Monday, December 29, 2008

Outlook money article on the real estate meltdown

A comprehensive article on the state of the real estate industry vindicates what people on this blog have been saying all along. Prices have to fall in line with affordability for buyers to bite. Those who leverage beyond their means will get wiped out. Speculate and Die is the mantra of real estate. Right now the black money operators have been swindeled by the construction companies who have promised astronomical profits but now are facing wipeouts. Unfortunately no one will shed tears for these undeserving and corrupt hooligans.
Wait! Real Estate Meltdown Ahead

“Do deewane shehar mein, raat mein yaa dopahar mein,

Aabodana dhoondhte hain, ek aashiyana dhoondhte hain...”

These lines from the 1977 classic Hindi film Gharonda would, in brief, encapsulate the struggles that most people go through while buying a home, especially so in the last 2-3 years. Residential property prices crashed in the mid-1990s, and it took till 2002-03 for them to start rising again. When they did, however, the progress was rapid. Within a short span of time, the prices had risen so much that the budget buyer, who comprises the bulk of the market, was left out in the cold.

This would possibly have continued had real estate developers not been overtaken by international events of a scale that they could not anticipate. The US sub-prime crisis triggered recessionary forces globally. That, in turn, crashed volumes in the Indian property market to a trickle. “Going forward, the market will remain slow and transaction volumes will remain low,” says Anshuman Magazine, chairman and managing director, CB Richard Ellis South Asia, a realty consulting firm.

For homebuyers though, things are getting better. A correction in property prices is already underway. In the following pages, we try to figure out what you should do if you are in the market to buy or sell, and how to arrive at a reasonable price, give or take a bit, at which to strike a deal.

34 comments:

Anonymous said...

Thank you Vik for the article. "Who, then, was buying? In most of the recent projects, more than 80 per cent were speculators who wanted to exit in 6-12 months,” says Vineet Singh, business head, www.99acres.com.

Now the time has come for the greedy speculators to pay the price Realestate: No more an attractive investment

Rags to riches’ and ‘to rags again’ — this is the current state of the real estate industry.

Anonymous said...

Decoupling may paint rosy picture about the Indian economy rise & strong GDP.
But it is not going to help real estate any way.
Who are the major buyers for real estate? IT/ITS, BPO & service industry. When worlds developed economies are facing trouble, IT industry also has missed it’s target.[refer Nascom comment] . Currently Job cut & salary cut is the only happening thing in IT.
When there is no job, why people want to migrate to Banglore? If people will not migrate, who will buy the costly real estates?
As per the majority of US economist, the current crisis will reach to bottom in 2nd Quarter of 2009, then it will remain stagnant till year end, then gradual recovery will start in 1st or 2nd quarter of 2010. As recovery will be slow it will take some more time to reach to it’s normal level. As per Montek Sing[head of India’s Planning commission] it will take 18 months to improve the Indian economy. IMF also has downgraded the world economic outlook for 2009.
NOTE: 2007 was the top of economic boom, so that price level is still not in near term.

The CREDAI, price information said that Ad-Karnatak, there is no restriction on advertisement as there is difference between dream & fact. To know fact about real estate prices you have to visit real estate companies and then negotiate the price, in 3/4 setting you will get the 20-30% discounted price.

So guys let it fall then only pick up, minimum 50% price cut is guaranty.

Vulture.

Shailesh said...

My family has lot of connection in Construction industry in Mumbai. To every insider, RE downturn is well known fact. This time the price rise was much higher than in early 90's, hence everyone is worried even more.

Anonymous said...

@Vulture,

I think the fact that India is going to continue experiencing strong GDP growth and Indian IT will have a rosy future does not have any connection with the Real Estate downturn in the future.

In 1998 upto 2000, the world experienced a dot com boom, y2k and a surge in outsourcing. IT professionals were making tons of money even then. Yet, the real estate prices were stable. Similarly if the IT industry starts booming again in 2010 it would not prevent the decline you will see in 2009.

Like Shailesh says, the prices were driven unrealistically upwards this time around. This was not due to any sharp demand as such, it was driven by a concerted strategy with the connivance of various players and speculators. With all such ponzi schemes the bubble burst has to come.

Since it went up so fantastically its going to have a spectacular fall as well. When ultimately the realization will sink in that realty price fall is imminent, all of these jokers will fall over one another to quickly unload their "assets". You will see an unbelievable price decline...this is assured.

Anonymous said...

This is the co-relation,
Developed Economy<=>IT Industry<=>Real Estate

How many domestic IT projects are running? Less than 10%, it means the strong Indian economy is not helping IT industry in any way.

Where are the major real estate projects have started? Based on a survey, near to IT/ITS industry. In fact lot of big projects has acquired land under sez, where they will build 20% office space & 80% residential space.
 Refer the research report marketed by Investment banks to PE,Hedge fund investors, which clearly mention the housing, office space demand due to IT.
 In Pune, there are 4 mega town ship projects, out of this 3 projects are in or near to SEZ unit.
 Refer any advertisement of housing, it will provide the distance information between major IT companies & the project location.

When GDP is so good(7%) why there is economic slump?
GDP = Per Capita Income*Population.
As Population factor is higher, GDP is strong. But the low per capita income do not allow to buy asset.

Agree, this explain RE boom in Bangalore, Pune, Chennai, NCR. For other region similar analysis can be provided.

IT industry will not boom in 2010 like 2007, refer the economic outlook. 2010 is slow recovery it means your variable pay cut may get restore by 5-10%.

In 98-00 the PE investment was below $1bn, in 2007 the PE investment was $14bn, out of this RE was the most preferred investment destination & this investment has given 30-40% return to foreign investors. This explains the exorbitant price rise in housing.
For 2008, PE investment is $9.2bn which is incurring –ve return, which shows the pull on speculators.
Agree, supply outstrips demand & speculation is the reason for price rise. The correlation of IT is to explain the largest class of RE buyer & it's impact on housing.

So guys let it fall then only pick up, minimum 50% price cut is guaranty.

Vulture.

Eagle said...

VULTURE'S FAMOUS SLOGAN
'So guys let it fall then only pick up, minimum 50% price cut is guaranty'. What a prediction!!!

There is a price correction going on which is within 10-20% bracket. Once the market gets stabilized, the appreciation in prices will be in par with inflation. My advise to potential home buyers is to bargain hard and buy now.

Anonymous said...

It's law of supply and demand starting to unravel. For last 5 decades, home affordability existsted for 5-10% of population reducing now to barely 2%. Common man of India, which is 90% still makes 12 lacks per year or less. for example, prime minister of india makes 12 lacks per year. With banks cutting down on loan, Prices of 12 * 3 = 36 lacks is more resonable for aam admi to get a loan as well from bank. Anything above that is purely bubble as per bank. Now even the house buying is not affordaple to our Prime minister, then the rest of the country, aam admi will take long time to dream of house affordability, may be 2020.

Anonymous said...

Thank you anon@12:46 PM for the caveat "Once the market get stabilised".

Which year the markets will get stabilized in? ..2010, 2011 or 2012 considering the next bubbles i.e. credit card and commercial real estate loans on the horizon?


Economic Meltdown: The Oncoming Trillion Dollar Credit Card Debt Tsunami

"While many eyes are focusing on the housing meltdown and its hugely negative effect on an economy clearly moving into recession, few are paying attention to the next bubble expected to burst: credit cards. Combined with the subprime losses, such a credit card nightmare has the potential, experts say, of bringing down the entire financial system and global economy."

Next Tsunami To Hit Will Be The Commercial Real Estate Market

"Barrack predict a “refinancing crisis” in the next three years since plenty of CMBS and CDOs mature in 2010 and 2011"

There has been a lot of discussion (media publicity) about the US home buyers defaulting on home loans ( sub-prime, near prime and now prime) and consequently Indian IT/ITES/BPO companies having started dreaming about the prospective growth in Merger/Acquisition business. Do they expect that in the face of more sever financial crisis (which has spread from BFSI segments to Manufacturing & Retail sectors) and reduced consumer spending, the US companies will liquidate the most valuable asset i.e. cash on expanding the business?
It is unfortunate but true that the current crisis is just the beginning of the end and it is just a matter of time before the IT bubble also gets burst.

Prospective buyers please wait until the home prices crash by minimum 50% as suggested by the anon @5:27 PM

Anonymous said...

Anon@1:45PM,

You have hit the nail on the head. The first article on credit cards was a very good read. I personally abhor and eschew credit cards preferring to pay by cash. But I know for sure that a majority (who knows but maybe 75% of the users) are going to default and get entrapped in a horrific plastic jail. This will happen to India too.
About Commercial real estate thats the last show waiting to drop and when it does after the subprime, the credit card crisis...the tsunami could deluge the once might US. It might be the last knell...There are a bunch of exotic instruments like CDS (credit default swap) which could cause a global inundation if they come through too. Pretty scary times.

I think the Indian real estate industry has also been unrealistic and I remember reading articles after repeated articles from Deepak Parekh some two years back(2006) warning about the bubble and holding out that a correction is imminent. That was 2 years back prices have gone up by almost a 1000% after that...So imagine what happens to the IT consumer who has been merrily buying priced-to-the-sky houses just because rates were down and merrily using his credit cards. Builders merrily buying land banks, building hundreds of houses and commercial real estate too!! A carnage awaits India too..and although there is a lag of a year or two..2009 could be particularly brutal.

Anonymous said...

No matter who says what, this time the bubble is real and the RE prices are going to fall upto 70%. It will take a few years but no force on this earth can stop the inevitable. the Govt. can only slow the decline process but not stop it.

So, future buyers be careful as prices will go down if you buy today. I would say wait till 2011 till you see some good prices. A 1 crore house in Delhi today would be worth 30 lacs after the games in 2010 are over in Delhi.

Anonymous said...

Well, I would suggest readers to worry about their jobs and source of income rather than houses. This time there will be major layoffs and the liquidity will evaporate from the market. No loans and reduced salaries.

Massive downturn is coming and reality will hit brains of Indian people soon. All the coolie jobs in IT will go down and all the sweet dreams will stay dreams.

1 CR will be equal to 50 Lacs soon. I think Indian people are way drunk to think 1CR is a small amount.

Anonymous said...

Vik,

Wishing you a very happy new year 2009. Take the resolution to post to good news on RE also

Abdulla

Anonymous said...

Please read the title of the blog. "Good news" for RE is lower prices for RE as most of the visitors here are buyers, who would like to get value for money.

Anonymous said...

There is very well planned (and well funded) Media campaign in favor to buy the property and glorifying articles on how Real estate is still good investment. Some media houses especially most corrupt and well know media house Times group is doing. See for example...there was one article on Assocham recommending special loan to increase from 20L existing limit to 40L -
Raise priority sector home loan limit to Rs 40 lakh: Assocham


There are total 19 comments from readers 4 on first day and 15 on 2nd day i.e. on Dec 10th against these planned tactics and to my surprise there no comments reported after Dec 10th...literally no comments. this is interesting. and this is not first time. I have observed many times
Times group is well funded by these builders lobby and their avt income..articles such as religios issues, bollywood/moview reviews quickly appear with no moderations but such burning issues for thousands of people are appearing but being pulled down with such tactics for few reasons I understand -

- TOI and ET don't want such articles (which might lead to hundreds of anger comments from to be in most commented section/most read section and most emailed section...

- they literally suppress such comments going against these lobby by so called moderation policy

- this media house can't afford to loose this consistant income from these notorious sucking groups
Vik,
Thanks for making this blog available..
Dear readers,
lets unite and spread this message and this blog across all potential home buyers...

Anonymous said...

People thinking about 50% crash in real estate prices are idiots. I agree world is in recession and things are not good but that's not the end of the world.


DO NOT EXPECT 50% FALL, EXPECT 20-30% FALL IN METRO AREAS and 30-40% FALL IN NEW TOWN SHIPS far away or suburban areas.

People still need to eat, entertain and travel and IT companies are NOT going to CLOSE THEIR SHOPS completely.

I agree there will be few layoffs and prices will fall but they won't fall 50%,

Example:
1 CR. HOME will not be available for Rs.30 lakhs in 2010 as some posters are suggesting. 60-70 Lakhs prices target will be more appropriate (40%).

INDIAN HOUSING INDUSTRY IS NOT LIKE UNITED STATES AND DEVELOPED NATIONS HOUSING INDUSTRY.

Please let me explain why:

1) Indian's population is ever growing, its growing at the rate of 2% per annum. That will make our population 2 BILLIONS by 2040. We need to build housing for all these 900 million people whom we are going to add in our population in next 30 years.

2) Due to high number of population and educated population all educated youth's will prefer to stay in metro area's in good housing complexes. (No wonder why everyone wants to stay in metros like Mumbai and Delhi) in India.

3) Unlike United States real state Indian housing industry contains HUGE CASH MONEY mostly BLACK MONEY.

I have seen many people investing in real state to park their cash which they don't want to show it to government to save taxes.

These people who have bought houses on CASH will NOT SELL THEIR HOMES AT 50-60% LOW PRICES because they don't know what to do with that money hence they have invested it in houses.

I AGREE that current prices are high and must come low to become affordable for common man but do not expect prices to fall more then 30-40% or you will end up waiting and waiting and waiting.

For example, If you wanted to buy 1 CR. home in Jan 2008 and if you are getting that home for 65-75 lakhs and if YOU CAN AFFORD i say hit the nail and block the deal.

Dont wait for prices to fall to 50 lakhs or something, it MAY NOT HAPPEN.

Discloser: I am FLAT owner and wanted to upgrade to better location and also waiting for prices to fall, but could believe all mis information some people are spreading here about price crashes. I am also working with institutional investor firm and trust me world is not coming to end.

DO NOT EXPECT 50% FALL, EXPECT 20-30% FALL IN METRO AREAS and 30-40% FALL IN NEW TOWNSHIPS or subrban areas.

Of course you can come here and bitch and speculate or whatever if you don't have money and can't afford to buy home just like me :)

- Jay.

Abdulla, bag ja, teri yah par nahi chalegi. HAHA.

Anonymous said...

My dear Jay,
Everyone said the same about stock market and it is more than 50% down now and will go down further this year.

If you need to buy, please go ahead and catch the falling knife at 30% drop. Prices have to adjust with salaries and affordability.
From where I'm seeing, a drop of at least 60-70% is inevitable. Just it can be prolonged to to govt. intervention but declines cannot be stopped.

Anonymous said...

Hey Jay - Correction on the population figures....India could touch 1.5 Billion by 2050 (not 2 Billion). Also the replacement rate is declining...so the explosion will abate sometime in the future....due to an amalgam of reasons...some of it will not be very positive, But thats a seperate discussion. At 1.2 Billion people we can barely feed ourselves. I wonder who things India will become rich enough to own their homes. Life will get tougher and crime rates will rise..so will inflation and other issues. Its true that India will be increasingly Urban. But that doesnt mean....that there will be demand for housing the way Developers are projecting it.

I just surveyed a few properties at Thane and Suburbs of Mumbai - the sales people of developers are getting desprate. A property going for Rs.7K psf exactly a yaer back has hit Rs.5500psf....without even negotiating....I reckon there is more to go.

Anonymous said...

Mr Jay, your information about the housing demand is nothing but the wall st. investment banker’s broacher. Guys search for BRIC report & you will get the same calculations. This report is nothing but, how the developing economies becoming developed economy & what kind of investment opportunities present in BRIC.
 The time horizon of the report is 30/40 years.
 But In short run it is not true.

Why real estate prices went so high since 2005? Do you wan to say that population surge in last 3years? OR suddenly the productivity went such a high level?

There are two speculators for real estate prices 1) End buyers (HNI) 2) FDI fund
What is the FDI route?
Foreign Investors => PE Fund => Real estate Projects.
What is the return on PE fund? It was 30-40% in 2006, 2007.
So the new house price = cost + 40%(for PE) + 25%(for RE companies)
It means for 50lakh house the 20lakh for PE & 12.5Lakh for RE & 17.5lakh is the cost.
You can tally the cost figure considering the land+ labors + material, it will match.

As the lock in period for PE investment is 3years, the prices are falling gradually.
Since 2004 to 2007 the PE investment increased 14 times. Since 2008 it is showing the declining trend due to –ve return & it will become ugly in 2010 cause the 2007’s $14 bn will mature the lock in period of 3years with –ve return, which will cause more redemption pressure on PE in 2010.

So guys let it fall then only pick up, minimum 50% price cut is guaranty.

Vulture.

Anonymous said...

Vulture,
The way things are 50% price fall looks very low, I think it will fall to more like 60-70% in many areas. Alraedy without any negotiation or anything, properties in Thane where the builders were arrogantly quoting for Rs. 6000/- psf (arrogantly because they used to drive away potential customers saying "lene ka hai to lo, time pass mat karo, chalo bolo") are now being displayed on large hoardings at Rs. 3600/- on READY POSSESSION basis, at such an early stage of the down cycle. BTW the same propert was available in 2004 (booking rate at 1800/- psf).What has changed so much in 3 years that the rate should even be 3600/- today (a rise of 100%)? Nothing. Hence I think basically it has nothing to with percentage corrections, prices will come down to 2003 levels or even lower depending on the capacity of the builder lobby and banks to hold on.
BTW all of those who are harping on the black money factor, in all of Thane in the newly developed areas, most flats have been bought by salaried middle class people (those who take loans) with 100% cheque payment all white. Only black component could be the covered parking slots that were sold for atrocious amounts. Black money may have been the one financing the builders, but it was certainly not a factor on the buyers end.

Anonymous said...

I think the black money would be lost the way it was earned unethically by stealing from someone. I don't understand what is the mentality of people with black money as they know it is stealing money and their conscience is fine with STEALING. What would they teach their children that go out and steal like your father did.

As regards to RE, with US going down India will see massive liquidity crisis. RE has to go down to 1998-99 levels i.e. at least 70-80% drops.

In US also people never believed at the peak that prices could go down by 50% and now they are scrambling to get their RE sold after close to 50-60% drops in many areas.

It takes a while for masses to get out of denial mode as they cling to people who speak the same trash about RE getting better in a few months or next year kind os things.

As regards to population, US has more than 35 million illegal immigrants. Their population has also grown. I think both US and India has supply of houses for another decade and no new construction is needed. The more they build new, the more the prices will fall down as the builders will keep adding to the unsold inventory.

sabbalseshu said...

Please stop posting false propaganda under the guise of 'Anonymous'. As a real estate professional, I confidently say that the market has stabilized and expecting a further drop in prices in nothing but foolishness. The marker does not depend on salaried people. The salaried people whatever position they are holding are just underdogs to the business community. If people loose jobs doesn't mean that the market is going to collapse. There are plenty of people who can afford to buy apartments without mortgage or loans.

Be realistic and buy if you can afford. Dont believe in doomsday prophets.

Vinay said...

sabbalseshu, just answer my simple questions,

if salaried people are not important, and they are under dogs,

1) Why builders are crowded near IT hubs, SEZ's to build residential property?
2)Why RE lobby is urging banks to cut the interest rates(I mean home loan rates)?

Shivaji said...

A link to an interesting article on Mumbai real estate


http://www.expressindia.com/latest-news/year-when-slowdown-burst-the-real-estate-bubble/404346/


Happy New Year

Anonymous said...

people,

The guy who is telling about the advertisement where prices are shown as rs.3600/- is from lodha group. Previously there rate was Rs.4200 and not Rs.6000/- as claimed by poster here. If you want to show facts then please show it properly, do not try to spread mis information.

I have been saying this again and again, property prices will not fall more then 25-30% in cities like mumbai, delhi, thane and will not fall more then 30-40% in cities like pune etc. from jan 2008 prices.

Example
Thane price was Rs.1600 in Feb 2000 and Rs.2300 in April 2003 thats about 10% price increase each year. If you consider that price increase over years prices should go around 3000-3600 which is little higher then current price which is already corrected by 20-25% from jan 2008 prices. How much you are expecting it to go down? 60%-70%? (from rs.4500 to rs.1800-Rs.1600)????

Are you joking?, my friend is the builder and he claims cost of construction has gone up from Rs.800/- sq.ft. to rs.1300/- sq.ft. for lower grade kind of construction and cost of construction for builders like hiranandani and lodha group is around rs.1500/- per.sq.ft.

Considering the prices at which they have aquired land banks they need at least rs.3000 / sq.f.t prices to break even. And what about the profits for coming years, why do you expect them to sell you flats for prices of lan in 2000? because of slump?

People 30%-35% drop in jan 2008 prices will be good buying approtunaty, if you can afford to buy at that prices, i say struck the deal do not wait for prices to drop 50% from jan 2008 prices because thats not going to happen unless there is war or something.


So in 2003 prices in bandra was about Rs.8000 sq.ft. are you telling me that i am going to get flat in bandra for rs.8000 sq.ft in 2010?

If thats the case i will be buying 2 apt. and not 1. But i know this is never going to happen unless there is war or something because economy is not that bad and layoffs are not yet coming even after big failures and cost cutting in united states.

-Jay

Anonymous said...

Abdulla and Sabbalseshu have succeeded in brainwashing Jay.

Anonymous said...

Hey Jay, Good calculations. I can conclude from this that if you are in the RE business today then you are doomed. Why create a product that nobody is going to buy even at cost price (As you say)! It's stupid isn't it. No margins, nothing. Why don't the builders put their money in a bank to earn 10% and stay happily :)

Since the above may not be true, its all the bluff game that is still going on. No margins, rock-bottom, cost-price, buy-back, etc. If RE guys have invested in a land at higher prices (Just as people put in money at Sensex=21K), let them pay the price and book losses.

Amit kulkarni said...

Just today, I checked with various agents in malad(w) and visited some builders too, but every one is quoting a price around 7000/ sq.ft for built up area. This is way too more than I can afford. I spoke to several watchmen who told me that the occupancy in these building is just 20%. The owners just park their cars in the parking lot but dont live there. This is baffling.

3 years back the rates were 50% than today and these flats will not be sold unless they cut the prices by 50% or more.

Can some real estate professional shed some light on what is happening.

Anonymous said...

Cement makers start shutting down plants

http://www.dnaindia.com/report.asp?newsid=1218804

Does this mean that the construction boom is over ???

Anonymous said...

@Amit kulkarni

The apartment you are referring to belong to investors. You have to wait little longer for these people to realise that the boom days are over and they will start selling these assets. Once this happens, the prices will nose dive.

A relative of mine has 3 apartments near mind space and he is nearly bankrupt.He has lost heavily in stock market and owes money to banks etc. How long do you think before he tries to liquidate his assets as he has to eat like everybody else. There are many people like him who are paper millionaires but on the brink of bankruptcy.

The real cash will happen soon. may be a year or 18 months. Until then live in a rental place and youbuy when the apartments are really affordable.

Anonymous said...

the prices will fall to pre 2003 level. period

Anonymous said...

RE is made a scapegoat for global economic crisis and India has to face a world order/ consipiracy.

RE crisis ( 90% fall) will wipe out black money for ever.

Anonymous said...

I hear that bigger players like Raheja Group are now backing off planned projects. Moreover the current govt is pumping money in market to avert real estate crash before the General Elections. Real Estate prices will crash like never seen before in India.
-Vikas Yadav
Accenture/Bestbuy

sansei said...

Sansei.

Me thinks there is enough black money still idling and being generated. Its holding power of these heavily profitted builders as well as RE investors verses the buying trigger.

The crisis is in US, India has huge population with huge black money generation capability. + genuine demand. set aside IT people for the moment.

It is agreed 200-300% upsurge in RE on mere economy growth hormones in short period. But reverse might not be true.

Rural incomes from land sale i.e blackmoney is indirectly contributing to RE balloon.

Credit card is with miniscule but highly visible population. Crash effect will be more in media than real.

Surely prices will fall but max 50% is the limit. It would be 30-50% realistically.

No need to time the market. You will get properties which were overleveraged at these crash prices.

Better to pay 10 % more than try to be greedy and time out.Dont wait for crash price because then in that scenario u would start looking for roti and kapda rather than a shelter.

Better start hunting for property and bargain hard using competition, than wait for a crash.
u money might become useless in a crahed economy.

Sansei..

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