Wednesday, November 16, 2011

India 2011 - Moving to Better Ground

Watch the builders in panel cringe on new Land Acquisition bill. I think minister Jairam Ramesh have them pinned down properly, now either they have to come down from ivory tower and compromise or live with anarchy ....


shailesh said...

It is pretty long but interesting video. I at least commend WEF on starting the debate and post it on youtube. The only thing I think WEF should have had some neutral expert in forum. The right format would have been, that an neutral expert explain current reality, what new law proposes, why changes are required, and then open it up to the debate. That way everyone would have come up to same page before here arguments for and against the changes.

shailesh said...

Proposed land acquisition Bill seen as a retrograde step

MumbaiPav said...

Just in case you have been trying to sell your property since last 4 months...

VadaPav said...

MumbaiPav: The article reads like "paid news" written by the real estate mafia. Moral of the story seems to be - don't lower your prices even if the market demands it. Isn't that what the builders are doing? Now, they just want to prevent resales from lowering the price to artificially keep the prices high. These kinds of cheap tricks show that the crash is coming, big time.

Anonymous said...

VadaPav i agree with u :)

As soon as i read the headline
"Just in case you have been trying to sell your property since last 4 months..."

that means there is a slowdown. just takes common sense to understand it.

Wht is funny is the sentence starts with "Just In Case" :)

the sentence shud be rephrased.
"So no ones buying your old property at your royal price.. forget buying we know no ones even bothering to see it. so read this"

shailesh said...

Interesting observations... I guess law of economics do not apply to India due to this issue of Black Money. The challenge is RBI is fighting this issue by raising rates, politicians will never do the right thing or allow increase of supply, so in that case the only thing that will suffer is Indian Rupee...

Inflation in India - The failure to control black money

A lot of black money was being funneled out of India and it actually kept money supply in control but nowadays, this money is reentering the Indian market via the assistance of financial managers who aim to provide annual returns of between 10 percent - 20 percent. We need to note that it is only common sense to reinvest this money in a market like India, via assets like stocks, bonds, and even real estate rather than let it accrue interest at a paltry one to two percent a year in Switzerland.

As an example, let us consider the real estate market which is one of the favorite destinations for undocumented black money. We know that real estate prices have sky rocketed in India and a decent flat in Mumbai costs nothing less than a mostly unaffordable 1.5 crores. It is no secret that real estate developers routinely ask for 30 percent - 40 percent payment in black and investors when reselling these properties follow the same pattern.

These are large chunks of wealth that are changing hands with no paper trail whatsoever and they quickly go back into the market as it makes no sense to lock them up in a cupboard. A great validation for this pattern can be seen in the fact that while hikes in interest rates have adversely impacted other industries like the auto sector, real estate is still booming and there seems to be virtually no indication of a foreseeable slow down. Based on the government's colossal failure in arresting real estate prices, we can conclude that no amount of monetary tightening is going to pull this money out of circulation.

The Indian economy is now suffering more from the lack of supply than from excess demand. Consider the fact that farmers are now selling off their agricultural land due to declining returns because the cost of cultivation, especially wages, is rising faster than their sale prices. Buyers of this land are investors who are betting on the scarcity created by tough land acquisition and land usage laws and not on higher profits from farming.

Consider the recent case of the Awachat family demanding reliance for 1.6 crore per acre of their rural farm land near Nagpur. 1.6 crore per acre for a 11.5 acre plot that generates only five lakhs in revenues a year sounds ridiculous to any business professional and when we consider the fact that the original rate paid to other farmers was 25 lakhs an acre, this starts to border on the absurd.

But, this one piece of land cuts through reliance's planned coal supply line for its 600 MW plant and this is the perfect ransom opportunity for a farmer to essentially retire with a 16 plus crore bounty.

While at first glance, this appears to be a case of the small man standing up to big corporate, the reality is that such unreasonable demands exist simply because there is considerable precedent of over inflated real estate transactions. Not only are we paying for this via electricity bill hikes, but we also lose the farmer (however greedy) himself. Lesser farmers, lesser land, lesser food, 20% plus food inflation is the current state of affairs and there is simply no policy aimed at correcting this situation.

Anonymous said...

Why are all cribbing about high real estate prices and inflation and blah blah... What's the point?

Better, earn more on the par of inflation. Better up your value of service and earn more. Instead everybody wants high prices for their real estate and assets than their labor. Increase price on your labor. Everything will fall on same level then, and best part is - you can afford RE.

Ladies in India are cribbing about increase in just mere 200 rupees for maid, but want 1.5 crores for their houses. I think with this comparison maids in India are way underpaid for their labor. Same applies for many hard working middle class and poor people in India.

Equalize the equation.

Anonymous said...

Love the comment by Anon @ 8:32 above!


Anonymous said...

"@ MumbaiPav said...
Just in case you have been trying to sell your property since last 4 months..."

What a fart advices on the article. Why doesn't someone put a calc onto paper. If property is investment property and no buyers for asking price, that means hold and keep increasing asking price on par with EMI or keep loosing money even if asking price remains same - cost is increasing - EMI and up keep of estate.


Anonymous said...

This is reality in India. When new building starts selling flats with extra amenities , people in Neighbourhood starts quoting same rate for 30 years old building. Then owner in new building start quoting more because it is brand new house. This keeps going on and on with little interest from buyers.

Anonymous said...

Indian RE has already crashed by 15% in just the past 3 months. Don't see it? Here's why: you've been saving in Rupees.

If you've been saving in any other major currency, including the pathetic USD, you will see the crash. How? Well, the INR has collapsed by 15% in just over the past 3 months. INR was at 44 to the USD earlier this year and now it is lower than 51 per year. This is a collapse of 15%.


This is exactly as I have been screaming from the rooftops in this blog over the past couple of years. INDIAN RE WILL NEVER CORRECT IN INR TERMS, BUT IT WILL COLLAPSE WHEN MEASURED IN CHF, SGD, NOK, EUR or JPY.

GOI/RBI may agressively bail out, print and lower-interest rates for leveraged builders and home-owners to maintain nominal RE prices, but GOI/RBI HAS NO CONTROL OVER REAL RE PRICES, WHICH ARE DETERMINED BY THE MARKET.

Anonymous said...

I believe RE will slowly start to become secondary.. inflation has really started to bite all of us now. In Chennai after 10 years they have hiked the bus fare which is still okay. but now they have increased price of milk by 33% . This adds just 500 crores to the state kitty while fiscal deficit for state is 1.05 lakh crores, the biggest culprit being our electricity board as they have not hiked fares. I expect inflation to spiral out of control , which means food and clothing would be primary while RE would become luxury.. we could see at least a 30-40% hike in electricity bills shortly.

Yeah we have grouses againts maids but please mind they are also not cheaper anymore. A maid makes a min of 1000-1500 rupee per month for working arnd 1 hour every day which translates to wages of around 40 rupees / hour with tea and lunch included.

a fresh sftware engineer ( 18000 p.m) makes 600/8 = close to 70 rupees per hour. wage differentials have started to reduce but dignity of labour is still missing.

The party is popping out of control. i would stay out of long term commitment for the next 2-3 years even if the whole world says RE will never go down. defly not with the current inflation when i know my hikes are lower than the actual inflation (15%)..

Interesting times. would like to see how government is able to mop up funds for RTE as well as NREGA schemes.

aam aadmi said...

yup electricity bills are going to rise substantially, the world is seeing an energy crunch, it seems stupid to talk about expensive RE in the suburbs at this point.

A smart man would shift to some small town where living costs are much lower or wait it out.

DhImAn said...

Black vs. White Economy. Let me analyze this real quick.

A quick estimate of total money supply in India is $13.8 trillion.

Black money supply is estimated to be around $1 trillion.

This means that the ratio of black to white money is about 1:13, or about 7.6% or say 8%.

If we were to convert all black money to white, the reduction in the total money supply would be 30% of 1 trillion (this money would go as taxes), i.e, 30% of 8% of the total supply, i.e., 2.5% of the entire money supply.

Thus, the whole "black money" fracas is about something that is 2.5% of the economy, a negligible amount at best.

Or looking at it differently again, the black economy contributes a measly 2.5% increase in the total money supply, not nearly enough to cause a 100% percent (at the very least) appreciation in house prices.

There goes the black money "argument". Poof.

DhImAn said...

Sorry in my last post, I misread the numbers, M3 is quoted at $1.4 trillion.

Let's re-do the numbers. Say white = $1.4 trillion, and black = $1 trillion. Then black money/total money = 1/2.4 = about 42%. To convert all this to white means paying taxes and losing about 30% of 42%, i.e., 12% of the total money supply.

Or looked at differently, having black as black increases the available money supply by 12%.

12% is still not enough to account for appreciations of 300-400% in real estate alone.

Besides, a great deal of that black money is not chasing real estate in India, it is safely tucked away in Switzerland.

My point still stands. Black money is a sideshow, a distraction. The real reasons for the real estate bubble lie elsewhere.

Pawan said...

You are dismissing a 45% component of money supply as nothing?

Tell me one thing. If you found a bag with 50L in it, what would you do? You can not declare it to the govt. because they will want to know the source of it. You can't store it in your house. You can't send it out of India legally. The only option is to buy RE.

Secondly, if instead 50 people found 1L each, what would they do?

If 5000 people found 1000Rs each?

You get the drift?

People with serious money are competing for best RE, best schools, membership to exclusive clubs etc. What matters is who has that black money and what avenues they have for investing it.

I agree though that black money is not the cause of RE bubble. Black money goes wherever it sees profit. RE bubble will pop only when this hot money gets diverted elsewhere.

For people like us with white money, we have no reason to compete with the black money guy where he has a 30% advantage over us.

Anonymous said...

"I believe RE will slowly start to become secondary.. inflation has really started to bite all of us now. In Chennai after 10 years they have hiked the bus fare which is still okay. but now they have increased price of milk by 33% . "

Are you sure about this? Does this really matter to the Crorepathis in Chennai?

Chennai is filled with Mercs, BMWs and Audis. There aren't that many luxury cars even in American cities. These Crorepathis are not concerned about piddling increases in milk prices or bus fares.

There's an incredible amount of money sloshing about in Chennai (much of it NRI money - 99% of families in Chennai have a family member working abroad).

In this state of affairs, I don't see any point in which "RE becomes secondary".

REBear said...

Sorry, ignore the weblink in my above post. Here is the correct link:

How Banks Create Money Out Of Thin Air

REBear said...


I don't know why my posts get deleted after few minutes in this blog, but just rewriting in the hope that this time it will appear.

You are missing the fundamentals of money creation in fractional reserve banking system. 100/- fiat currency can create up to 1000/- in the system assuming 10% reserve ratio. If on the other hand 100/- is just kept as black at home, it can not create money. So if all black money enters the banking system, M2 money supply would increase exponentially.

Anonymous said...

anon @ 11:54

i have been an NRI. been abroad for 3.5 years. Its beyond my means to purchase any semblance of a decent apartment in chennai. Both husband and wife need to be working to make that kind of money and that too for a period more than 5 years. unfortunately that number is very small..

chennai has crorepathis but limited folks.. once the common person gets impacted it raises all prices - labour , essentials etc.. people who make less than 15 lakhs a year would be terribly affected by the way things are going and i think that population would be a huge majority in any city..

DhImAn said...


You are dismissing a 45% component of money supply as nothing?

I tried to show that the effect was no more than 12% or so.

The only difference between white and black money is the 30% tax that has not been paid. The rest of the money is there regardless.

All money is created by the RBI and other banks (ref. fractional reserve banking). You and I cannot create money, not one red cent.

Thus, if there are 1.4 units (a unit being say $1 trillion) of white money and 1 unit of black money, then:

a) RBI created a total of 2.4 units of money.

b) Taxes were paid, money was accounted for etc. to 1.4 units.

c) Taxes were not paid etc. for 1 unit.

d) The amount of taxes not paid was 0.3 units.

e) This "extra" 0.3 units is now circulating in the economy, but is only 0.3/2.4, i.e., 12% of the total money supply.

(We assume that in paying taxes, the money is taken out of circulation, but that is not true; the government spends it back into the economy, but let's ignore that for the moment.)

f) Most of this "extra" money isn't even in India, so it isn't chasing flats in India - at least not directly.

So what is the inescapable conclusion? (in the immortal words of Inspector Clouseau)

This: the effect of black money on the price appreciation of flats in India is negligible at best (a 12% component of the total 300-400% appreciation).

The causes of the real estate bubble are elsewhere, as I said. If you want to find out for yourself, look up monetary inflation, velocity of money, credit bubble and competitive devaluation.

polt said...

Early signs that credit is becoming harder to get.

The housing market in other countries was made/broken largely by the following factors.
1. Easy and cheap (low interest) credit.
2. Sentiment
3. Job market and wage growth.

It will be the same here in India. We are not different. As long as the above three factors are in favour of RE, prices will not fall. I would say that 1,2 are changing here. 3 still is good at least for now.

Govt manipulation, black money, population growth, gold holdings, etc will have a marginal impact at best.

DhImAn said...

REBear: So if all black money enters the banking system, M2 money supply would increase exponentially.

Exactly my point. People say that RE prices will never come down as long as there is black money. I say, make that money white, see fractional reserve banking make it 10x, and watch RE prices soar.

In other words, counter-intuitive as it may sound, I posit that the existence of black money actually keeps RE prices lower.

Anonymous said...


"In other words, counter-intuitive as it may sound, I posit that the existence of black money actually keeps RE prices lower."

Brilliant point. And absolutely bang-on correct. Only ignorant simpletons who don't understand markets and fractional reserve banking squeal "It's the black money! black money! black money!".

Wrong, it's the banks stupid.

DhImAn said...

Here is a nice article: "Can you see this gorilla?"

This is in attempt to refute the "It will never happen here" crowd.

Pawan said...


You did not answer my question about finding that bag full of 50L rupees.

Anyways. Lets change the scenario. Let us say there is no black money in India. Then the govt. comes up with a regulation that any amount of your income money you invest in real-estate is tax free but on rest of your income you will have to pay tax at 30%. What happens then?

DhImAn said...

You did not answer my question about finding that bag full of 50L rupees.

Pawan, sorry, I thought I did, albeit indirectly.

So here goes - if I didn't create 50L, but I merely found it, then it originally belonged to someone else. Now whether this someone else saves it or buys something with it, or whether I save it or buy something with it, is immaterial to the question that this 50L is already in the economy and chasing something.

Thus, it doesn't matter if half of the entire population loses its money, and the other half finds it. The aggregate effect to the economy at large is exactly zero.

This is a zero sum game, in other words.

What makes it a non-zero sum game? Only if that 50L got created from somewhere, i.e., as new money supply, will it have an effect.

And in India, except some negligible counterfeiting maybe, the entire money supply is created by... ta da... the RBI and other banks.

This is the 1000 kg gorilla in the room; those who miss this focus in on trivialities such as black money vs. white (or in that video, counting passes).

DhImAn said...

@Pawan re. your second scenario.

Other than banks, now you've hit upon the second important cause of bubbles - government rules and regulations.

This is in addition to a policy called "nudging".

So what governments do is provide incentives - such as tax breaks or tax credits for certain behaviors; and they filter the information available to make people behave in certain ways.

Banks and governments created this state of affairs, this is clear.

The only relevant questions are:

1. Is this state of affairs permanent?

2. Do those with the power to control this state of affairs desire this to be a permanent state, or is there greater gain to be had by "cycling"? Or, worded differently, is the Sensex at 21000 permanently a good thing or is there greater gain to be had by making it cycle from 8000 to 21000 and back and forth again?

The answers to these questions will invariably lead you to a good strategy for what you need to do.

DhImAn said...

And I forgot to mention, that policy already exists, Pawan, in addition to a tax deduction for interest paid on a home loan.

Imagine every property sale attracting an income tax of 30% on the gains.

shailesh said...

Well to tall folks on the board who have doubts on Real Estate slowdowns.... The slowdown has started almost 6 to 9 months ago, its just our reporting mechanism is very slow. Lets see what final numbers come out.

Sluggish realty may hit state revenue target

MUMBAI: A slowdown in Mumbai's real estate sector is becoming a headache for the government. It is staring at the possibility of missing its overall revenue target for the current fiscalon account of a sluggish real estate.

The government had estimated a revenue of Rs 15,677 crore from stamp duty and registration charges for property transaction, about 15% higher than the corresponding collection during the last fiscal. The projection was based on the assumption that the buoyancy seen during 2010-11, where collection from stamp duty and registration recorded a 31% rise over the previous year, would continue.

This, however, has not turned out to be the case. Real estate transactions have witnessed a downward trend from the start of the fiscal year. The government was hoping for the sale to pick up during the period before and after Diwali. However, inputs with the state functionaries clearly indicate that even that has not materialized.

An official said at this rate, the government might end up collecting Rs 1,500 crore less in stamp duty and registration as compared to target estimates.

shailesh said...

Mumbai property registrations fall 25%

Mumbai: Property sales registrations in Mumbai for October fell 25% at 4,633 from the previous year, according to the data sourced from the Director General of Registrations, Mumbai. There were 6,200 registrations in October 2010, data released by Mumbai-based brokerage Prabhudas Lilladher showed.

The sluggishness in the Mumbai real estate sector is evident from the fact that despite October being the festive season, home buyers stayed away from the market. “Sales are not happening,” said Thirumal Govindraj, head-western region, CB Richard Ellis South Asia. “Registration numbers are more of a reflection of the secondary market, which constitutes ready apartments. A flat will be registered once the projects reach completion,” he said.

polt said...

"In addition to a tax deduction for interest paid on a home loan."

This BTW, is another govt giveaway to builders (not only homeowners as commonly thought).
Which is why, when the original DTC proposed to do away with this deduction, the loudest opposition came from the builders. New buyers did not care, because house prices would have fallen. (The theoretical fall would have been the NPV of all expected future gains from the tax deduction.).

DingDing said...

decision making

DingDing said...

decision making

Saba said...


Rupee lost another chunk today. It is 51.30 now. At last its time to celebrate.

Govt does not want to see the fact. To bring down inflation, RE has to come down.

Nobody is talking about this fact.

funnily they put blame on poor saying that they eat more and healthier now, so that inflation is rising..what an insensitive arrogant statement that is?

now the bloody fools are waiting for base effect to take inflation down.

Anonymous said...

The crap will really hit the fan if RBI is forced to raise interest rates to save the rupee.

In 1992, the Bank of England had to raise rates by 300 basis points in one day to save the pound.
If that happens here, EMIs will go through the roof.

Anonymous said...

In addition to increasing EMIs
1. Corporates who borrowed abroad will be hit.
2. PE/Hedge funds indulging in carry trade will be hit as well and will probably take money out if they have not already.

aam aadmi said...

"In 1992, the Bank of England had to raise rates by 300 basis points in one day to save the pound.
If that happens here, EMIs will go through the roof"

Will definitely happen here. After all it's the poor who vote, not the rich nor the middle class, if rupee falls things become costlier, which unlike corruption actually impacts election results and the netas know it.

I still remember how onions made the NDA govt cry rivers of tear.

Cool Head said...

Your assumption that black money is not getting into the banking system (and thereby contributing to growth of the moneysupply due to fractional reserve banking) may not be completely correct. Perhaps a lot of black money is being laundered by various means, made white and thus entering the banking system. This may be increasing the money supply drastically leading to inflation? What would happen if the govt, now short on funds were to declare a VDIS? The black money from abroad would come in be laundered "officially" and contribute to money supply.However it amy also mean that a lot of it that has been locked in RE assets may get liquidated to be declared as white? What happens if all the hoarders start selling their RE at same time? It may lead to a drop in RE prices but it may lead to inflation after a log of 6 months. I see NO ONE in the media or any forums doing this kind of analysis at all. Pity.

Anonymous said...

Mr. DhIman:

Reading all black money arguments, it seems that black money is not solely reason of real estate price increase. Also, black money is needed to keep RE prices in control. People need to earn more Black money so that why RE, all other necessities can be put in check.

Ha.. Black money rules. Earning every 130 rupees of black money is equal to 100 of white money. But hey you will have 130 to spend and not 100, that will increase your purchasing power. You will more rich. Will elimination of black money you will have to earn more white money to purchase same item.... hmm.. now apply this to current RE prices. 1.5 crores house will cost you 45 lacs more in white money, i.e. around 2 crores. That means you WHITE salary has to be on par... how many Indians are there will 2 crores of white money? RE prices will rise? think again.

DhImAn said...

@Cool Head - I agree with you. I wasn't saying that black money isn't getting laundered or whatever. I was trying to point out that black money has been made into a scapegoat for all ills, which it is not.

It's like this - if you have a fever, you could think the cause is demonic possession, or you could think that the cause is a microbial infection.

Identifying the root cause allows you to plan for the future in addition to fixing your current problem, and that is what I am trying to do.

So if a significant portion of black money has already been laundered, then that leaves even less to push real estate prices, making it less of a culprit.

Further, if there is more white money because of laundering, then banks are doing their fractional reserve thing, making the bubble worse than if the money hadn't been laundered. However, they would have done this anyway if the money was white to start with; becoming black and then white isn't very comforting.

So you see, the entire blame lies on the monetary system and their proponents - chiefly banks. Of course, for anything to function successfully on such a grand scale, there has to be the obvious co-operation from lawmakers, law enforcement, the media and so on.

It is but natural that they deflect the blame away from themselves, to the obvious red herring - black money.

However, the mathematics of the situation don't lie; convert all black to white and you will blow the bubble bigger.

As for nobody doing a rational analysis of the economic situation; well it is a pity, but there are vested interests who actually would discourage such analysis.

DhImAn said...

@Anon 9:11AM:

That kind of "rich", when everyone becomes exactly 30% "richer" at the same time, is called currency devaluation.

Once again, I'm not saying this isn't happening, witness $/Re = 51+.

And that's true. The choices for the government, RBI or whoever are these:

a) Inflate and see your currency get hammered, but keep the RE party going.

b) Don't inflate and see RE, jobs, GDP growth, investments, stock market and everything else get hammered, but keep the currency strong.

Governments inevitably choose a) until the currency gets so hammered that there is international "concern" - a la PIIGS; then they have no choice but to choose b).

How long till the transition? Who knows? But something will give before 2020.

I digressed, but to get back to your numbers, do you know what happens when money supply increases? The cost of money goes down (supply demand thing, as usual).

What is the cost of money? The interest rate of course.

So even if your hypothetical flat costs 2 crores, a lower interest rate will translate to a lower EMI, and more affordability for the buyer.

This in turn means more buyers will jump in, meaning RE demand will rise, meaning prices will rise further.

And thus a bubble begins.

seesaw said...

Who is this Sailesh? He just keeps giving links to articles. Whats the point? Its damn irritating. Do some analysis or else just happily observe the comments.

Anonymous said...

I appreciate Shailesh's links to articles. I am reading this blog as it helps me find other interesting links.

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