Monday, May 04, 2009

Sensex and real estate in India

With the sharp rally in the market, people have been questioning the impact of the recent uptrend to real estate prices in India. Some projections put the Sensex at 15000, some others say that this is a bear market rally and will fizzle out as the results get announced. There is another article I read which said almost more then half billion dollars of FII money went into the market in the past few weeks. This must have wiped out bunch of shorts, most local businessmen who shorted the sensex between 9k and 10.5k thinking the sensex will go back to 7.5k, the lowest level seen in the past 4 years. However the FII swooped upon the sensex in huge numbers and have wiped the bears out of the system. Goes to show the perils of investing in futures and options. 

If you read the first post in this blog it was made in Dec 2005, when the sensex was at 9057 and India was shining brightly. Now it is 3.5 years and the Sensex is 13,000 having visited 21,000 on the upside and 7500 on the downside. 

If one has to co-relate the market, even though any co-relation can be atmost be deemed co-incidental,  prices today are down 25-50% of the peak made in Jan 2008. Loan rates were lowest in 2003, when I remember Standard Chartered offering 8 % rates when I was in Bangalore. At that time, I could get a 3 bed for 30L the same today is at 80L. However in Bangalore one can easily find a 3 bed for 35-50L in some tech areas, same is case for Pune, Chennai, Hyderabad.

In Mumbai it is impossible to find any such deals except in far flung suburbs where one can break his back in the train commute. 

The question to ask is why should real estate be dependent on the stock market ? Real estate can be more co-related to the economic well being of a society, job security and availability of cheap loans. Expecting stock market profits to end up in real estate is at best fool hardy. I had several friends who bought 2nd houses on  loans in 2008 with the hope of paying them down with their stock market investments. With the wipeout in the markets, they are remorseful and regretting the whole episode of short term loss making trades. Now they live hand to mouth paying off their montly EMI's with their current salaries. With prices being down, they are in negative equity and bleeding every month. They are cut twice, once by the drop of their real estate values, 2nd by the interest they pay the banks and the biggest cut is the slicing of their portfolios by 70%. 

Please don't trade short term with the aim of investing in real estate. If you are investing in the market, it should be for a period of 4-5 years. If you buy real estate, buy the primary residence at minimum 30% discounts to the current price with a 40% downpayment. The cost of good night's sleep is priceless. Never compromise on this ever.

22 comments:

lsjey said...

Well, As in India, and US previously Japan had this problem of twin collapses ( or pullbacks). Goes only to show that:

1. There is correlation
2. People behave in herds
3. Markets are not always correct and rational
4. Governments always ensure that good money will be thrown after bad.

Net effect, Developers do not lower prices to the level that people can come and start buying. Also if all developers start lowering prices then we have a big collapse which the governments do not want.

So this stalemate will continue.

Regards
Lsjey

Anonymous said...

Vik,
I don't think that there is any corelation between real estate and stock market, only the common is both are investment options. One is fast liquid and the other is not that liquid.
Whatever stock market rally we have seen in last 6 trading sessions and in the past is mainly because of the FII's, who are actually deciding the market direction these days.
As far as housing market goes, all depends on the affordability, price per sq. ft. and partly interest rate for the low income group.
It will be a great mistake to put a blind stake in the current real estate market just on the basis that bulls are back in the stock market. If one thinks like this and planning to put money in real estate, it's as good as a suicidal act only because the prices are still in the sky and no more attractive and affordable.

Anonymous said...

Vik,

Good you brought out this topic.
FII's have invested more then 1.5 Billion US$ in last two months, off course I don’t have the figures for yesterdays trade (731 pts+), I am sure it will be additional quarter billion minimum.
http://www.myiris.com/shares/market/marketPulse/fiiShow.php

Mumbai with a population of 1Cr+ contributes more then 25% of IT collection. Mumbai has land constrain unlike other cities. Still largest migration of population, govt is putting a lot of money in infrastructure.

Lot of people in Mumabi are sitting with loads of money waiting to time the market and the builders and politicians know about it.

Typically society redevelopment creates supply in Mumbai market. The existing tenant goes in for development only if he/she gets minimum 20 to 25% extra area

TDR prices falling from 4300 to 1000 is a classic case where we come to know the status of redevelopment.

Not that Mumbai is not corrected, I would say Mumabi in some areas/project have even corrected to the tune of 35% again having said that this is not across the board. Some areas in Mumbai has witnessed practically nil correction.

In past i have worked with an India Pharma company which replicates MNC formulation. Trust me the cost of a strip for 6 tablets is Rs.2.50 and this company manages to sell this life saving drug at Rs.76 MRP. Now is there any control on this which a life saving drug? This businessman is busy copying and raking huge profits, yes this again is unethical but that’s life pal. we have to accept it.

I still feel instead of going for a 2BHK pls. go in for 1BHK but buy. Pls. do not wait to time the market.

50% increase in three years for Mumbai.

Dont time, dont time, dont time.

Bindas Bhai

Venkatesh Babu K R said...

People of India should realize and firmly keep one point in mind ...

The background of all FII investment is not because they see India or China developing nation etc... All they are trying is to hamper the growth of these countries.

A healthy uniform growth is what is required for sustained development, and not an exponential growth followed by exponential fall. Exponential growth followed by exponential fall is really unhealthy for development. The FIIs are just trying this kind of mantra. It is like F**king people for some time, take rest and then be back in action.

So, don't get carried away with all FII investments etc... If people are not wise, they'll trap folks and dump them into gutter.

Anonymous said...

Capgemini slashes 600 jobs in India2009-05-05 11:11:06


Hyderabad/Mumbai: Capgemini, a France-based consulting, technology and outsourcing solutions company, has reportedly given pink slips to 600 employees, including 400 from Hyderabad and 200 from its Pune facility, in the last few weeks.

A senior official with knowledge of the development confirmed the move. "Most of the laid off employees were serving global customers in the banking and financial services space," the official said on condition of anonymity.


Bringing down staff costs

"Given the pressure on spending on information technology in the BFSI (banking, financial services and insurance) space, the company has decided to bring down its employee costs by cutting down on the number of associates," the official said.

The Hyderabad office of Capgemini was not immediately accessible to get a comment on the reported downsizing of staff to the tune of 400 employees.

More India business stories

Capgemini operates in Mumbai, Chennai, Bangalore, Kolkata, Pune and Hyderabad. The company serves automotive, financial services, energy, healthcare, telecom and media.

Venkatesh Babu K R said...

Also wanted to mention one point - regarding outsourcing all the mellow drama around it that happened in the past 10 years - There are multiple reasons behind companies pursing outsourcing.

1. The primary reason cited during initial outsourcing was - Cheap labor and High quality of intelligence. This is true, India and China were offering cheap labor and people were intelligent etc...

but there is more strategic reason to outsource stuff to countries like India and China ... The strategy is to make people dependent on foreign stuff and technology heavily ... and then get maximum out of that business ... Look at Google search - The search is free, but the business they are making out of it is of magnitude 100bn $ ... and definitely they are minting good amount of money from Indian markets coz everybody knows - Indians are also using the Google service like anybody else.

So, it is time for us to innovate and keep our technology with us and use that in our daily lives ... People have to reduce over dependency on unknown software or services.

Anonymous said...

Venkatesh,

You are talking about ideal world in your first post. Friend this does not exist in real world.

In second post you are talking about protectionism, this will only bring compliancy and bring money for people like Rahul Bajaj.

We need to compete and survive instead of following what Obama is doing.

Anonymous said...

Venkatesh,

You are talking about ideal world in your first post. Friend this does not exist in real world.

In second post you are talking about protectionism, this will only bring compliancy and bring money for people like Rahul Bajaj.

We need to compete and survive instead of following what Obama is doing.

Venkatesh Babu K R said...

Hi Anonymous,

What you said is true, but people shouldn't get carried away by all the sensex rise/fall etc... People really need to know what is the real intention behind all market rise and falls ...

The last time when market breached 20K, I talked to lot of my friends who had invested in stock market, and none of them had a simple clue of why stock market was soaring like that ... Now people know the real intention that was behind the stock market rise that time ...

Anonymous said...

FII's have pumped in more than 1.5 Billion US$ and this is just the beginning. They will pump in more and wait for our Mutual fund and DII to get in. These guys will further put more money and wait for retails investor to come in and then these guys will make monkeys out of us and exit the market. This is bound to happen and that is how the market works.

Just to give you an example FII may have brought at Rs.110 RPL (04.05.09 buy) now to sell this stock andd make money. These guys will take this stock further up involving MF, DII and retail investor. Once the common man gets trapped these guys will encash probably at Rs.300.

We need to buy now and exit once we get 30 to 40% return and for a change make these FII's monkey. This again is an ideal situation god knows if this can happen.

Let’s wait and watch and see how many people get sucked in this.

50% increase in three years for Mumbai.

Dont time, dont time, dont time.

Bindas Bhai

Anonymous said...

Bindas Bhai,

You are a real moron, Pls. keep your fundas to youself and get off this site

Bharat said...

Stock's, real estate, gold, commodities are all assets. Is there a correlation between them? Maybe..When Stocks go up, bonds go down and so do commodities. Similarly with other asset classes. In the last boom, as Marc Faber said, any sensible person would have been scared and should have been sitting on cash. Because all the asset classes were in bubble mode!! Gold was running into bubble mode, stock market was in bubble mode and so was Real Estate!! This was clearly unsustainable. One other warning was that the Subprime bubble was soaring sky high...Janitors in US had two houses!!

So, should was assume that from now onwards whenever Gold or Stock market shoots up, all other asset classes will follow suit?? If you are sensible you will get scared and sit on money if all asset classes once again go into bubble mode. If you are an inveterate risk taker you will again bet everything into that most Illiquid of assets Real Estate and loose once again everything...

This Bindaas Bhai is a funny creature -
1. He says don't time the market..then he comes up with a hare brained scheme to time the market in order to dupe the FII's!!
2. He then says unethical behavior is the nature of the business and we should make sure we also make some money along with the unethical business/political folks. Then he goes onto rant about FII's and how we should try to fool them!!! While saying that Builders/Corrupt Politicians/Real Estate Brokers are bad but we should forgive them???

I tell you...pls. stay away from advice which is aimed at taking money from your wallet and into other people's wallets!

Vik said...

BB is missing the point. If a corporation makes money doesn't mean all employees do. The company I work for, the CEO makes 20M, the average engineers makes 80k. When the CEO outsources the job, the H1b makes 60k. There is huge disparity in the profits gained by the company and the employees salaries, which after he factors in taxes and cost of living is practically 10-15% of the salaries. There is a saying in Japan, Japan is prosperous but Japanese are not. That country had the best performing market in1989, after 20 years they are still in the dumps. If India becomes Japan, then practically the real estate will be owned by few people and rest will be renters.

If I were to migrate to a city to search for a job, I would move to any of the cities in the south. There is a great presentation made by Mahindra World city about Chennai. North Indians typically don't like Chennai due to food and more conservative mindset, but I think given the affordability and opportunities it presents in todays environment that is the best city to move to in India. I will post a presentation about Mahindra World city in the next post.

Its pointless to struggle in Mumbai to buy an apt and be indebted for life. Didn't our forefathers move across the country for better pastures. Today we should be more informed with all the new technology, however we are still trapped in our own mindsets and fixed ideas.

Anonymous said...

Hi All,
I haven't missed reading a single post or thread on this blog for the past few months. Here's my first contribution, a very good article on rediff - http://business.rediff.com/report/2009/may/05/slide-show-1-time-not-ripe-for-buying-a-home.htm

Good one for Value-Seekers and Eye Opener for Anti-Timers.

NT (Neutral Territory)

Mathew said...

I've seen that some comments are extremely good and up to the point. My comments are primarily to emphasize the general behaviour of consumers in a bull market. The current rallies have undoubtedly triggered a wave of exuberance in investor circles. But in my opinion it is the same old cycle where every rallies will be met with even ugly reversals as was made clear the last few months. Most common people who are late to the party and slow to respond will pay the price. The current rally is mostly a fake one re-surged with artificial stimulant money which itself is a repetition of the fancy debt financing options. By the end of the year it will be more or less clear as to what direction will the economies go. On the subject of this post, India's property prices are highly elevated and must have to come down in order to sustain the rate of growth. Anything growing too fast cannot cope with the pace and will fall.

Subel said...

Vik,

Please send the link for the Mahindra article. Funny you mentioned Chennai, I think Chennai is far worse than Mumbai...

Vik said...

Lets discuss Chennai CSK vs Mumbai Indian in the next post when I post the Mahindra article.

Anonymous said...

If stock market goes up why should i invest in real estate.. as someone pointed in some previous post , i would be better off investing in something which is readily liquid rather tahn in something as creepy as real estate..

if i am buying for living then i have no choice unless i get my dream home at an affordable rent. better to rent a luxury apmt than to buy a dingy "nano" sized appmt

Just a comparison as to how House prices and salary are correlated. an average IT Guy bachelor would save close to 25 grand per year. the avg house price = 250k to 300 k

compare it here in india, average savings = 3 lakhs per year. the price should similarly be 30 or at max 50 in a great locaility but the price is upwards of 80 lakhs. thats the disconnect between India and Us. now dont give me the crap saying land is scarce. In US people build independent houses not flats. I am sure FSI is gonna increase and DLF would soon be filing bankruptcy along with parsvnath . that would start the
tamashaa..

Time Time But Now is not the Time.

"Jai ho " Vulture

Fake Bindass "Bahan"

Anonymous said...

Hi,
vulture speaks sense
bindas bhai speaks non sense
vulture justifies the drop in prices to come

Anonymous said...

India, Suddenly Starved for Investment

“In a recent report, the International Monetary Fund said Indian companies were among the world’s most vulnerable, after American firms, because they borrowed aggressively during the boom. Using data from Moody’s, the credit rating firm, the I.M.F. estimated in a recent report that defaults among nonfinancial South Asian firms could climb to 20 percent in the coming year, up from an expectation of 4.2 percent a year earlier”.

http://www.nytimes.com/2009/05/05/
business/global/05rupee.html?_r=1&ref=business

Vik said...

Thank you NT. You need to contribute more so we can know your story too. Its the collective experience which makes the discussion more lively

Ashok said...

India is one of the fast growing country in the world.There are so many Job opportunities in all the areas of domain.There are so many jobs in chennai in the IT sector to establish their firms which has major role in the country by providing more jobs.