Wednesday, April 29, 2009

Rediff: Housing prices could fall 25% more

From http://business.rediff.com/report/2009/apr/29/perfin-housing-prices-could-fall-25-percent-more.htm

Property prices have been on a slow but steady decline over the past year-and- a-half. Experts predict that this trend will continue and one can expect a 20-25 per cent further drop in prices in the next year or so.

While interest rate cuts by banks have been comparatively faster in being implemented, largely through the consistent efforts of the Reserve Bank of India [Get Quote], the builder community has been reluctant to follow suit with ready price cuts, even when the uncomfortable truth remains that there is no choice in the matter.

Cutbacks and compromises

Though the initial interest rate cuts and a discounted interest rate for the initial year introduced by some banks resulted in a lot of loan transfers, new loans did not pick up pace on the expected lines.

Another fact that contributed to this factor is the prevalent grim mood of the job market. People are wary of taking on new debt liabilities while struggling to meet their existing commitments. Builders who had been concentrating on high income groups and premium housing needs are now stuck with incomplete projects and lack of funds.

The builders, sensing the buyer's mood, slowly started to relent and made attempts at slashing property prices. Prices have definitely started to slide in favour of the buyer. However, there have been several instances where there have been compromises over the square feet area of the house.

For example, balconies have disappeared from floor plan, 1,000 sq. ft homes are being converted to 850 or 900 sq. ft. in a bid to make space for more apartments in a block, 544 square feet, single bedroom apartments which had practically disappeared are making a come back!

So, there have been a lot of cutbacks from the offerings of several builders to enable slashing of prices and yet not make deep dents in their profit margins.

On the other hand, builders have also entered into tie-ups with banks to offer discounts in the former of special lower interest rates, waiving off the processing fee, slashing the down payment rates, et cetera apart from other discounts of 10-25 per cent on the actual property from their side.

Market reports are suggesting a slew of new launches announced have a price correction of nearly 30 per cent in and around Mumbai and Chennai.

What needs to be done?

As price cuts are now a visible reality for builders they need to make the most of the existing situation and identify new opportunities to counter the challenge of debt and losses they are currently facing due to the credit crunch in the present and the realty boom of the past.

A bit of innovation, some significant changes in outlook and proactive help from the government could pull them out of the current mess.

Innovation could be introduced in many ways. New building materials that are more cost effective could be used, for example use of prefabricated cement blocks can reduce cost by around 10-15 per cent.

A possible tie-up between CMDA (Chennai Metropolitan Development Authority) and private players is in the discussion stages and there is dire need for mass housing needs for lower and middle income groups, which can provide some relief for private players who are currently struggling to finish projects.

Recent statistics reports suggest that the urban population currently at 328 million is rapidly increasing and will touch 576 million in 2030.

This means there is going to be a significantly huge demand for housing. So builders can take heart in the volume of requirements and adapt their real estate strategy accordingly.

Builders are also expecting the government to pitch in and bring down stamp duty charges, taxes, etc to make price reductions more feasible.

A strategic approach to affordable housing

A methodical analysis of income profiles across sections should be matched with housing requirements. Depending on the percentage of population in a particular price segment, housing requirements need to be planned and accommodated. This can be possible only if the authorities and builder groups get together and formulate a plan of action based on surveys and recommendations.

As housing is a key subject during the current elections, things are being implemented at a faster pace. In fact, one such development in the right direction involves a task force set up by the housing ministry in Jan 2008, with HDFC [Get Quote] chairman Deepak Parekh in the lead.

The committee has come up with significant ideas like revamping of State housing boards, upward revision of FSI (Floor Space Index), making available land conducive for construction, etc. More such evaluations should be brought to the table for discussion and accordingly new plans should be devised and implemented to evolve from the current situation.

This is a time for review and change. The learning gathered from the past year-and-a-half should be the basis for a brand new start.

The stage is set for a complete change in the real estate scenario that is more 'real' and 'affordable' to enable everyone to own a home.

The author is Head of Content & Research at BankBazaar.com

14 comments:

Anonymous said...

The Indian IT companies are spreading the false propaganda of new recruitment. In fact the 2007-08 passed out who got the offer letter are yet to join the companies.

Tech Mahindra may use benched Satyam staffBhavana, BANGALORE, says: There are many students who still didn't get joining dates who passed out in 2008,and I am one of them.1 year got over and we are nowhere now.just waiting and waiting and waiting for the joining dates sir.
[28 Apr, 2009 1710hrs IST]

Hari, Faridabad, says: Sir.. wat about satyam 2008 freshers??? if satyam's bench strength will reduce drastically they might call us..
[28 Apr, 2009 1425hrs IST]

Unmesh Kapil, Mumbai, says: How TechM employees will be affected by this move? and what about campus picks still waiting for their joinig dates?
[28 Apr, 2009 1413hrs IST]

Rajat, kolkata, says: Sir TechMahindra is going to use bench employees of satyam but is there any news about the joining dates of TechMahindra freshers(2008 passo out) its like almost 1year they are waiting and still they dont have any idea whether the company will absorb them or not
[28 Apr, 2009 1321hrs IST]

jatin marwaha, chandigarh, says: what about the students of 2008 passout who were being hired in 2007 to join tech m and still waiting for there joining, i m one of them
[28 Apr, 2009 1044hrs IST]

shayna said...

Upward revision of the floor space index will see further drop in house prices as more units get built on a sq-ft.

Ref MUMBAI, I would be looking at the AIRPORT closely, as and when the decision is made to move and the airport is shut down (this could be over a 10yr horizon ) there will be frantic activity in the western suburbs to build huge towers peering into the sea off JUHU.

Most of the buildings in PARLA, S'CRUZ, JUHU and ANDHERI-w pvt owned. These owners will never let go the oppurtunity to increase the floor space and encash it, whatever be the price. This could have a lasting effect of house prices in MUMBAI, undoubtedly the supply side of the economics will be higher than the demand.

Anonymous said...

Though there are talks about green shoots, Fed is still not signaling about market bottoming. Today Paul Volcker suggested multi years for full recovery of US economy.
When world’s largest economies [Europe + US] are in deep trouble, with optimistic prediction India can only attain partial recovery.
Credit cycle of boom and bust [Marc Faber]
• The upswing usually starts with an opportunity - new markets, new technologies or some dramatic political change - and investors looking for good returns.
• It proceeds through the euphoria of rising prices, particularly of assets, while an expansion of credit inflates the bubble.
• In the manic phase, investors scramble to get out of money and into illiquid things such as stocks, commodities, real estate or tulip bulbs: 'a larger and larger group of people seeks to become rich without a real understanding of the processes involved'.
• Ultimately, the markets stop rising and people who have borrowed heavily find themselves overstretched. This is 'distress', which generates unexpected failures, followed by 'revulsion' or 'discredit'.
• The final phase is a self-feeding panic, where the bubble bursts. People of wealth and credit scramble to unload whatever they have bought at greater and greater losses, and cash becomes king.

“Economists said housing prices would probably continue to fall as Americans, worried about rising unemployment and the recession, put off big financial decisions like buying a home”.

http://www.nytimes.com/2009/04/29/
business/economy/29econ.html?_r=1&ref=business

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

Vulture.

Anonymous said...

Real Estate vs. Stock Investing


In real estate investing the BUY decision is the vital half of the equation, and in stock investing the SELL decision determines whether you win or lose.In real estate you need to know what price to pay, where to buy, and how to best finance a property.

In stock investing you can not get heavy financial leverage, but you have high liquidity and can sell quickly and easily for as little as $10 in commissions. Knowing how to invest in stocks requires that you learn the stock market game. In this game, you must know when to sell. So guys let it fall then only pick up, minimum 50% price cut is guarantee.

Vulture.

Anonymous said...

Above article URL:

http://stockinvesting101.net/
real-estate-vs-stock-investing/

Vulture.

Anonymous said...

@Vulture.7:19 PM

Thank you for the post. Well explained boom & burst cycle.

Vik said...

Its a long recovery cycle for average people. he stock market currently is a sentiment gauge and is being rigged by traders and Wall St. This rally will wind down in the dog days of summer unless we see hiring and real GDP growth numbers. Everything else is a mayajaal

Bharat said...

Today was a really wonderful day. We had news about -6.1% growth in GDP and the DOW started rallying as soon as the markets opened!!!

For some time there I thought, I have finally lost it and am unable to understand how markets behave. But the sharp volatility in the end and the news that almost all the banks have flunked the stress test reinforced the perception that the ^DJI is just being rigged by market insiders and maybe the PPT for the time being...So the technicals still indicate a steep fall in the offing, just wait and watch.

Similarly the Sensex is poised for a very steep fall, its just a matter of time. I agree with Vulture that RE does not have much to do with Stock Markets and the way one operates is very different in both markets.

RE will give a real mega fall...like someone said here - Humpty dumpt sat on a wall(rather a fence) and humpty dumpty is poised for a really big fall,
all the kings horses and all the kings men will not be able to put together humpty dumpty again...

For the uninitiated RE = humpty dumpty..

Anonymous said...

Read How Economic Times is involved inStock Market Frauds Times Group Scam in Stock Markets

Anonymous said...

Vulture, excellent points.

Agree totally that "In real estate investing the BUY decision is the vital half of the equation, and in stock investing the SELL decision determines whether you win or lose."

To go further, there is one similarity between the stock and RE markets. Regardless of market conditions, one can make money from both. There is always some stock which goes up when all else is going down.

I agree that this stock bounce is a bear market rally which will collapse. Unfortunately, I could not make any money from the 40% rise from the bottom. Now it is too late, time to sell.

I was expecting the bear market rally, but since the margin of risk was too high, I stayed out. Its identical to the rally of 1930 after the crash of 1929.

About RE, there are three main considerations (without leverage).

1. Buy price
2. Location
3. Segment and saturation

1. Prices will stay flat for 3 years. So one can wait for 1-1.5 years without much risk, if one is wanting to buy already built property

Problem is, maximum bump comes from new property. It is easy and cheap to buy new flat on construction linked plan without too much disruption in finances. New RE will come online 2-3 years later. So one has to anticipate 3 years in advance.

Problem of course is default risk by builder.

2. It is silly to buy in a location which will see over supply.

Ultimately, roads, metro and commercial area close by are essential for price of flat to appreciate. Otherwise it is a piece of concrete.

No point buying far away or where any number of flats can be built - thats why I dont like Indirapuram and NOIDA. Every flat piece of ground can potentially host 50 flats easily - there is no limit to how many such flats can be built in India, there is no dearth of land (except by govt. interference)

Just like researching a potential ten bagger, one has to research out a great location. I think it is easier to research RE than stocks.

3a. Luxury segment (2000 sf)is the most volatile. There, timing your sell is as important as timing your buy.

The right time to buy this segment was 2002-2003 when I had considered it. Did not buy because 20-25 Lakhs was too much money for me - and I never leverage. So I went for stocks which did rather well too.

2007-8 was right time to sell. Now people holding this segment cannot sell for at least 3-4 years, after which next bull run will start, it will be a good time to buy and time to sell will be 3-4 years after that. So anybody holding in this segment has to wait for 7-8 years to get decent, maybe even fantastic returns.

It is silly to buy this segment now - better wait for 2-3 years and buy.

3b. Middle class segment (1000 sf) is less volatile, more like an FMCG stock.

Problem is, it is less likely to give a significant upside than luxury.

There is likely to be oversupply of this segment after 3 years. Oversupply currently is almost reached in NOIDA and Faridabad.

I see this segment as a good hedge against inflation.

I think choosing a good location can give a good bump up vis-a-vis average flats in this segment. One must ensure that too much oversupply does not come up close by, which should be one of the considerations for location, along with metro and highway (and electricity and water).

After that it is luck - does your builder get liquidated, etc.

Still I am not 100% sure.

3c. Lower segment (~500 sf) is really a tenement or bachelor studio flat. Companies should make these in bulk and give out on rent if gove allows, rent can be really cheap and still company will make money. Unfortunately our govt is a bloody parasite that does not want our people to live decently.

We should be buying these REIT company stock on the market, not buy such flats individually and turn into rent collectors. Let someone else do it.

It is pathetic that in Mumbai people live in these tiny flats and spend a lifetime's savings on it as well.

Venkat

Anonymous said...

I am beginning to realise this is not a bear market rally. I strongly feel that this is the good time to invest in stocks.

Markets are looking upward and very soon you will see Nifty at 3800+. All the bear talk is great as long as we are not ignoring the changes happening in the market.

I know someone who is with Sharekhan at senior level. He told me the other day that it is good time to buy. Market in just a month’s time will touch 3400. My advise is to be neutral and see how the market is taking shape and then take a call.

I am not advising that the market will go up or down but be neutral when you make judgment, thing have changed now all over the world. We have almost completed 15 months of bear rally and this is the phase of consolidation.

Don’t get carried away by hard core bulls or bears because both could be dangerous. Make your own judgment and learn to be more flexible and as Bindas Bhai said don’t time the market be it shares or property.

Kindly do not discount what Bindas Bhai, Kapil and what Venkat are saying. Turnaround may be in the corner so please keep your mind open and look at the signals. What looks expensive today will look cheaper tomorrow when the bulls come in the market.

Atul

shayna said...

The foll article is from BOB PESTON's blog on the BBC. He is one of the anti-eastablishment journalists and has been poking holes in the economic boom of last many years.

Official statistics tell us where we've been, rather than where we're going. But if the numbers are any good, they help to provide a bit of context and definition to our hunches and intuitions about what's going on in the world.

So if there's anyone left on the planet who's still sceptical that we've been living through the mother of all credit crunches, I would direct you to quarterly banking statistics published today by the central bankers' bank, the BIS.

These show a plunge of almost $1.9 trillion or just over 5% between the third and fourth quarters of 2008 in banks' international assets, their overseas loans and investments.

In other words, there was a massive contraction of lending across national borders.

Banks called in their loans to overseas banks and other overseas borrowers on a colossal scale: it was the biggest shrinkage in banks' international assets since records began at the end of 1977.

In fact it's exceedingly rare for there to be any contraction at all in cross-border lending. So this represents an unusual reversal of financial globalisation.

Of course we already knew that banks were calling in credit last autumn in a panicky and manic way, after the collapse of Lehman.

Now we have a measure of that panic (though note that these figures are about the stuff that goes on to banks' balance sheets, not other forms of credit outside the banking system - so it's not the whole story of the crunch).

Now it won't surprise you that the shrinkage in international business was particularly pronounced for British banks

The overseas assets of British banks shrank $891bn during the whole of 2008 - which represents an astonishing 65% of the contraction of all overseas lending and investing by the world's leading banks in that year.

That repatriation by the Brits of lending is merely the corollary of an eye-watering withdrawal of credit from the UK by foreign banks: the liabilities to overseas lenders of our banks shrank $793bn in 2008.

Why were British banks so exposed to the global credit crunch?

Well it's because in the preceding few years they expanded their overseas lending at a breathtaking and unsustainable rate.

According to BIS figures, British banks' overseas liabilities increased from $3.4tn in December 2003 to $7.3tn in December 2007.

In that context, the recent fall to $6.1tn in British banks' cross-border liabilities does not look like the end of the story - especially if cross-border flows of credit in general continue to diminish.

To put it another way, there's a strong likelihood that overseas funding of British banks will continue to be squeezed significantly in the coming weeks and months.

Some of that will be absorbed by British banks calling in their overseas lending.

But it also means that there's no realistic prospect in the coming months of our banks being weaned off their new dependence on funding provided by taxpayers - unless, that is, we wish to risk a further serious contraction of lending by banks to UK households and businesses.
This article is relevant to the indian housing market because of RBS, BARCLAYS, ICICI and STANCHART. All of these banks are either based in U.K. or have had their main source of credit from U.K. Most of them are heavily involved in the Indian capital markets i.e RE funding. And this article is an example of the size or sample of the size of funding that has evaporated.

Anonymous said...

Pls. have a look at Indian Bank numbers!!! :-)

Anonymous said...

Atul, I never said buy into this stock market rally.

I am totally convinced that this is a bear market rally and stock market wil collapse to 2500 Nifty or less.

Sensex 7000 would be a good time to buy. Should be there by August -September

Sensex 7800 WAS a good time to buy 3 months ago. Now is a good time to sell.