Saturday, February 21, 2009

Goldman Sachs Research - Building up to a crisis

Also shows the trends are the last downturn in 1996.

Via R.N. Bhaskar at The original PDF can be found here.

Quoting Bhaskar:

The Mumbai attacks tipped real estate prices down by another 5-10%. This brings the decline in real estate prices in Mumbai to around 25% from peak levels. But market watchers say real estate prices in Mumbai could fall by another 25% over the next six months. Expectedly, most developers are bracing themselves for the worst of times (see the next item). The only silver lining appears to be the reduction in rates on home loans. But with consumers expecting real estate prices to fall much further, it is doubtful if too many people will queue up for such loans right away.

The last time when there was a crash in property prices (in 1996), it took four years for real estate prices to bottom out. This time, while property prices have fallen 25% rather sharply, the bottoming out is expected to take at least another year. So, evidently, the real estate sector could experience either a sharp downturn, or a slow prolonged one (see table).
Check out the article.

For a responsible citizen, is investing in land the wrong thing to do?

Like a few other NRIs, I got carried away during the boom years of Bangalore Real Estate and invested in land. I tend to think I am a responsible citizen, so in order to avoid the normal trappings of black money, went with a 'BDA approved developer' in an approved layout. All the money I put in was accounted for money - directly from my savings earned through my full time job. I made sure the money I paid was properly accounted for, receipts issued and so on.

To my surprise, at the time of land registration, the land was being registered for a fraction of what I paid for and the rest of the money going towards 'community development' towards the developer. Again, since this was all documented correctly in the documents I signed and since I had written proof, I didn't think twice about this. I was now a proud land owner in Bangalore.

Early 2007, I visited India and tried to sell the land. I was told that the best deal I could sell the land was through a 50:50 split of black vs white money. Even if I find a buyer to pay completely through white money, I would run into trouble trying to register the land at that face value, since the face value might be much higher than the prevailing rate or the rate the Government sets as fair price value.

Now the quandary. I dislike black money. I strongly feel it feeds corruption, feeds the mafia monster and in general prevents India from truly becoming the great nation it ought to be. From a pure investment point of view, as white money, I have barely beaten the Fixed Deposit rates offered by the banks and I have generated an equivalent amount of black money. The preferred way of disposing off the black money would be to re-invest the money into real estate, thereby feeding the corrupt system even more fodder. I disliked the idea and I haven't sold the land yet.

Every person I talk to treat this with an very casual attitude, "Every one does it, so what is the big deal?" - "There are much bigger fish to fry in India, no one comes after you and me".

In my view, it is pretty callous and the domino effect caused by many of us small investors is what drives the parallel Indian black economy. The more you feed the mafia monster, the more it grows. It controls countries in the long run.

Hence the title of the blog. For a responsible citizen, is investing in land the wrong thing to do? To be very clear, I am not looking for suggestions of what to do with black money - I am looking to hear from you what responsible citizens would do to avoid the black money mess in the first place.

Friday, February 20, 2009

Prices of starter homes

This is my first post to this excellent blog. Thanks to Vik for the opportunity.

One of the blogs I follow regularly is The Big Picture. Barry had an extremely interesting blog yesterday about home prices (in the US), but the similarities are very striking in India as well.

Real Estate is unique from most other goods and services, in that the purchase is not independent of other transactions. Buy 100 shares of stock, or a new or used car, or a can of soup, and only two parties are involved: The buyer and the seller.

Buy a home, and you are likely involved in a long transaction chain with five, six or even more other buyers and sellers. A newlywed couple buys a starter home from a family (with another child on the way), who are moving to a bigger home, and whose seller is moving to an even nicer part of town, and so on. It is a long chain, not of mere lateral moves, but increases in size, cost (and property taxes). If any of those sales fall through, the entire chain collapses.

And therein lies the problem.

The concept of constantly upgrading your home may not be as common in India, but has the real estate industry in India completely ignored the long tail of non IT earners? Entry level two bedroom apartments in Bangalore seem to sell for about 30 lakhs in a reasonable neighborhood, which given a Rs.30,000 per month salary, is about 9-10 years gross annual income.

Assuming this recession cleans up the speculators in the Indian real estate segment, in my opinion, the resurrection of the realty segment totally depends upon the long tail entry level homes.

I think we are somewhat beginning to see this happen already in Bangalore. From a recent Craigslist ad:

You would be delighted to know that DLF's premium homes project in Bangalore – WESTEND HEIGHTS, DLF BTM Extn. is now being launched as Westend Heights, New Town - DLF BTM Extn. We have completely redesigned the project to bring you an even better lifestyle experience than before to maximize comfort and convenience.

The new mix has come with an unbelievable price!

Apartment area Unit rate

1085 sft - 1225 sft Rs. 2000 / sft
1345 sft - 1410 sft Rs. 1900 / sft
1570 sft - 1820 sft Rs. 1850 / sft

This is an Unbelievable offer .Could you afford to miss it out ......

Is this the start of a trend? Is sanity returning?

Non-Immigrant visa and the housing bubble

I was browsing forums and came across this unfortunate situation of a laid of H1-b visa holder. Its painful to see the implications of of a temorary visa and iliquid assets backed by debt. The poor laid off employee probably did everything right but still coudn't escape the deathly spiral of foreclosure, layoffs and a temporary visa. Its a reminder for everyone to keep debt levels manageable, regardless of Visa status. If you have a housing loan, make sure you have atleast six months or more of emergency funds. Sometimes life comes at you hard, when you are not looking.
I got laid off from a Job almost a week ago. I just have 2 months left on my 6 year H-1B expiry.The chances of finding a new job in this market are very slim. I have a home and car in US. It will be extremely difficult for me, if not impossible, to continue with paying mortgage w/o any source of income. What if I have to go back to India in order to avoid being "Out of Status", in the event I am unable to find a new job. Do I need to file for bankruptcy/foreclosure for the home? I can still sell off my car, but to go thorugh the home foreclosure process may take months..I will not have that much time in the event I have to leave the country..What happens in a case like mine? I genuinely want to stay in US and find a job to pay my mortgage, but in the event, I have to leave the country, who eventually is responsible for the home? And what implications it could have on my future visit to US?Prompt reply will be really appreciated.

Thursday, February 19, 2009

The end of Secret Swiss banking

Bloomberg reports on the collapse of secrecy in the Swiss Banking industry. From what I hear, Singapore is the new offshore destination for secret banking since their laws are tighter then Switzerland.

If India did something similar to the US, how many skeletons would tumble out of the closet ?

Switzerland’s unprecedented decision to let UBS AG hand U.S. tax authorities clients’ details risks damaging a banking industry that relies on a pledge of confidentiality to win business, legal scholars said.

“This could open the floodgates,” Peter V. Kunz, head of the business law department at the University of Berne, said in a telephone interview today. “Giving in to the U.S. sends a signal to other countries and the European Union. I don’t see what would stop them from acting in the same way.”

The Swiss Financial Market Supervisory Authority said yesterday it would allow UBS to pass on some client data to save the country’s biggest bank from criminal charges in the U.S. that it said could have “put its existence at risk.”

Switzerland is being increasingly pressed by countries such as neighboring Germany to amend banking secrecy laws, first introduced in 1934, which they say promote tax evasion. German Finance Minister Peer Steinbrueck said last year the Swiss should be put on a “blacklist” of uncooperative tax havens. The European Commission proposed this month to end anonymity for bank account holders within the 27-nation area, and may seek to expand the measure to cover Switzerland and Liechtenstein.

“Swiss banking secrecy will not exist in today’s form in two or three years,” said Dirk Nitzsche, a senior finance lecturer at Cass Business School in London. “Switzerland has already done a lot over the past couple of years. But the international community wants more.”

Offshore Center

Client confidentiality is a cornerstone of Switzerland’s banking industry, which has attracted some 27 percent of all privately held offshore assets, according to the Swiss Banking Association. U.S. law views tax evasion as a crime. Swiss law doesn’t. The Swiss view tax fraud as a more serious offense.

The U.S.’s success “is likely to encourage other tax authorities to pursue claims against the Swiss more vigorously,” Dirk Hoffmann-Becking, an analyst at Sanford Bernstein & Co., said in a note to clients today.

The U.S. is likely to continue to put pressure on both UBS and the Swiss government to make it harder for individuals to move money offshore as President Barack Obama’s administration attempts to finance its economic stimulus plan, he added.

The European Commission, the European Union’s executive arm, today said it welcomed any effort to improve governance.

“We expect a similar request from EU member states to Switzerland would not receive different treatment,” Maria Assimakopoulou, spokeswoman on tax issues for the agency, told reporters in Brussels today.

Justice Department

Swiss Finance Minister Hans-Rudolf Merz described the settlement as an “isolated case” after the U.S. authorities set a Feb. 18 deadline for UBS to reach a deal or face indictment. While it’s “problematic” that the official procedure wasn’t followed, an indictment and possible failure of UBS would have had consequences for the whole Swiss economy, he stressed.

The U.S. Justice Department accused UBS of conspiring to defraud the country by helping 17,000 Americans hide accounts from the Internal Revenue Service. The U.S. will drop the charge in 18 months if the bank reforms its practices, aids prosecutors and pays $780 million. UBS will immediately turn over names of about 250 clients, according to people familiar with the matter.

“The U.S. authorities didn’t want to wait, as a constitutional state is supposed to do, but pressured for an exceptional allowance,” Kunz said. “The legal basis for such actions is very thin.”


The government should have followed the information-exchange agreement it has with the U.S. and waited for a Swiss court to rule on the matter, legal professors say. Clients have to be notified before their data is released under Swiss law. The federal administrative court received objections in November.

“What concerns me the most is that evidently legal protection for these clients is being impeded,” said Rainer Schweizer, a law professor at the University of St. Gallen. “Clients have to complain about this to the federal court.”

UBS agreed only to the immediate disclosure of account holders involved in fraudulent or sham offshore account structures, according to people familiar with the matter. The Swiss finance ministry has had some 40 people working on the case, trying to determine whether any of the clients whose information was requested committed tax fraud.

Merz said that data on some 200 to 300 clients that is transferred to the U.S. “clearly” relates to tax fraud rather than tax evasion. UBS Chairman Peter Kurer told Swiss television in an interview that the clients had made “false statements in writing” to the U.S. tax authorities.

Wednesday, February 18, 2009

Inviting bloggers to contribute to the blog

Hello Guys,
I came across this feature in the blog settings where I could invite bloggers to contribute to the blog. If people are interested I could invite them. I think we have some good rational people which contribute meaningfuly to the blog. Drop me a note in the comments sections with your email address and I will add you to the list.


Monday, February 16, 2009

20,000 defaulters to lose homes

Here is another video where Nassim Taleb and Daniel Kahneman discusses the crisis hitting the US and consequently the world. Officially Japan is in depression. Just as Lehman was leveraged 30:1, I expect the builders to have similar leverage. Financial wizadry aside, we now turn to psycology for answers.

Source Deccan Chronicle 17/Feb/2009
Around 20,000 houses in the twin cities are to be auctioned after borrowers defaulted on home loan payments. This is the first time that so many houses are being put up for auction. Many of the borrowers are IT employees who were unable to pay the equated monthly instalments because of the current slowdown in the software industry. Several techies who took loans have lost their jobs and others were forced to accept salary cuts making it difficult for them to meet their financial commitments.

Apart from techies, there are many employees in the aviation sector too who are unable to pay their EMIs. Banks are in a piquant situa tion since borrowers have not hurried to pay their EMIs despite the threat of the auction.

In fact, they are willing for the auction as they are not in a position to mobilise resources. The borrowers have no option but to forego the amount that they have invested may come to around 20 per cent of the property value. Banks which provided 80 per cent amount as loan fear that they may not get the amount even if they auction the properties. “There is no option for banks except to dispose the properties when the borrowers are reluctant to clear the dues,” said the IDBI director, Mr K. Narasimha Murthy. “More auctions will be held in the next few months since many borrowers are yet to receive final notices from banks.”

Baseline scenario outlook on India

I just came across this site which seem to discuss all the economic situation of today and the Obama stimulus plan. What Obama does affects the world and India is no exception. Here is an excerpt from their outlook on India from a macro-economic perspective. The full link is to article is here. Simon Johnson's interview with Bill Moyers on the stimulus package and bank oligarchy in the US. With the 30:1 leverage we've seen how Lehman and Bear Stearns have helped dig a hole deeper then anyone could imagine.


There are striking similarities between the current policy debate in India and in the Eurozone. In both places, there is little or no concern that inflation will rebound any time soon. At least for people based in Delhi, there is as a result confidence that aggressive monetary policy can cushion the blows coming from the global economy. As in the Eurozone, all eyes are on monetary policy because of fears that fiscal policy cannot do much more than it is already doing, given that government debt levels are already on the high side.

The discordant note comes from the business community. They feel that Delhi does not fully understand that the real economy is already in bad shape. Sectors such as real estate and autos are hurting badly. Small businesses, in particular, are bearing the brunt of the blow. The banking picture seems more murky, but is surely not good. And of course the Satyam accounting scandal could not come at a worse time.

Overall, official growth forecasts need to be marked down for India, although the monsoon was good and the agricultural sector is not highly leveraged. India will likely cut interest rates further quite soon (and has space for additional cuts), but we should not expect much more from the fiscal side.