Friday, October 17, 2008

Revisiting the first post of this blog

Rewiding almost 3 years into the past, I found my original post. Most of the observations made then have been vindicated by the turn of events. Three years later, the stock market is up 10% and looks very likely to go below 9k in the following weeks, thereby wiping gains for 3 years. The FII's have taken the Indian investor for a ride down a a tunnel of hell. As everyone reads the bad news, I'm thinking of what could be good prices to pay for apts in the year ahead ? Anything over 3000 is steep by any standards. Black money can chase other black money, however loans are in short supply so they cannot chase other loans. If a black money operator buys an apt paying 1cr, immediately the Income Tax folks will get alerted and will be on his case. The only place where they can hide money is to buy land/plots where there is a substantial portion in black. As state governments keep raising gudiance value, this avenue is closing as well. In Chennai the guidance of OMR road is up 10 times over the past 3 years. Hence speculation here attracts the Income tax bugs. The only avenue black money folks have is to fund builders, however given the state of the loan market, they will be unwilling to do so. The goal of every black money operator is to convert the black to white, but as avenues for the conversion evaporate due to increasing risk, storing black money under the matteress or in hidden cabinets seems to the only way. Any builder who is looking for money is paying 30% interest, this used to be the case in 2003. So the market is dull, people have lost money in the market upto 80% in many cases. How long can 10000 per sq/ft hold ?
and I just got this in the mail and couldn't come at a better time. A drop of 40% from the existing rates, However to take the risk of execution during a time of financial crisis is foolhardy. We will see these prices for ready to occupy apts soon.

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Friday, December 09, 2005
Asset Bubble or not ?
As the Indian economy grew by 8% as stated by the finance minster(12/9/2005), the sensex hit an all time high of 9057 and housing prices have continued to skyrocket in major metro areas.

One of the worrisome aspects of this growth is that low interest rates have helped companies in BIFR(chapter 11 for India) to come back with healthy balance sheets specifically due to debt-refinancing. (18% to 11%). The productivity growth or job growth is not wholly responsible for the growth. Also many of these restructured companies might pay themselves dividends or buy back shares thereby increasing the wealth of the directors, and owners and thus balloning the stock market beyond fundamental basis.

The white collar worker has to deal with the consequences of this semi-illusionary growth in the form of increasing property prices (10-20% year-over-year) and is borrowing heavily thanks to low interest rates.

As property prices push higher, the risk of default of these small apt buyers increases as global interest rates rise, energy prices push higher , inflation increases and the rupee devalues as the external debt mounts rapidly

Most Indians in the market for a apartment now have never experienced a downturn in the economy so they might find themselves highly shafted if they over-leverage themselves on the loans as well as the floating interest rates.

Unfortunately unlike the developed west , India has no reliable source of data available for real estate prices and transactions and most prices are rigged by a cartel of builders. I'm also skeptical of the media in reporting the truth since they too dont have any reliable data to go from and finally real estate agents, the less said about them the better.

This blog attempts to understand area development and price movements and if people contribute uncover hidden unsold inventory. I'll post information about Mumbai/Pune/Bangalore over which I can get anecdotal evidence or as I browse the news papers and talk to real-estate agents and builders. All articles and comments are welcome. I'll be the moderator of the comments so that the spammers dont take over.

This blog is inspired from a similar blog http://thehousingbubbleblog.com/ which is now a reliable source of data for various US housing markets.

13 comments:

Anonymous said...

The economic factors like supply, demand the level of unemployment & financial market indicators can explain the price on general level. But to understand the price movement at micros level one has to understand the crooked plans of the politician & land mafia.

 In every booming market the area used to be a different. For an example 1998 in pune “Kondwa” was the most hyped area then correction happened & prices softened. In 2006-07 boom “Baner”, “Kalayni Nagar” ,”Viman Nagar” became the most hyped area & the prices in “Kondwa” became less than Baner. How come the prices in area which already have infrastructure became less that the undeveloped area? This is the scheme of builders, to buy cheap land then spread a hype among the people to persuade that this is the only heaven on the earth. After pushing people in debt & bulging own pockets, then builder will start another heaven.

 Now the biggest roudy is making entry in whole drama, yes humare neta. As soon as come in the power first thing will be to shut down existing development project which was started by previous roudy. They will announce new development project near to a place where he has already purchased a huge land in venture with builder. Now the people who has brought asset in that area in last boom time will become worthless as there is no development.

In 2009 the price level in Pune-Baner is expected to cool down to Rs 2,400 per sq foot from existing 3,000 mark.

Anonymous said...

The only thing I can say is there will soon be no buyers, huge inventories, distressed properties, and builders offering aggressive discounts and incentives like airtickets, cars, and other ass lickups.

But, the prices have no where to go but south. They will keep going down till a bottom is reached that is sustainable with median income levels. I think that bottom is around around 60% price cuts from current level and may take a year or two to happen.

Anonymous said...

"In 2009 the price level in Pune-Baner is expected to cool down to Rs 2,400 per sq foot from existing 3,000 mark.".. considering the slowdown in the IT field (the sector which set the crazy real estates rates ) it will be no surprise to see the rates going down by 40 - 50 %

Anonymous said...

All this black money thing is crap. I see it this way: People will lose it the way they earned it and even faster.

All the paper money will get evaporated like the paper stock money.

I think my fellow citizens in India should worry about:
--saving their jobs, especially ones that were created in the last 5 years in finance, IT or as a spillover of these fields like Real Estate jobs in banking/loans, appraisals, dealers etc. and even people in hotel/travel industry as a big slowdown is coming.

This slowdown is here to stay for a good 6-8 years before the world economy can again pick up.

Western countries have given money of their middle class/low income people to thr rich/upper middle class of the poor countries like India. That is getting over now.

Face the reality, get ready for reality. If you like capitalism, why fear layoffs like Jet Airways was doing.

People should stop spending on wasteful things and completely stop using the money they never had like like on credit cards etc.

Observer said...

Black money was present in the nineties also. So why the boom and bust in property prices then, which came down by almost 40%? Can Abdulla or Shailesh answer this question? I think people are wildly extrapolating unrelated issues to justify property prices staying high. That will not work.

Anonymous said...

The fallacy of “GROWTH & PROSPERITY” (caused by FII and Finance Minister-Government taking credit for the same) which led to real estate boom well explained in simple article http://www.rediff.com/money/2008/oct/13bcrisis10.htm. by M R Venkatesh

- “one-third of the aggregate FII flow of the past fifteen years was just in one year. No wonder India witnessed an unprecedented boom in her stock markets during 2007-08.”

- “What makes the FII flow driven stock market rise as a yardstick of economic growth extremely risky in the Indian context is that according to experts less than three percent of the national household savings find their way into the stock market.”

- “such inflows set the stock markets on a dose of high octane. The boom in stock markets translated into a real estate boom. And when the excess liquidity flowed into the potato markets, government realised, it was not a case of potato boom but classical inflation where too much money chased too little goods!”

mallapottell said...

Real estate prices in bubble zone

The question that bothers a lot of prospective home buyers is whether they will miss the bus if they wait any further. However, the right question should be: Can I afford to buy a house today? Even if you are one of those blessed ones, the thought should be: Is it a fair price for the house? Your house might not be an investment, but does that mean you should pay any price for it?

The prices currently being quoted are simply atrocious. From a time, not too long ago, when people talked about loans of Rs 10 lakh to Rs 50 lakh, today the average loan size is substantially higher.

A simple 2-bedroom house in Malad can cost up to Rs 1.2 crore (including stamp duty and registration charges). This is the price that sellers expect, but this does not mean they are actually getting it. The cost of a similar flat 4 years ago was close to Rs 30 lakh.

The entire real estate boom took off in 2003 on the back of very low interest rates and low prices. However, the situation has changed now with realty prices going up 3-4 times, while interest rates are 60-70% higher. Incomes have certainly not grown four-fold in the past four years. Today, even if you are earning Rs 25 lakh annually, it is extremely difficult to buy a 2-bedroom house in the suburbs.

Even if you make a down payment of Rs 20 lakh, you will still end up borrowing close to Rs 1 crore. This would mean an EMI of close to Rs 1 lakh per month. So, after tax and EMIs, a person with Rs 25 lakh gross income will be left with just Rs 5-6 lakh as disposable income for lifestyle and living expenses. Once you take EPF contributions, you will just be left with Rs 4 lakh annually.

Lifestyle inflation (driving a car, visiting malls, eating out & entertainment), which is much higher than normal living expenses, eats up a significant portion of one’s income. Hence, it is just not possible even for someone earning Rs 30 lakh to service an EMI of Rs 1 lakh every month. Even if you do manage to do it, you will be left with no savings.

So, what should you do? Should you buy a house today? Real estate prices, though location-specific, have been witnessing a slowdown in demand. One might argue that luxury accommodations might not be impacted by this. However, there is a visible slowdown in real estate and prices are down on an average by 10-15% in places like Mumbai.

Unlike the stock market, there is no index for the real estate market and no price-discovery mechanism. In fact, the price discovery is very subjective and identical properties in the same building can go for two different prices.

If one had a real estate index, it would have had given details on number of transactions. Thus, enabling one to witness the slowdown that has started last year itself.

There have been several reports of builders borrowing at very high interest rates and some defaulting on their interest payouts. In fact, real estate stocks have been hammered the most and the basic assumptions on which their landbanks were valued are a matter of debate now.

I believe the stock market here is one leg ahead of the realty market and there is a lot more pain to come in the residential segment. One is also witnessing a lot of projects being delayed and redevelopment schemes being postponed.

Speculators have started to exit since late last year and investors trying to exit now are unable to get the price they could dictate some time back. With rising interest rates, demand should come down. However, location still rules and some premium commercial property could still fetch good money.

Not that it is any indicator, but if you look at the price-to-rent ratio (PR Ratio) similar to PE ratio, one can clearly see that the prices are in the bubble territory.

Since there are no margin calls in the realty space, the holding capacity of an investment can be substantially higher than a leveraged exposure in stock market, where margin calls have to be attended immediately. Hence, real estate prices generally do not fall drastically.

Small builders are cash-starved and are not getting into new projects. This is the case with mid-size developers. However, big builders with access to IPO funds and PE funds can wait for an extended period of time before cutting prices.

One can clearly see that the discounts offered in the form of stamp duty waivers or furnishings are nothing but a desperate attempt to get end-users.

Like in the stock market, it pays to be patient in the real estate market too. For realty market to sustain itself, there should be a steady inflow of end-users. Speculators and investors can only take it to a certain level. End-users can only come when prices are affordable and for that at least 30% correction is a must.

If you have been eyeing a property for some time, don’t just think twice, think several times before you sign on the dotted line. Be patient for the next 12-18 months and you are bound to come out as a winner.

sanjay said...

Hi mallapottell,

I believe you dont have a active mortage in india right now...

The actual increase in the interest rates is 80 % compared to the 2006 rates. The interest rates bottomed out in 2006...

One thing i still feel happy for the builders is if the end users are paying so high emi's these young people with very high disposable incomes would have shown off their wealth before common man and created social issues!!!

As buffet agreed its very tough for a normal man not to purchase a house/stock when there was mad rush for real estate/stock from people around him... Else everyone will be like buffet...

May be the law of averages is playing its role... People jumping companies once in 6 months out of greed to get more money... This excess money got in to the hands of builders... A small part actually helped even the labourers get more money for the daily wage...

Anonymous said...

This whole thing makes no financial sense. Why do people have to buy when they can rent for cheap: the reason people think is RE prices never go down, or buy now or never, or get low interest rates and just worry about the EMI that they can afford even if the rates are interest only, or the overall Indian Society forces people to buy their own house and feel good in family and society: ahhh my son just bought a house or I have 3 houses or the boy has his own house where my daughter is getting married. BUT people forget that the house belongs to the bank unless it is paid off and when prices don't go up there is no sense in buying.

Financial sense: The Rent of the property one can get should be around the mortgage a person pays to the bank. This is analogical to the P/E ratio in the stock market.
If rent is Rs. 20,000 the mortgage should not be more than Rs. 25,000.

My rough way to calculate the price of property is 150xMonthly rent. If the rent is 20K, the price should be 150x20,000 which equals to Rs. 30 lacs as the price of the property. In a high priced market one can pay even 35 lacs maximum. But any amount more than 35 lacs makes no financial sense.

Naive stupid Indians are just losing their hard earned money to these greedy banks and philosophy of the Finance ministry. They are looting people in open and people are also enjoying it.

If the house is worth 90 lacs, one should be able to rent it easily at Rs. 60,000 per month. If not, the price should be lowered based on the rents in that area.

--

mallapottell said...

Mumbai market is still holding on. How long it can continue to do so, is anybody's guess. Real Estate agents are quoting 10,000-12,000 rs per sq.ft in malad west. What is amazing is the reality of the present economic climate is not grasped by the builders/resellers. They are all hoping for a miracle.
My sdvise to all prospective home buyers is - wait . Situation may drastically start changing from dec 08 onwards

mallapottell said...

sanjay,

I don't have a mortgage and I don't own a apartment in Mumbai. I am living in a prime area called Marine Drive. I inherited this from my parents. The place is very old but spacious (about 3000 sq.ft carpet area ) and the rent is very low. I was offered a huge amount by my landlord to vacate, but shitty rat hole of about 1000sq. ft in suburban bandra costs 3 crores + maintenance which could be a few thousands.Compared to my present locality, bandra is a slum. Now I have decided no matter the amount of money offered , I am going to stay put.

Anonymous said...

First of thanks for this blog, it is very informative and has good information.
I was planning to buy a flat of 1900sqft in Lucknow prime area (mall avenue) which is being offered by the builder for total 60Lacs including 20lac in black. Based on the current market I initially thought it was high, but now I believe that more firmly, due to the market change. Based on the rent x 150 formula - the rent should be 40k/month, which is impossible in Lucknow. Lucknow has recently seen a huge upswing in the real estate market, even though market is slowing down but the real estate builders/developers haven't yet started to reduce the prices yet.

Vik said...

I would just give a lowball offer to the builder and see if he bites. If he does'nt wait for another month. If the property is still on the market, none has offered him is asking price. Cash is king and a 10% return in an Fixed deposit is not a bad investment. Specially when the market has collapsed and people have suddenly become poor