Tuesday, November 25, 2008

The Sound Of Crashing Real Estate (Goldman Sachs)

Ex_Realtor,
You mentioned that you were recently laid off from a big construction house. What is your experience like for working for these folks ? What are the inside secrets which you could share for the benefit of all readers.
Vik.
Goldman Sachs
India: The Sound Of Crashing Real Estate India's property market is poised for a deep correction. This will bring on sizeable knock down effects, with India GDP expect to slide down to a growth of 5.8 per cent in FY10. We estimate prices may need to fall by up to 30% from current levels, with significant knock on effects on the economy.

In particular, it will slow construction activity, which directly accounts for 7.3% of GDP, but has sector linkages which we estimate to be 14% of GDP.
After India's last housing bust in 1996, real property prices fell some 40% over three years, negatively affecting consumption and investment demand.

Mitigating factors-favorable demographics, low mortgage penetration, ongoing infrastructure demand.
India's property market is poised for a deep correction. Property prices have risen dramatically over the past three years, supply exceeds demand in most geographies, and affordability lags prices. Our India Real Estate Team believes that residential property prices in some geographies may need to fall by up to 30% from current levels for affordability to catch up. As elsewhere globally, we think this will have negative effects on the economy.

The imminent slowdown in construction activity can potentially have a big impact on the economy. By using an input-output matrix, we estimate that although the sector directly accounts for 7.3% of GDP, its backward linkages in terms of the sector's usage of iron, steel, cement etc., and forward linkages to other sectors, impacts an estimated 14% of GDP.
Therefore, a slowdown in the construction sector can potentially have large knock-on effects on the economy.
From the demand side, a property downturn, we think, will have negative effects on consumption and investment. As housing forms the largest component of household wealth, consumer demand will be impacted. The fall in collateral will also hurt firms' balance sheets, increase their funding costs, hurt confidence, and reduce investment demand. However,
the impact on demand will be lower than in developed countries.

Lessons from previous housing busts suggest that they tend to be prolonged episodes with considerable macro consequences. After India's last housing bust in 1996, real property prices fell some 40% over three years, and did not recover to their previous peaks for a decade.

Consumption and investment demand were both negatively affected, and growth slowed from an average of 6.8% in the four years prior to the bust to 5.4% in the four years after it. Typically, housing busts in OECD countries have lasted six years with a 30% decline in prices and substantial negative implications for the economy.

Mitigating factors, such as India's favorable demographics, low mortgage penetration, falling interest rates, and ongoing infrastructure demand, in our view, will keep the property downturn from being protracted. However, we believe a sharp slowdown is imminent. We therefore remain negative on the real estate sector, and its supplier industries such as cement, iron, and steel, and reiterate our below consensus estimate of
5.8% GDP growth in FY10.

Safe Harbor Statement:
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations,
tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

13 comments:

Anonymous said...

I just find it ironical that a lot of this mess has been caused by idiots sitting in Goldman Sachs, Morgan Stanley, JP Morgan and other failed US institutions. And now they are coming up with their expert advice on Indian markets. I think they should just shut up and save their jobs as their savior Hank Paulson is himself going to be begging for a job after Jan20th.

What a bunch a losers. Indian market would correct by 70-80% which a common person like me can tell and I don't need a stamp from Goldman to make my prediction. I'm very glad that I didn't buy any property during the bubble period and I'm waiting to buy from banks distressed properties in a year ot two.

Mantra: When everyone is buying, you sell and when everyone is selling, you buy.

Shailesh said...

IT, auto sectors’ slowdown has Pune realtors changing tack to attract buyers

Pune: A slowdown in demand for houses across India has hit Pune hard, pulling down realty prices by about one-fifth, resulting in builders and developers lavishing discounts and gifts at buyers, mostly the industrial city’s software and auto sector professionals.

* Kubix Realties Pvt. Ltd is offering a 3 series BMW car priced at around Rs33 lakh or 2kg gold free on purchase of a Rs2.75 crore bungalow, equivalent to a 12% discount.
* Wadhwani Constructions is offering customers a Tata Indica car on purchase of a three-bedroom apartment and a Honda Activa scooter to buyers of a one-bedroom flat.
* Belvalkar Housing is offering customers a price guarantee designed to protect the buyer against huge fluctuations in the real estate market, guaranteed until possession two years from now. This essentially means that if the apartment is selling at a lower rate at the time of possession, the builder will pay the buyer the difference with interest.

Shailesh said...

Indian City Living Worse Than in Us Jails, Survey Reveals

There are few more forbidding environments than the American jail system. But it appears that urban life in India may be worse. The latest government figures reveal people in its cities live in just 60sq ft per person ? the minimum size required by US prisons.The figures reveal that the country's experience of grappling with urbanization has become increasingly unsuccessful. Although the landscape of Indian cities is becoming dotted with new apartment blocks and gated communities of white-washed mansions, these sit as small islands in seas of slums.

Economists have also begun to fret over how little of India's wealth is trickling down to the poor. According to the World Bank, the estimated number of poor in India tops 450 million or 41.6% of the population."In the past quarter century, the poverty rate has slowly declined by somewhat less than one percentage point a year," wrote Usha Tuteja in the Economic Times. "Clearly, India has not experienced the spectacular declines in poverty expected in an emerging economy with high growth."

I hope Manmohan Singh gets the message, or he will be out just like previous NDA govt.

Shailesh said...

No work... we can’t leave as wages unpaid for two weeks

NEW DELHI : Rajvanshi Rai, a carpenter at a construction site on the outskirts of the national capital, has been sitting idle in a dingy labour camp for the last five days because he has not been paid wages for the last two weeks. He, along with hundreds of migrant labourers at the camp in Kundli, is unaware of the financial crisis that has engulfed the economic world. All they know is that their contractor has told them to stop work because the builder has not paid him.

These are the first signs of a slowdown in India’s booming real-estate sector, one of the largest employment generators. And feeling the pinch are labourers from Bihar, West Bengal and Uttar Pradesh. “We don’t know what happened. The contractor told us that the builder has not paid him. There is no work now. We cannot leave because the contractor has not paid us wages for the last two weeks. Our money is stuck,” Rai says, puffing a bidi as others huddle nearby to listen to the radio commentary of the India-England Cricket match.

Ex Realtor said...

Modern day real estate company is a conglomerate of Promoters(builders), Investors, Politicians, Various government officials and Underworld dons. No real estate company can survive without the later three. The real suckers in this game are investors and victims are consumers.
The downturn in real estate prices triggered by the stock market crash is expected to continue until prices reach half from the present. The net losers in this game are solely the investors. The other three categories I mentioned earlier are unlikely to be affected much. The small time private builders may just vanish from the scene.
It is prudent to wait for the prices to stabilize than giving in to builder propaganda. My advise to people who want to own homes:
1. It is unwise to book/buy apartments that are not complete. Due to the present economic climate, the builder can indefinitely delay the completion. There is nothing one can do in this case and moving to court is futile as many of you are aware. Courts are more corrupt than the builders.
2. Before buying, do as much research as possible about the projects completed by the builder. Best source is approaching the civil engineers associated with the project. A sub standard construction may cost you dearly later.
3. Do not believe the stories the builder may tell you about the future development in the surrounding area where u plan to buy . This is normally concocted. All builders keep bogus plans that are for your eyes only and they won’t give you a copy
4. Have a independent lawyer to represent you. The lawyers recommended by the builder are one sided.

Anonymous said...

All the maneuvers of the IT companies are being unmasked.

Wipro prods 5000 engineers into BPO
http://www.dnaindia.com/report.asp?newsid=1209645
“An engineer who received the revised offer letter said, “Actually, we got selected for Wipro Technologies (the IT company) and we even received offer letters from them stating the cadre as that of a software engineer. But now they have betrayed us. They made us wait for nine months, only to get this shocking news. We could have applied to other companies if they had informed us of this before.”

“Wipro chief financial officer Suresh Senapaty had said the percentage of staff based in India will come down as more jobs are created in China and other developing countries “

The new recruits are being greeted with a rude shock while the oldies are being sent on pilgrimage (sabbatical for social work).

IT techies’ LUXORIOUS salary is a thing of a past for the fodder of an unsatiated hunger of greedy builders/banks.

Anonymous said...

See another cartel? in the free market Govt. is protecting relatives & friends, instead of passing price benefit to citizens. http://economictimes.indiatimes.com/Govt_imposes_5_per_cent_import_duty_on_steel/articleshow/3728880.cms

Last year we have already seen the Cement cartel. These are two more factors in addition to 4 factors mentioned by Ex Realtor.

How can we tackle with this vicious force? The answer is simple, you need a strategy, they want us to buy at exorbitant price but we will let them fall with their game plan then buy it at corrected price.

Look at the past, how prices sky rocketed.
http://money.cnn.com/magazines/fortune/fortune_archive/2006/07/10/8380919/index.htm
http://www.tribuneindia.com/2007/20070526/real1.htm

Now when global crisis has choked the throat of speculators, builders has started the trick to lure the buyers. If any builder will guaranty for buy back against price fluctuation ask for the following terms, in case you want return back the apartment.
-- To pledge his personal property which is 300 times of the cost of apartment as collateral.
-- 10.5% annual interest rate on the cost of apartment.

So guys let it fall then only pick up, minimum 50% price cut is Guaranty.
Warning: It’s a minimum 50%, it can go further down.

Vulure.

Anonymous said...

Broken link in above post.

http://money.cnn.com/magazines/fortune/fortune_archive
/2006/07/10/8380919/index.htm

Anonymous said...

well, i woudl just add one thing.. that duringa slowdon we normally make the mistake of buying too early i.e. we feel that it si the bottom wheereas it has long way to go.One shopuld avoid these common mistakes listed at http://www.indianpropertyreview.com/2008/11/common-mistakes-to-avoid-during-a-slowdown/

Hari Shankar

Anonymous said...

Property market will soon vanish.And the losers will be left holding the property.

A 50-60% correction is inevitable.

Anonymous said...

ICICI PRUDENTIAL and other ICICI group companies are short selling SBI shares in stock market just to make sure..
a)SBI shares fall more than ICICI, so people would look the other way over the genuine fall of ICICI.
b)People might think its bankex as a whole is falling rather than the weakness in one single bank,ICICI.
c) ICICI business is very weak and anymore drastic fall in the share price of it, will trigger a massive exodus of depositors from the bank to GOVT owned SBI. So a fall in the price of both will leave people confused.

But the reality is SBI is a strong bank and any attempts to tarnish it will not stick, cos the minute ICICI group companies stop short selling (massive selling without owning), SBI will stop falling. But ICICI will continue to fall as it has no support from smart investors. Remember a massive 70% of ICICI is owned by FII's and ADS holders. The reason for the fall of ICICI is nothing but these smart investors know ICICI cant hold on for long.

The point I am making is,ICICI was the bank in the forefront of disbursing loans to the property buyers. With the collapse of the bank in the coming months, realty market will be getting the last nail in the coffin.

Prakash Talreja.

Shailesh said...

Thoughts and Prayers with anyone affected in recent Terror attacks. Be Safe.

Shailesh said...

Banks turn lenient with home loan borrowers facing crunch