Wednesday, October 22, 2008

Crisis of the mind

IBN live reports on a suicide/murder by a stock broker who is unable to make good of his losses and take care of his family and buy a flat. As we have discussed, investors have huge losses where they are losing all their capital which they have built up over the past 3 years, plus many have taken loans against the stocks/margin which the banks are asking them to pay back. Added to that they have EmI's on houses. The whole bubble was created on a house of cards and the deck has collapsed.

One of the readers mentioned about an apt which he had purchased for 30L which is now 1.2 crores in 3 years. This is a fantastic investment if he is able to liquidate it at 1.2 Cr. If he does he has found a sucker and more power to him. If he does'nt then I guess he is the sucker, since he wont see 1.2Cr for a very long time. Just as the Sensex has retraced all the 100% return over the 3 year period and stocks are down 70%,80%. so will the housing market retrace to lower levels. No bubble exists in a vaccum and this is no exception.

Also having lived in Bangalore and mumbai with mumbai being my hometown, I can say that Bangalore has many more opportunities for higher paying jobs then mumbai. Housing is also way too cheap as compared to mumbai and with newer societies with all amenities which have sprung up over the past 5 years, things are better in Bangalore then before. The locals complain of the spike in traffic but then mumbai has equally bad traffic so to a mumbaikar there is no difference, but the housing cost and the pay packet, both which work in his favor.

There will be some people who will argue the black money aspect of housing and I can only say that the house of cards was created on EmI availability which generated more black money for the builders. Now that the generator fuse has been shorted, so will the output.

One last point I'd like to make is the psycology of builders who want to keep raising prices even if they can make a handsome profit by selling 10% below their current prices. It achieves the following purposes

1. Creates an illusion that prices are rising prepetually for the buyer who is seeking appreciation.
2. Provides mental comfort to existing owners that they are in the money and they dont need to sell
3. Traps NRI's and other high net worth people who has disposable income and/or black money
4. Enforces the notion that real estate is a growth asset as opposed to an income generating asset. If you looks at the P/E it is abysmal in mumbai
5. Sells the mantra of moving up the chain as real estate always builds equity.

All these things work in the long run if you have a good entry point. In a bubble economy, all bets are off and the last man standing will face the music.

33 comments:

Observer said...

A stockbroker in Hyderabad commits suicide. What will happen to those people who may lose their jobs and are no longer able to pay their EMIs? Will Ashish and real estate brokers Anil and Sabbalseshu be happy they made their profits at such people's expense? Karma will catch up with folks who dupe others and push others into going into unsustainable debt.

http://www.ibnlive.com/news/hyderabad-stockbrokers-family-commits-suicide/73865-3.html?from=search-relatedstories

Hyderabad: A Hyderabad stockbroker's family allegedly committed suicide by setting themselves on fire.

Police found the charred remains of Upender, his wife 25-year-old Swapna and their two-and-a-half year old son Akshaj at their home early on Thursday morning.

Upender was a stock broker at Saidabad in Hyderabad and police say the crash in the stock market could have prompted him to take the extreme step.

The bodies were taken to a hospital for post-mortem.

Police suspect the family committed suicide on Wednesday night by setting off the LPG cylinder on fire.

"All the doors where locked from inside and scene of offence says it's a sure case of suicide. We are getting reports that Upendra was stock broker and due to losses, he committed suicide," police inspector Sriniwas said.

Observer said...

Another stockbroker in Indore commits suicide as he is unable to repay loans. The next tragedy to unfold may be housing loans. What happens if people who bought houses on loans lose their jobs? What happens if they listen to people like Ashish who assure them that "houses will keep going up in price by 12% every year"? Will people like Ashish, Anil, Boss etc come and pay their EMIs for them? People please tell your friends and relatives to be very careful before going into debt, and not to pay more than 30% of their income for housing loans. So if they make a salary of 1 lakh/month, then they should not buy a flat worth more than 30 lakhs. It is better to live on rent and have some peace of mind, instead of becoming a statistic like this.

http://www.ibnlive.com/news/wall-street-impact-indian-broker-commits-suicide/73895-3.html?from=search-relatedstories

ndore: Failing to cope up with the growing uncertainty in the Indian markets, another stock broker committed suicide in Indore, allegedly out of desperation after a fall in the markets.

Though Indore police have not confirmed the death as a suicide, family members say he may have ended his life as some investors wanted their money back.

Ravi Sharma had incurred big losses in the recent slump in the share market. Things took a turn for the worse after American firm Lehman brothers went bankrupt and AIG also threatened to go under. Police expect to know more after Sharma's computer is checked.

Earlier this week, two of the biggest names in the world's financial market, Lehman Brothers and Merrill Lynch, collapsed.

And even though Barclays came in with an offer to buy the good part of Lehman, there is no denying that there is a financial crisis in the US — a crisis which analysts are describing as the biggest since the Great Depression of 1929.

Observer said...

For every suicide case which comes in the papers, there are thousands of cases where people are depressed and under extreme stress because of going into debt or in fear of job loss. What do people like Ashish, Anil and others have to say about this? Builders do not care, they have already made massive, enormous profits and have enough to take care of even their great grandchildrens' lives.


Of course rich people, or criminals who have black money are exempt from the above warning. But how many of them are there to sustain this market?

Jamshed said...

Few months back, I used to see smartly dressed youngsters in posh restaurants in south mumbai, spending money like water, tipping the waiters in hundreds,zooming away in new cars and wondering where all the money came from. Suddenly, this crowd has vanished and the old timers who stopped coming to these places because of the arrogant behavior of this new crowd, have started returning. Looks like the credit cards are maxed out or the banks have started putting a freeze on their assets. Whatever the reason, business has gone down drastically in south mumbai. People are awakening to the reality. The sudden boom created by chidambaram/manmohan (madrsi/sardarji cocktail) has more of a curse than boon. The demoralizing effect on the young work force may remain for a long time to come. Real Estate is going to take the biggest hit and I wont be surprised that many heads will roll. Behind every project in mumbai, there lies the hand of underworld and these financier's dictionary there are no phrases like ' economic downturn - market gone down - loss' . They will demand their investments back and they will take it either by hook or crook. If the banks start taking over the apartments of mortgage defaulters, how are they going to resell them. These apartments will be like dead assets.

My assumption is that banks will be bailed out by the government and the loss will be passed on to middle class employees and small businesses. Let us wait and see

Shailesh said...

Freebies fail to lure home buyers

Unless developers are willing to reduce prices by at least 25-40% to affordable levels, home buyers are likely to stay away. This was the message emanating from a four-day property exhibition organised by the Maharashtra Chamber of Housing Industry (MCHI) at the Bandra-Kurla complex despite the huge response.

“We are highly encouraged by the overwhelming response to the exhibition. The attendance of quality home seekers on all four days and their interest in the property shows the rising demand for housing in Mumbai and the state,” said Pravin Doshi, president of MCHI.

However, it does not seem that the response was matched by conversions. Although 800 properties by 85 real estate developers were put up for sale and 15 housing finance companies were also on hand to provide funding, it is estimated that the conversion rate was below 10%. It must be kept in mind that such exhibitions are not really the point of sales for something personal like a home.

Shailesh said...

Centrum Research: Real estate prices to drop by 20-30%

Centrum Broking Pvt Ltd a part of the Centrum Group, today shared findings from its research report on the Mumbai Real Estate Sector. It expects a 30-35% fall in India's residential prices from the peak, with the Mumbai Metropolitan Region (MMR) estimated to witness the lowest fall of 20-30% until April 2009. Residential demand in Mumbai is estimated at 66mn.sq.ft. vs 55mn.sq.ft supply

The report says that the decline in real estate prices in Mumbai will bring back affordability and is expected to boost demand.

Shailesh said...

Employee inefficiency to trigger more pink slips in IT industry

Shailesh said...

Deepak Parekh hints at housing bubble

Mumbai, Oct. 21: The HDFC chai-rman, Mr Deepak Parekh, said investors who invested in the real estate at huge costs will suffer huge losses.

He said, "In the last two-and-half years, the real esta-te sector had attracted investments of Rs 1,10,000 crore through initial public offerings, private equity and from the listings at the London and Singapore sto-ck exchanges. These funds predominantly were used to invest in lands but at exorbitantly high rates. Now a steep price fall is expected in the real estate and these investors are going to suffer huge losses," he said.

The rise in the interest rates on the home loans has kept the buyers away as the common man is comfor-table with about eight to nine per cent interest rate, he added. The present rate is around 11 per cent.

Mr Parekh was speaking in a meeting organised by the Rotary Club of Bombay on Tuesday.

Mr Parekh said, "For the last six months, the rates in the real estate sector have been stagnant. Developers are offering discounts in the form of stamp duty waiver, free parking space among other incentives but are refusing to reduce the rates of their properties. Buyers are not interested to buy the flats and there are about 30 per cent flats lying unsold in Mumbai itself. It suggests that the real estate sector will see a sharper and larger correction."

On the shares of realty companies, Mr Parekh said that the prices of the shares of a few real estate companies are 80 per cent lower than their issue price, and added that "it is almost a bankruptcy. Some top-level real estate companies are in trouble," he said.

I guess Mr. Deepak Parekh has not met Aashish or Babu. He will change his opinion once he understand Black Market Money in India.

Shailesh said...

No vertical limit: High-rises on tiny plots get OK

In September, the Supreme Court removed the cap of 2.5 FSI imposed by the High Court on redevelopment of buildings built prior to 1940 and allowed an unlimited vertical growth for such structures even if they are not dilapidated. The SC order also does away with minimum open space required to be kept between two buildings.

These are the first set of proposals to be okayed following the SC order.

A classic example is that of Chunilal Baldev building in Bhuleshwar, one of the most crammed places in the island city. The three-storey building is on a tiny 60 sq mt plot. With a proposed FSI of 4.85, the new building will be at least 15 storeys high. A redevelopment project in Khetwadi has proposed a staggering 6.3 FSI on a narrow 260 sq mt plot, another one in heavily crowded area of Fort has asked for a 4.92 FSI on a narrow 104 sq mt plot.

“FSI of over six on a 260 sq mt plot would mean that the building would go as high as 30 storeys. Though legally this may be allowed, such tall structures with little open space around them will end up compromising on residents’ safety as they will be highly unserviceable,” said Pankaj Joshi from the Urban Design Research Institute.

Anonymous said...

Now the time has come to change the name of this web site from “India Housing bubble” to “India Housing trouble”, Vik please do the honor. Since 2007 every one is talking about the housing bubble & its burst time. Based on various news from all parts of the India, the bubble has busted. Now we should track the aftermath of burst.
Recession has started in US/UK, the unemployment rate is reaching to its peak. So there will be no NRI high net worth who will invest in real estate.
Indian IT industry already reduced the variable pay & handed over a pink slip.
Due to fall in oil prices OPEC is incurring losses, UAE is also facing the recession pinch, so don’t expect NRI buyer from there.
As speculator had already invested black Money is in real estate, which got eroded due to housing slump, there is no speculative buyer.
The largest middle class buyers can afford only at 30-40% less of current price level the wait & see game is going on.

Vik said...

@Anon,
The trouble is in the bubble and now we can track how low the market goes as time goes by. Changing the blog address is not as easy since we will lose all the wonderful indexing which is provided by Google, Yahoo and other search engines. I'm glad the bubble has burst. Now can look forward to a realistic housing market, something which every individual desires for himself and his family. After todays 500 drop, I think the Sensex will be down another 500-600 points. Forced liquidation by hedge funds and mutual funds investors who panic will fuel the capitulation in the days ahead.

Anonymous said...

I feel very soon intrest rates will further go down. It is just matter of time that home loans will be in single digit. Banks will start cutting deposit rates and people will start rethinking about Bank FD's.

People with money will not look at stock market atleast in near future. Only two option they will have i.e. property and gold.

Everyone knows that beyond a ponit gold will not give return and also an Investor will also know that the property prices are very high and he will also think twice to but any property.

Among all this the actual user will get tired paying rent and seeing the interest rates on home laon falling , these guys will go and start buying homes. (People will always calculate EMI vs rent and the advantage of own house via a viz rented house and off course creating so called asset)

Believe me it is always herd mentalty that works. There is no point in blaming me or anyone for us buying at low rates. We have just looked this as an investment opportunity.

Three years back at Pune I brought XX sq ft of Agriclture plot @ Rs.150/sq ft. This year this same area was converted into Residential area from Agricultural zone and in March i managed to sell the same @ Rs.5800/sq ft and I am sure that person who brought from me is not at loss. He will build couple of buildings and rake in his money.

Pal this is how business works, there is no point is blaming others and talking about Karma. I feel bad for people who are commiting suicide but their is always a thin line between investment and greed.

Either we take action at appropriate time or we keep discussing about it.

Anil

Anonymous said...

I feel very soon interest rates will further go down. It is just matter of time that home loans will be in single digit. Banks will start cutting deposit rates and people will start rethinking about Bank FD's.

People with money will not look at stock market at least in near future. Only two option they will have i.e. property and gold.

Everyone knows that beyond a point gold will not give return and again an Investor also knows that the property prices are very high and he will also think twice to buy any property.

Among all this the actual user will get tired paying rent and seeing the interest rates on home loan falling , these guys will go and start buying homes. (People will always calculate EMI vs rent and the advantage of own house via a viz rented house and off course creating so called asset)

Believe me it is always herd mentality that works. There is no point in blaming me or anyone for us buying at low rates. We have just looked this as an investment opportunity.

Three years back at Pune I brought XX sq ft of Agriculture plot @ Rs.150/sq ft. This year this same area was converted into Residential area from Agricultural zone and in March i managed to sell the same @ Rs.5800/sq ft and I am sure that person who brought from me is not at loss. He will build couple of buildings and rake in his money.

Pal this is how business works, there is no point is blaming others and talking about Karma. I feel bad for people who are committing suicide but their is always a thin line between investment and greed.

Either we take action at appropriate time or we keep discussing about it.

Anil

Observer said...

If more people start losing homes and feeling angry towards the brokers and builders who took their money, I wonder if the crime rate against them will pick up. I mean there are some people who commit suicide, and some others who would want to take revenge instead. If conditions worsen, brokers may have to hire bodyguards for themselves and their children, and restrict their families movements. When things start to go down, the people who have made lots of profit may need to spend some of it to protect their family. I think we should look at it as a business decision. Probably stocks of security companies (like Securitas) will be a good buy in the next few months. I am not saying that is a good thing, but this is one of the risks in being involved in the real estate business.

Observer said...

Layoffs beginning among real estate companies. Sales failed to kick off this Diwali season. Where is Ashish now? I am sure he will advise these companies to keep hiring instead of firing people because "property prices will keep going up by 12% a year".

Now, do I feel sorry for these real estate people getting laid off? I wonder if these sales people and brokers also felt sorry for the people they conned into buying these expensive flats. I heard about a broker trying to convince my neighbor to sell jewelry, and liquidate other savings, to afford the downpayment for the EMI. Karma always catches up in the end. Investors will also suffer losses. People should wait for one more year before looking for properties to purchase. Maybe finally the common man can afford a house.

http://economictimes.indiatimes.com/DLF_Unitech_Omaxe_Parsvnath_BPTP_plan_layoffs/articleshow/3630094.cms
NEW DELHI: It’s not going to be a happy Diwali for people working in the real estate industry. Even as sales failed to pick up this festive season, most realty firms including DLF, Unitech, Omaxe, Parsvnath and BPTP, now plan to lay off staff in significant numbers soon after Diwali.

While spokespersons of all these companies denied there were plans to cut jobs or salaries, executives in these companies told ET that job cuts were in the offing and salaries have been delayed in some of these companies.

“All real estate players, including us, will have to reduce manpower cost significantly if we are to survive in the current hostile market conditions,” says a top executive at a Delhi-based listed mid-size realty firm, which plans to reduce manpower by almost 20%. The job cuts will start happening soon after Diwali.

Executives at many other real estate firms also confirmed companies plan to offload people and a list of staff was being prepared, who would be asked to leave soon after the festive season was over. Developers are waiting for Diwali as they didn’t want to dampen sentiments further.

“Job cuts at Jet Airways became a big issue also because it was done before Diwali. Developers are wary of raking up any political controversy,” explained a senior executive.

Also, realty firms needed large number of sales staff for the festive season. But now that their price discounts or other freebies have failed to stimulate the home market, developers feel they can cut back on staff. The developers have already started easing off some staff. Many developers, including DLF, had already asked around a few hundred employees to leave.

And sources say more job cuts are in the offing at DLF, as construction pace slows and expansion plans are put on hold. Unitech, Omaxe, Parsvnath and BPTP too prepare to issue pink slips.

Salaries have been delayed at many mid-size and small realty firms, even as management is asking employees to take salary cut. Even though he denies salaries are being delayed or cut at his company, Parsvnath chairman Pradeep Jain supports the idea of salary cut.

“Employees’ salaries have risen so much in the past few years that I see no harm in reducing it a bit,” says Mr Jain.

“Salaries at the top management level have already started to come down. A number of real estate players are already renegotiating salaries with staff so that overall wage bill comes down and not many jobs are lost. Companies are preferring to retain the jobs of those capable of multi-tasking,” said Executive Access MD Ronesh Puri.

Employees at most real estate firms are in a state of panic as job loss fears mount. Too many resumes have been floating around in the market. “Earlier it was extremely difficult for a smaller developer like us to hire talent. Now we are flooded with CVs. Surely, people are being fired somewhere else,” says Ambience group chairman Raj Singh Gehlot.

Observer said...

Vik, can you please make the above comment into a separate post? I think many RSS readers and search engines pick up the headlines from blogs like these. So the news of layoffs will be picked up if it is on the main page rather than in the comment section. This will spread awareness among potential homebuyers that even real estate companies now are accepting the fact that there is a bubble and are laying off salespeople/brokers.

Observer said...

I think gold is a better investment than property. In particular, gold is a good inflation hedge, and is a store of value regardless of the political scene, or fiscal deficits, or changes in policies. Some of the qualities of a good investment are:

1. Easily traded with minimal transactional costs
2. Easily stored
3. Requires little or no maintenance to maintain its store of value
4. Widely accepted
5. Resistant to the economic policies and interest rate manipulations of the Government

A home is a place to live, and only recently has started becoming viewed as an "investment". Gold has been an investment which has lasted thousands of years. In fact, a lot of the "black money" sitting in Swiss Bank vaults is in the form of bullion. Crooks know that fixed deposits and property is not the best place to park their ill-gotten gains. An investment home also carries maintenance headaches and proper selection of tenants. Investment homes rarely produce an income greater than the cost to acquire it. Of course, these comments do not apply to very rich people who can afford to pay cash.

One thing people are missing is that rents are actually a component of the inflation calculation, typically 25%. Also, fixed deposit interest rates are usually close to the inflation rate. Only stocks are historically known to beat inflation, but this is true only over a long run, maybe 30-40 years. In the short term, it carries a lot of risk. The risk/reward equation may be very volatile over the period of a few years as boom/bust cycles occur.

Since property is part of the inflation calculation, it cannot outperform inflation over the long run. Someone had posted a great link on Chris Martensen's bubble explanation. I think people should really see that.

Anonymous said...

Lehman Brothers is not more. Merrill Lynch has gone down the Bank of America jaw. AIG too could go belly up. With a doubt, these developments in America are the most shocking events to have hit global financial markets. So where did it all begin? And what does it mean for the Indian stock markets? Find out. . .http://realtydigest.blogspot.com/2008/09/why-lehman-brothers-went-bust-whats.html

Observer said...

The other problem with "investment homes" is leverage. Again, this comment does not apply to people who can afford to pay cash. When one purchases an "investment home" with a downpayment and a loan, the hope is that a 15% downpayment will effectively provide a 200% return if the property appreciates by 30%. That is, if a property worth 1cr is bought with a 15 lakh investment, and if the property appreciates by 30 lakhs, then the return on the 15 lakh invested is 30 lakhs, a 200% return.

Now compare this to Gold or Fixed Deposits which will be of the order of 7-15%, very close to the prevailing inflation rate. If someone invests in stocks, in a good year they may make 30% return, but if there is a stock market crash, they may also get a -30% return. So it is of course very attractive to investors to park their money in such "investment property". However, the very same leverage can have a devastating effect if the property price goes down by even 15-20%. Now, the "investment property" is worth only 80 lakhs. The entire investment of 15 lakhs is gone, a 100% loss, and what is more worrisome, the investor has to pay an additional 5 lakhs to the bank!

I think once this bubble bursts completely, like in the 1990s, people will come to view homes as just a place to live, and not for investments. Home prices will once again be determined by end-users only, and thus will be linked to income and other fundamentals. Until the next generation of young graduates enters the workforce next decade of course :-) when the cycle will begin again.

Observer said...

Financial companies kick off job cuts, starting with DSP Merrill Lynch.

http://economictimes.indiatimes.com/News_by_Industry/DSP_Merrill_Lynch_kicks_off_job_cuts/articleshow/3630736.cms

MUMBAI/NEW DELHI: The impact of the global turmoil has hit the Indian shores. DSP Merrill Lynch has started cutting staff in businesses affected by the crisis. Though only about 20 have been affected so far, the feeling is that there could be a couple of rounds of job cuts in India this year as Merrill Lynch gets ready for a global merger with Bank of America.

In the past few months, the firm’s non-banking finance company (NBFC) in India has been using the put/call option or has asked corporates to prepay loans. Though others like HSBC and UBS have cut jobs in Asia, India was spared the axe so far. As revenues in India decline, bankers feel there would be some impact here as well since others too start layoffs.

Sources said DSP Merrill Lynch has cut jobs across levels, including structured finance, derivatives, fixed income, currency and commodities and the strategic risk group, which is the proprietary trading desk. They added that the investment banking division has also been hit.

Anonymous said...

Layoffs beginning among real estate companies. Sales failed to kick off this Diwali season. Where is Ashish now? I am sure he will advise these companies to keep hiring instead of firing people because "property prices will keep going up by 12% a year


This is like saying if HUL cuts staff then the prices of Ketchup will fall. If you want ketchup prices to fall then their should be serious competion. Govt must encourage competition by relaxing norms and encouraging industries to set up who can take HUL head on and deliver good product at reasonable price it is only then HUL will cut prices.

As I mentioned earlier Govt must increase FSI, bring more transparency and allow good competition in this sector. It is not the bulider alone to be blamed but also the Govt policy.

20 years back an anti ulcerant(Ranitidine 150mg) was costing Rs. 80 per strip but today MNC's are selling @ Rs.5. The entire credit goes to Govt policy.

I am not sure how much the corrupt polotician will help us in this case but anyways All the best.

Anil

Observer said...

When houses are not selling because of lack of demand at these high prices, then it is not a question of individual companies like DLF or HUL. Please read the article instead of just the headlines. It clearly mentions that many real estate companies are planning to reduce staff, not just one. This is purely about lack of demand at current prices. Thus, if there are few sales, then how are these companies going to continue paying salaries? They are businesses, and not charity organizations to pay the staff from all the previous years massive profits.

Also, in spite of there being many real estate companies, they all form regional cartels and pledge to hold prices high. One example is the Karnataka Builders Association, which is asking members not to lower prices in Bangalore. But eventually this trick will not work. Buyers can afford to rent and wait. However, builders cannot wait for many years since they will ultimately have to manage cash flow, and their previous profits will get eroded. That is why they are now cutting staff, so they can still maintain the high prices, and still make money off of fewer sales.

But if buyers stay away for another year, they will have no choice but to cut prices to drive more sales volume.

Anonymous said...

Observer said...
I think gold is a better investment than property. In particular, gold is a good inflation hedge, and is a store of value regardless of the political scene, or fiscal deficits, or changes in policies. Some of the qualities of a good investment are:

Friend,

I think you are fighting a loosing battle, year on year start paying rent you will come to know whether Gold is good investment or property ? Ask people without a house how secured they feel? It is only good to read all this but practically very difficult.

Staying on rent has its own set of problem, you are settled and your land lord want a 15 to 20% increase or if not atleast 5% increase. You cannot leave because school is nearby, your child’s friend circle, and overall you have just settled , “I just don’t feel like moving and moreover I will have to pay brokerage again” so what do I do now?

Pal last year there was a Financial planner who had advised people not to buy properties but instead stay on rent . He had calculated that you will need to fork only 30% of your EMI as rent. He also advised balance 70% you must invest in Mutual fund so that you can buy a house at a latter date because he was sure that the prices will correct and will not go up further. What happened since then we all know.

Recent MCHI exhibition in Mumbai has shown the world the interest and aspiration of people it is only a matter of time when conversion happen.

Anil

Anonymous said...

The tides will change with interest rates comming down,all of sudden you will see the same media singing a different story.

Ayub Parker said...

Why do people blame 'Ashish' for his advise. He is not forcing anyone to invest in real estate. He is just doing his job i.e wooing investors. If someone is dumb enough to fall for his tricks, it is not Ashish's fault Someone in an earlier blog pointed out that meridharti.com run by is a scam site. So avoid it and his advise

Observer said...

Again Mr. Anil, Please read my comment fully and not the headline. I was clearly comparing "investment property" and Gold. I had also said that a house is best meant for living in, and not as an investment. I hope you can understand.

Also, most advisers are also sales people just like real estate brokers and sales staff from real estate companies. Each adviser gets a commission from the mutual fund company if he can con people to buy financial products.

I would advise the following:

1. Buy a home only to live in. Do not buy a home as an investment. Do not spend more than 30% of your income on the mortgage.

2. Wait till you are somewhat secure in your job, and have a few years experience in your company. In layoffs, usually experienced people who are valuable to the business are safe.

3. Also, do not drop all your savings into the downpayment for the house. Keep at least a year's worth of living expenses in your bank account.

4. Take out a life insurance policy with a critical illness cover. The coverage amount must be greater than the value of the home loan, so that in the event of death or terminal illness your family can pay off the home loan, plus have some extra money, and not end up on the street. The insurance money is usually tax-free.

5. Write a will clearly naming the intended beneficiaries, and the ownership of the house if you have a mortgage. Keep a copy of all documents in a bank vault and nominate your spouse, family member, whoever, to operate the vault in case of death or disability.

6. Create a PPF account for each of your children, it provides 9% tax-free returns which can be used for their education and marriage.

7. Only after all the above steps have been completed, and if you have some money left over, then you should think about investments. Do not purchase property as an investment, unless you are absolutely confident that you will always meet the EMI obligation without fail. If you miss even one EMI, the bank may take the property and sell it. At that point, you may end up with a loss and also end up owing money to the bank.

8. Invest in gold if you are mostly looking to preserve the value of your savings, and have low tolerance for volatility. You can take out a recurring deposit, and after enough money has been accumulated, you can purchase gold coins, which have very little markup value unlike jewelry.

9. If you have a very long investment horizon, at least 10 years or so, then consider investing in reputable mutual funds. Do not go through a broker or an adviser since he may have his own agenda. Also, you will save commissions by investing directly with the mutual fund company itself. Look for an office in your city or town. Consider investing through a SIP which will smooth out some of the natural volatility in stock prices. Also, historical P/E ratios for stocks is 15 for the last 70 years. Be careful if the P/E ratios are significantly higher than this level.

Anonymous said...

good advise by observer. Thanks

Observer said...

For all those based in the US, you may wish to read the following article. In the next two weeks, a credit event could occur if a Treasury Auction fails. If that happens, then there could be a huge contraction of credit and essential Govt services. Mortgage rates could cross into double digits and companies may lay off large numbers of people, and many companies may actually go bankrupt. Americans would be concentrating on just the basic expenses, and sharply cut down on everything. No need to say this could mean major layoffs in the IT/BPO/textile/leather/diamond sectors here in India as contracts are not renewed.

In the worst case, America may default on its external debt next year, just like Iceland, Argentina and possibly Pakistan. If that happens, then half of IT companies in India will have to shut shop. People should absolutely not make any large purchases for the next year or so till this picture becomes clearer.

http://market-ticker.denninger.net/archives/P2.html

Anonymous said...

Guys ,bad news everyday
ebay 10% , yahoo 10% lay off
and today goldman sach announced 10% layoff

Vik said...

ICICI bank has just raised interest rates by 1% on loans. Interest rates need to go up to attract deposits and keep the currecncy from crashing any further. Lending rates, Deposit rates and the Currency need to be balanced in equilibrium to achieve low inflation and steady growth. Whenever there is a spike in any of these, it will affect the others and we have seen the impact.

Anonymous said...

Jameshed,

Don't blame the government for this real estate bubble. RBI rised interest rates several times and ordered banks not to finance real estate developers. Yet, the bubble happened - mostly because FIIs, financiers (black money) poured in several billions of dollars through FCCB. With the current downturn, is is a double whammy for developers - unable to complete and sell and the demand from financiers to payback. In short, it is the FIIs and black money that created this bubble, not the government.

Anonymous said...

Dear Jameshed,

your point is well taken. I was not talking about monetary policy but local bodies who do town planning and who deals in approving the development. Here in Mumbai before starting a project you need to get atleast 38 clearances and despite black and white law it is still open for interpratation of the respected officer, it is like our Indian customs dept.

What i meant was govt must look into this, keep one window clearance, increase the FSI as per city demands and then you see how the property markets react.

I am sure then a lot of people like you and me will come together form a society and build our homes.

Here there is a big BUT, are our politician ready for this?

Ajay Patel said...

Hi anonymous, I respect your observations and also how close your predictions...
Can you advise me if i should redeem my fmp's since i have a very large exposure in them. They are diverse some expiring in 40 days and some are 12 months.
regards, ajay