and not when it is ready for possession. So only end users who can really afford the house, will go into contract.

Also Govt should publish each real estate transactions immediately. That way there is much needed transparency and not much dependence on Rumor mill.

Also, Govt should charge urban infrastructure tax on top of property taxes and bring new land areas under supply in orderly manner. Right now there seem to be no planning. Office buildings pop up within residential housing, inflating prices of houses to very high values.

Kannan said...

Good discussoion going on over this blog also.. You can see these realty lobby over there also.

http://indianeconomy.org/2008/04/18/the-indian-real-estate-bubble-circa-2008/

Anonymous said...

Good blog guys.. A thread with data and reasonably coherant arguements from both sides.. To contextualize the situation, my 2 pence worth of comments - should a prospective homebuyer try to time the market? No, unless there is an end user cartel/assoc with reasonable trust between members (without 'prisoner's dilemma' concerns).. A structural issue to formation of such a cartel is that there are no permanent home buyers.. Post a successful transaction, such a cartel loses a member to the opposing camp! Hence, I would think overcoming this structural issue is not feasible.. Having said that, for a potential end user, is it a good time to buy? I would think anytime is a good time to buy, as long as ONE CAN AFFORD IT COMFORTABLY. What does that mean? If you have a reasonable contingency cash reserve, and if you take a max 8 yr loan with monthly EMI < 33% of your present take home salary, then you can afford it comfortably! In my opinion,a 15 yr loan with EMI for 50% of gross salary, counting on future salary hikes and with no contingency cash is not affordable.. It also helps if you are convinced you would be the actual end user. No point in buying to rent based on 'macro economic fundamentals'. End user, better think about his microeconomic situation! Is this a conservative approach? For sure! Why? You are responsible for your dependents and any more commitments are worth some thought. Based on this I have postponed my purchase decision. I suspect the market may not have reached present heights if many people had realistically evaluated affordability levels! Good luck! Arun

sabbalseshu said...

An interesting article:

Tuesday, August 26, 2008
Distress Sales Await Real Estate Investors
Real estate companies have so far been booking paper losses, but after Diwali, these losses will be real, according to Nayan Bavishi, a UK investor of the Baron Group, who invests in Indian and Dubai real estate. This should lead to some sudden wave of distress sales, which would bring apartment prices to realistic levels. "Right now, it is only depletion of paper profits; wait till after Diwali and their [real estate companies]'s pockets will get eroded further."

The Indian real estate market has been hurt by a slide in the stock market, rapidly rising interest rates and aggressive demands from private equity investors. After five years of boom, real estate firms in India are grappling with lukewarm sales and cash crunches as inflated property prices and interest rates at near-decade highs scare away buyers.

"The aggression for acquiring land has disappeared. Deal volumes are down 35-40 percent," said Anuj Puri, who heads property consultant Jones Lang LaSalle Meghraj. Till last year, property firms, flush with funds from public offers or advance bookings, rushed to bid for land parcels, even at distant locations in metros, and in second-tier towns.

Even mid-size developers in India say they hold land reserves of 60-100 million sq ft, sufficient for projects planned in the next 3-4 years. But slumping demand could drive down land prices soon, leading to some distress sales, officials say. "We have not acquired an inch of land in nine months. I think by December-January, land prices should soften," Vyomesh Shah, Managing Director of Akruti City told Reuters late last month.

Akruti City, a leading developer, has not acquired any land in the last 9 months. A shortage of cash has caused delay in projects and it is likely that some announced projects may not even take off the ground. Builders are now unable to fund through advance bookings by buyers. "Developers normally did construction through booking advances for planned projects. Sales are down, so obviously there are delays," said an analyst at a Mumbai-based brokerage that has revised downward target price on sector stocks by 15-25 percent.

Most real estate firms are still getting by with advance bookings done 18-24 months ago, a sustained lack of demand in the coming quarters may worsen the situation.

sabbalseshu said...

The prices in mumbai western suburbs are likely to reach the following levels in 2009. These rates are well below 60% of current rates.
(Source: Investment Planning Statergy - ****** bank, u.k

Mumbai - Western Suburbs Property Rates - 2009 -Residential
Location
Bandra 3000 - 9000
Khar 2500 - 7000
Santa Cruz 2000 - 4000
Vile Parle 2500 -4000
Andheri 2000 -4500
Jogeshwari 1800 - 3000
Goregaon 2000 - 5000
Malad 1500 - 3000
Kandivali 1500 - 3000
Borivali 1500 - 3000

Observer said...

Layoffs beginning. What will people do in this situation if they have stretched themselves to buy a house and sunk all their savings into a downpayment? Think the IT industry in India is immune to downturns? Now that Indian salaries are high, which are allowing them to splurge on those 65Lakh flats, they may also be the first to be laid off if the downturn in the US/Europe becomes worse. I am not too sympathetic towards some of these people, they should not have stretched themselves. Here are some stories in EconomicTimes:

http://economictimes.indiatimes.com/quickiearticleshow/msid-3405626.cms

Highlights:
------
Worse, since layoffs are not common in our country, many of these ousted workers face great emotional trauma, too. Some—especially young professionals who live away from home—don't even inform their families about their job loss.

Those who have their own families are dipping into savings and having trouble making ends meet. "Although my wife has a steady income, we still dip into our savings because of our huge housing loan," says Arun.

-----
A prominent broker notes, "In the last two years, there were such massive pay hikes that many people lost all sense of proportion. They were buying bigger homes and cars, and borrowing like never before. They never thought of basic stuff like saving for a rainy day. Always plan for what might happen if the market enters a bear phase. That will ensure the necessary dose of reality in planning our lives."

--------------
As Soumya says, "We know ours is a highrisk, high-reward industry. Layoffs may be an opportunity to take a break, or pursue other avenues . This happens in developed countries. But we lack social security and the support of peers and society. With our business cycle increasingly resembling that of developed countries, I think in some years, people will not consider layoffs 'dirty' anymore, and take it in their stride as part of working life."

---------------
Soumya, an analyst who recently lost her job in a KPO: "The warning signs were there since the beginning of the year. But you never believe the worst can happen to you; it always happens to other people. We were the most tenured in the financial services KPO, and the most expensive resources, and yet we were the first to be axed when cost-cutting became necessary."

Unfortunately, while they are still looking for another job, the market remains in the doldrums, and most companies have frozen their hiring programmes. Placement agencies are asking them to patient. "I've seen most of my colleagues go through three distinct phases. First, confidence that a job will soon come by. After incessant phone calls to consultants and friends comes the second phase, one of a desperation, when most of us spend around four hours a day calling consultants who, in the present market, do not even call back," says Soumya. "Then people move into the ennui phase. They leave it to luck. Most keep calling and attending interviews. But there are so many applicants for each job, and so many companies putting most positions on freeze now, that it's very difficult to find a new opening and apply."

Anonymous said...

Observer,
My cousin called me from India yesterday and said IPhone has been launched at a very high price in India at Rs.32K. He said why is it so cheap in US at $200 and Apple is cheating. I told him that Iphone here comes with a ATT plan which is at least $85 per month and ATT must be paying some money back to Apple. This is one of their strategy to entice US customers and in India the monthly charges may not be as high.

Anyway, I told him why do you worry as you guys have so much wealth now. My cousin said that 32K still is a lot of money for a phone in India and only a very few can afford it. He was not too optimistic about the longetivity of IT jobs and high salaries.

I wonder who are these idiots buying properties for crores when they can't afford a 32K phone cash.

Kannan said...

iPhone at 32K is a bundled offer with 2 years service.It looks ok and comparable with US.

Anonymous said...

Nice thoughts, hoping for prices to go down & come to the realistic level. Well, let's see for how long black market and nexus between corrupt officials & greedy developers can hold the prices at current level.
Dispoasalble income of masses determine the market for most of the goods and I believe property or reality sector is no different.