India’s Economy Grows 8.6%, Adding Pressure on Rates

As the economy grew by 8.6%, can the FM please mention the growth of black money, a primary cause of the housing bubble. It should be apparent to everybody that growth of the economy should translate to higher profits for all stakeholders including those in the government who are involved in the approval process. All this underhand money props the value of land and apartments thereby pricing out the common man. India is entering an era which the Japanese became very familiar with in the 90's. India is prosperous but Indian's are not. India has 8.6% growth but Maoists are blowing up trains and killing their own countrymen. It just appears that the Maoists don't think they belong to an country called India, and why would they. They have been neglected all thru the 60 years of independence and now the mining mafia is out uproot them of their own land. There couldn't be a better movie then Avatar to illustrate the plight of the Maoists indigenous people and most probably the Maoists wouldn't even know that someone made a few billion dollars of their cause.

Interestingly we now have Jones Meghraj and others from the real estate business who are saying that the Lodha's deal in Wadala is unsustainable. A case of the pot calling the kettle black. Nobody likes their territory infringed upon and it appears that Lodha's have entered Wadala causing grief to the existing projects., some of which could belong to their clients.

May 31 (Bloomberg) -- India’s economic growth accelerated, adding pressure on the central bank to raise interest rates even as Europe’s sovereign-debt crunch threatens the global recovery.

Gross domestic product rose 8.6 percent in the three months ended March 31 from a year earlier after a revised 6.5 percent gain in the previous quarter, the statistics office said in a statement in New Delhi today. That matched the median estimate in a Bloomberg News survey of 22 economists.

India and China, the world’s fastest-growing major economies, are weighing the risk of Europe’s debt crisis reducing demand in the market that accounts for a fifth of their exports. For India, the room to pause on monetary tightening is limited because its benchmark inflation rate is more than three times that in China.

“The biggest threat in India is from inflation and the risk that the economy overheats,” Kevin Grice, an economist at Capital Economics Ltd. in London, said before the report. “This, in the end, would force the Reserve Bank of India to aggressively hike policy rates, which would inevitably bring far lower growth later on.”

India’s central bank said May 19 that it will raise rates only cautiously even though they are “out of line” with the key wholesale-price inflation rate, running at 9.59 percent. In comparison, China’s $4.3 trillion economy expanded 11.9 percent in the first quarter and consumer prices rose 2.8 percent in April from a year earlier

More here

India weighs capital controls with rupee on rise

Economic times reports on the RBI's efforts to curb the inflow of hot money into India. Instead of adding a tax to the inflow, the RBI should tax outflows so short term speculators think twice before speculating the currency. The govt. is pandering to the exports led IT lobby which will see rupee based earnings shrink as the rupee appreciates. RBI is trying to generate some fear among the investment community however given its inept record in overseeing the IPL Cayman islands/Marutius mess its credibility is doubtful when it is given the task of policing inflows into capital markets.

If foreign money from Caymans ended up in IPL, it would not be surprising if thousands of crores found its way in real estate deals. Anyone from Goa can tell you how much Russian money has influenced the rise of real estate there. Showing fake teeth to the public is what govt officials can do. The general population has to deal with the ineptness of its own elected and selected officials. Just quoting fancy Yale professors to solve India's problems is like applying balm for treating coronary heat disease. Sigh..

India's government is weighing capital controls with the rupee on the rise amid fears of "hot money" flowing into the country as investors pile back into Indian assets.

Unlike fellow emerging market giant China, India allows its currency to float freely and the central bank has warned of the dangers of "sharp and volatile" exchange rate movements that could hurt India's economy.

With the rupee riding at 18-month highs against the dollar, one idea Reserve Bank of India Governor Duvvuri Subbarao is airing to curb sudden big movements in the currency's value is a tax on foreign exchange transactions, known as a Tobin tax, similar to one Brazil introduced last year.

"Depending on what flows come in, we would employ measures, including if necessary something like the Tobin tax," Subbarao said last week, referring to a proposal first aired in the 1970s by Yale economics professor James Tobin.

Subbarao Warns of ‘Hard Landing’ as Goldman Expects Rate Rises

Bloomberg reports

By Kartik Goyal and Anoop Agarwal

March 23 (Bloomberg) -- Reserve Bank Governor Duvvuri Subbarao said India risks a “hard landing” if inflation isn’t reined in as Goldman Sachs Group Inc. and Morgan Stanley said last week’s interest-rate rise isn’t sufficient to curb prices.

“If we don’t tighten now and take action, the adjustment that we will have to make later on will be strong and we might indeed have a hard landing,” Subbarao told reporters in Bangalore yesterday. “Even if there’s a short-term trade-off between growth and inflation, in the medium term it is important that inflation is kept low in order to sustain growth.”

Montek says Goldman Sachs analyst is wrong

“We think the Reserve Bank of India will need to raise effective policy rates by 300 basis points in 2010 to bring policy rates to neutral, in the face of rising domestic demand and inflationary pressures,” Goldman’s Mumbai-based economist Tushar Poddar said in a note on Feb. 26 after the budget was announced.

“300 basis points is quite a huge increase but certainly I don’t expect that kind of increase to take place,” Montek Singh Ahluwalia, the deputy chairman of the Planning Commission, an agency that sets India’s growth and investment targets, said in an interview. He added that a narrowing budget deficit will help restrain any rise in corporate borrowing costs.

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Lets take a hypothetical example

Principal 75L
Interest 10%
Tenure 10 years
EMI ~1L x 120 months = 120L
Total interest paid = 45L

With an increase of the interest rates to 12%

EMI = 1.076L

Total payments 1.076L x 120 = 129 L

Total interest paid = 54L


What about builders who finance the projects thru loans ? They are hit as well. Now if they pass on this cost to the end-user by a 20% increase in prices, the sky-high prices now will reach the Gods and only Indra will be able to afford these prices.

What a mess the UPA government has created.

Lets hear the detractors on this.


Here is the Businessweek article

India Swaps to Rise on Record Jump in Rate, Morgan Stanley Says

Let the party begin. BoooYaaah. Loan interest rates will go back to 12-13% from 9-10% a jump of 20%. Expect EMI's to rise by greater then 20%. Borrowing costs for builders will jump too and they will want to pass this to the customer, thereby forcing a further decline in affordability. There are no political compulsions for the government to keep rates low. They will use the next few years to reverse the bogus interest policy implemented by the supposedly independent RBI over the past few years. I feel sorry for speculators in Mumbai as the crash in stock markets is going to resonate loudly in the real estate sector. Be very careful of under construction projects. They will hold the biggest risk to the buyer.

By V. Ramakrishnan and Anil Varma

Feb. 1 (Bloomberg) -- India’s swap rates will surge as the central bank increases the benchmark borrowing costs by a record 1.5 percentage points this year to curb inflation, Morgan Stanley said.

The cost of swaps that mature in a year will rise 0.52 percentage point to 5.5 percent by April, Morgan Stanley India Primary Dealer Pvt. Ltd. said. Reserve Bank of India Governor Duvvuri Subbarao on Jan. 29 estimated wholesale-price gains will quicken to 8.5 percent by March from as little as 0.5 percent in September. He also raised reserve requirements for banks and said interest rates will increase “in future.”

“Inflation is becoming a bigger worry and that sets the tone for higher interest rates going forward,” Manoj Swain, Chief Executive Officer at Mumbai-based Morgan Stanley India Primary Dealer, said in an interview. “Upward pressure on swaps will increase because of the rising requirement to hedge against higher rates and tighter liquidity.”

Read more here

HDFC Rate cutter offer

In the mortgage business the more you know the better it gets. Ignorance is definitely not bliss.

HDFC has comeup with a scheme called "Rate cutter" for the existing Loan customers . In this ,if you repay 0.5% of the outstanding principal, your interest will come down to 9.5 irrespective of your present rate. If you repay 1.5% , then it comes down to 9%.

There is a huge win for everyone since the differential payout could be in the 30k-50k range but the interest savings are in the lakhs. I have no idea why they don't publicize this but some friends have benefitted from this and are very happy. Hope more folks benefit. Also check with your local bank to see if they are able to match this offer. Enjoy and spread this news. This Diwali is definitely going to good for the HDFC loan borrowers. Kudos to Deepak Parekh for this.

Underwater Mortgages Reach Epidemic Levels

Heard on the radio today. Caller bought a house in Merced, CA for 300k in 2005, now the house is worth 150k. Multiply this situation for all purchases made in 2005 in Merced. Isn't everyone who bought a house in merced in the last 4 years under water ? When the loan goes into foreclosure the caller loses all the equity he has paid up to the bank and the interest payments for sure. All housing loans are structured to pay of the interest first so the principal payment to the house is negligible.

Now assuming an area like Cupertino, CA which hasnt' seen such a drop, maybe 10%. By definition if the owner's equity portion on the house in the first few years is negligible so without doubt this buyer is under water too. By this metric all housing transactions made in the past 4 years should leave their owners under water. Houses prices have dropped to levels more then the outstanding loan amount because of negligible payments made towards the principal.

Lets random sample a house in Santa Clara, CA using Zillow in one of the sought of areas by Indians and Chinese first generation immigrants.

06/19/2009: $660,000

03/14/2001: $650,000

4% closing costs of $650k = $26,000

Total cost (2001) = $676,000

Downpayment ~10% = 76,000

Total Loan ~90% = 60,0000

Total interest paid at 5.4 % till date = 243,311.60

Total principal paid till date thru monthy payments = 80,000

Property taxes = 8,000 x 8 = ~64,000

Income Tax Interest deduction in taxes at 30% = -80,000

House maintainence cost 3,000 x 8 = 24,000

Total equity in the house = 76k + 80k = 156k

Total cost of ownership = 243k + 64k + 24k = 331k

Outstanding loan =520k

Total Loss = 660 -(520k + 331k)  + 80k(IT deduction) = -111k

Total Loss for owner over 8 years = ~$111,000

Lets assume owner had rented the place for 2k a month as an average over 8 years = 2 x 12 x 8 = $ 192k total

Assume the owner saved the difference between mortgage and the rent (3.3k -2k) = 1.3 x12 x 8 = $125k

Total savings in the bank of renter  = downpayment + difference = 76 + 124k = 200k

Assuming an average return of 3% over 8 years of 200k, yielding simple interest = 48k

Total savings with renter in the bank = ~248,000

http://www.zillow.com/homedetails/charts/19597851_zpid,1year_chartDuration/

24x7 Wallst reports

Underwater mortgages hurt home sales and increase delinquencies and foreclosures.

People who have to pay their mortgage holder to sell their homes are less likely to be sellers. A home sold for $200,000 when it has a $250,000 mortgage is a home that the owner may not be able to afford to sell.

People living in homes with monthly mortgage payment that stretch their abilities to cover their living costs may stay in homes that they believe have a lot of equity and where a sale will eventually bring them a profit. That hope for a bonanza may encourage them to go through the agony of making large payments. People who have no hope of making money on their homes are more likely to be willing to abandon them or be kicked out.

Both of these trends make it more likely that the housing sales pace will continue to be slow and property values will not recover.

Real estate research firm Zillow says that 23% of mortgages are now underwater. The company adds that the number could be 30% a year from now.

One of the major reasons for the trouble is that home values fell 12.1% year-over-year in Q2 to a Zillow Home Value Index of $186,500, resulting in a total 22.3% drop in value since the market peaked in mid-2006. Twenty-two percent of all transactions in June were foreclosures, a possible sign that people are not willing to fight until the end to save their houses.

Budget impact on Indian housing loans

If SBI can lower car loans to 8%, how much lower can they go on property ? I remember in Jan 2003, StanChart was offering loans at 7.75% with the some other banks offering 7.25% variable. Now the rate schedules are announced in advance, so people will have visibility into the rates for the 2nd and 3rd year, instead of just floating/variable rate. As of the latest SBI announcements its 8% for the 1st year and 10% for the 2nd and 3rd year. Still not bad when compared to 12-14% rates a year ago. Add to this the increase in the income tax deduction for housing interest loans from 1.5L to 3L. It appears that just like the US, the Indian government bailout of the housing industry is on track to boost property prices. We are back to the races now. How much will the home buyer bite is everbody's guess ?

Home loan exemption increases

It appears that the government is on an appeasement drive to help the builders. Loan based properties will soon see spikes in sales as these changes take effect. Still the impact will be almost zero on highly priced properties which are not served by the loan market specially Mumbai. For that you need 3/4 of your income to be generated by evading taxes. It is then possible to own in Mumbai. I think this move and the lowering of rates to the vicinity of 9% will drive a bunch of people to make purchases. I'm not turning bullish here but I think for the prospective buyer, doing some research locally is probably not a bad thing. You can always choose to back out of the final purchase but some research is definitely warranted. There was another article I read which mentioned that the 6th pay commission has raised government salaries of unskilled workers to 9500. With such rapid inflation, Rs 1000 will not hold much value any longer. Government jobs didn't pay much and everyone flocked to the private industry. Now the scales have been tipped and government jobs everywhere (US or India) will again be coveted with envy. We are seeing a complete reversal of trend unfolding before our eyes.

NEW DELHI:
The government is considering a proposal to hike income-tax exemption available for interest payment on home loans to Rs 2.5 lakh a Home Loan
Tax benefits on home loan year, to boost demand and rebuild the slowdown-hit housing industry.

The ministry of housing and urban development has urged finance minister Pranab Mukherjee to make an announcement to this effect as part of his Budget presentation in early July, a government official said on condition of anonymity.

At present, taxpayers taking housing loans are eligible for income-tax exemption on interest payment of up to Rs 1.5 lakh every year. Besides this, the repayment of principal amount is part of investments eligible for benefit under Section 80(C) of the Income-Tax Act, which has a ceiling of Rs 1 lakh.

The government has already identified housing as one of its focus areas, a fact highlighted by President Pratibha Patil in her address to both the houses of Parliament.

The existing tax exemption limit is considered inadequate at a time when a two-bedroom house in big cities costs at least Rs 25 lakh.

Considering a person takes a loan of Rs 20 lakh at an interest rate of 9.5%, he would pay Rs 1,88,493 towards interest alone in the first year. His annual interest payment in the first five years would be more than Rs 1.5 lakh.

If the exemption limit is hiked to Rs 2.5 lakh, then a person paying that much home loan interest in a year will save an additional Rs 31,000 in tax every year. This saving of over Rs 2,500 a month would be significant for most borrowers, making home purchases more affordable.

However, as per existing norms, the tax benefits start flowing in only after the construction of the house is completed, which usually takes 2-3 years in case of builder flats.

The housing industry has urged the government to allow for the deduction as soon as loan repayment starts, as it would give substantial relief to home buyers and boost demand.

The Budget documents do not provide an estimate of the revenue forgone on account of this exemption, but it is unlikely to be very significant.

Of the total Rs 38,107-crore tax revenue forgone on account of tax exemptions to individuals in 2007-08, nearly Rs 30,000 crore is on account of Section 80C benefit, one component of which is principal repayment on housing loan.

The housing sector in the country has been hit hard by demand slowdown, following a rise in interest rates. Besides lowering of home loan interest rates, the industry has been continuously pitching for greater tax benefit, as it had the potential of stimulating demand.

Buyers rights and consumer activism

It seems that apt buyers have woken up to the internet and are organizing and ganging up against builders in ways never seen before. In the old days, media was controlled by few select companies or the government. Consumers had to resort to telephones, type-writers and sit-in dharnas to have their voice heard. In this new age of instant connectivity, builders are facing the music by irate buyers who are getting increasingly impatient for their purchases. Most of these buyers on delayed projects are paying a high rate of pre-EMI in addition to the EMI they will end up paying once the loan tenure begins. They also have to account for the loss in rent they have to incur for their present accommodation. They are bleeding slowly and it is high time builders be held accountable for their losses. For too long have buyers been herded around like sheep.

Livemint.com reports. Kudos to the Wall Street Journal for voicing the problems of the masses. Most Indian newspapers write soft marketing articles how it is a great time to buy. Its time for the Times group of companies to take some journalism lessons from the WSJ. If only Vineet Jain can get some time from posting Holi pictures on his Indiantimes website.


After using a portion of his retirement money to buy an apartment in Gur gaon, on the outskirts of New Delhi, S.K. Bangia pursued the developer for almost a year to get the purchase agreement. He eventually got a letter cancelling the allotment of the flat, Bangia says.

The 62-year-old former bank manager booked the apartment in a Raheja Developers Pvt. Ltd project in December 2007, the month that he retired, in his and his son’s name. His son wanted to borrow a home loan to finance part of the cost.

“They did not give (me) a buyer’s agreement and an approved sanctioned plan of the project, without which no bank gives a loan,” says Bangia, who sent a legal notice to the company in November, demanding the sanctioned plan and buyer’s agreement. A sanctioned plan is a project layout approved by the local urban development authority.

Homebuyers are taking recourse to consumer forums and the courts and online activist groups to resolve grievances against real estate developers. As slowing economic growth and a property market downturn cause cash-strapped realtors to abort or delay projects, property buyers are increasingly being forced to turn consumer activists.

Bangia, who approached a consumer court last month, claims he was targeted because he was trying to involve other buyers in his fight. He wants double the 9% interest Raheja Developers paid him on the money it eventually refunded him. Raheja, which charges 18% interest for delayed payments, says it’s following the rules.

“As per the terms of agreement to sell, it is mentioned that the company will give 9% interest,” said a Raheja Developers official who didn’t want to be named. “I am not familiar with this particular case...” One reason for the increasing incidence of disputes is a decline in real estate valuations, which is prompting buyers who had booked property at high prices in the past to seek refunds and switch to cheaper developments, said Anuj Puri, chairman of Jones Lang LaSalle Meghraj.

“It is (also) true that many projects of developers have got delayed for genuine reasons—may be because of lack of finance or whatever—and at the same time the tolerance level of buyers has gone down,” he said.

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.

India

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.

U.S. Housing Slump Has ‘Just Begun,’ Says Forecaster Talbott

Feb. 5 (Bloomberg) -- Let’s say you own a $1 million home in Santa Barbara, California.

The house seemed like a steal when you bought it with that adjustable-rate mortgage in 2005. You still love the white beaches and those yachts bobbing up and down in the harbor.

Then you awaken early one morning, troubled that your monthly payments will soon double. You go out to pick up your newspaper and see for-sale signs on five houses on the street. One identical to yours just sold for $500,000.

Are you going to pay the bank $1 million plus interest for your place? John R. Talbott, a former investment banker for Goldman Sachs, poses that hypothetical question in his latest book of financial prophesy, “Contagion.”

His answer: “I don’t think so,” he says. “If I’m right, then this housing decline has only just begun.”

Talbott is an oracle with a track record: His previous books predicted the collapse of both the housing bubble and the tech-stock binge before it. A friend who runs a New York steak house introduces him as Johnny Nostradamus, he says.

What sets him apart from other doomsayers is his relentless emphasis on simple arithmetic. He walks you through the numbers to show how U.S. house prices got so out of kilter with wages, rental prices and replacement values -- the cost of buying a property and building a home. (“Homes in California by 2006 were selling at three to five times what it would cost to build a similar home from scratch,” he writes.)

Five More Years

Talbott’s latest predictions are sobering. The U.S. is only halfway through the total potential decline in housing prices, he says. Home values will continue to deteriorate for four to five years, he forecasts. Adjustable-rate mortgages issued in 2004 and 2005, for example, are only now resetting for the first time, he notes.

Bankers may “try to blame the crisis on poor Americans with bad credit histories, but that is not the real cause of the housing crisis,” he says. “The greatest home-price appreciations and the homes most subject to price readjustment are in America’s wealthiest cities and its glitziest neighborhoods.”

At the end of 2008, a record 19 million U.S. homes stood empty and homeownership sank to an eight-year low as banks seized homes faster than they could sell them, the U.S. Census Bureau said this week. Almost one in six owners with mortgages owed more than their homes were worth, Zillow.com said the same day.

By the time the crash ends, Talbott predicts, homeowners will have lost as much as $10 trillion, with investors and banks worldwide losing almost $2 trillion. And just as the U.S. starts getting over a prolonged recession, the first big wave of baby boomers will retire, depriving the economy of their productivity (and high consumption), he says.

Back to 1997

So how far will the price of your home on the range fall? Citing historical data and trends, Talbott concludes that real prices should return to their average 1997 levels, adjusted for inflation. Why 1997? A 120-year historical graph shows that real home prices in the U.S. stayed relatively flat for 100 years, then began rising in 1981 and surged from 1997 to 2006.

A return to 1997 prices “would get us out of the heady, crazy days from 1997 to 2006 in which banks were lending large amounts of money under poor supervision and aggressive terms.”

How did we get into this mess? Talbott blames everyone from average Americans who caught “the greed bug” to hedge funds and credit-default swaps. The single biggest error, he says, was for U.S. citizens to allow their national politicians to take large campaign contributions from big business and Wall Street -- a theme Kevin Phillips developed in “Bad Money.”

‘No Accident’

“This crisis was no accident,” he says. It began, in Talbot’s view, because the U.S. government was “co-opted” into deregulating the financial industry. Politicians were “paid to deregulate industry,” taking billions of dollars each year in campaign contributions.

His investment advice for this prolonged recession: Hang on to cash and invest in gold or Treasury Inflation-Protected Securities, or TIPS. If he had to invest in stocks, he would put his money in China.

Living in smaller houses with their savings gutted, U.S. baby boomers will face yet another big challenge, Talbott says:

“The toughest job to get in the future will be the elderly person greeting you as you enter the local Wal-Mart.”

“Contagion: The Financial Epidemic That Is Sweeping the Global Economy . . . and How to Protect Yourself From It” is from Wiley (256 pages, $24.95, 15.99 pounds, 19.20 euros).

EMI Quiz

I was running some numbers thru an EMI calculator and was surprised at some of the results, so I thought why not play a little game with the bloggers and have some fun.

Q-1.
Assuming a principal of 10L, interest rate of 12% and repayment of 20 years, how much of the EMI payment would go towards interest at the end of 5 years ?

Interest paid
A) 2.52 L
B) 3.85 L
C) 5.78 L
D) EMI = equal interest and principal payments so does not matter.

Q-2.
Now if a US homeowner borrowed the same at 6% what would be the result

A) 1.20 L
B) 2.78 L
C) 3.21 L
D) Half of the answer of Q-1


The answer as some people have pointed out is C for Q1 and B for Q2. The black magic of the EMI is responsible for a payment of more then 500% of the EMI towards interest as opposed to principal. After 5 years the borrower wouldve paid 80k as principal and 5.8L as interest. At the end of 10 years the principal payment is 2.3L as opposed to the interest of 10.8 L. After 15 years, you have finally paid of 1/2 the principal and 15L as interest. At 20 years you have paid off the 10L principal and 16.4L as interest.

Now for an average apt of 1crore in Mumbai with 10% down lets do the numbers for 90L loan. Here I wouldve paid an interest of 1.4 crores for a 90L loan and god forbid if I couldn't make the EMI after 5 years and had to sell the apt I wouldve paid 52L as interest with 7L as principal and the house would have to be worth atleast 1.4 crores to break even.

The EMI method of loan repayment is one of the worst methods of calculation and benefits the banks the most, leaving the borrower shackled in loans forever. As finance professionals will tell you, there are many ways of calculating interest where interest and principal are paid off in equal chunks per payment. Here the interest payment is drastically reduced due to the reducing principal. Unfortunately the bank has no interest (pun not intended) in principal payments and all they care about is the interest.

Builders and their inflation predictions

It comes as no surprise to me that the members of the real estate community including investors are disappointed at the contents and comments on this blog. Lets put things in perspective and maybe they can understand a bit more about investing and economic boom and bust cycles. When the biggest builder DLF makes a comment on national TV that real estate prices will to return to inflation adjusted prices of 1998, that is a pretty strong statement.

Lets examine the official inflation numbers from 1998 as reported by Reserve Bank of India publication. I'm no economist but cursory look at the inflation numbers shows an average WPI inflation of 5.1% over 1995-2004. If we go with another average for the subsequent period of 7% for the period 2004-2008, we have a combined average of (5.1 + 7)/2 = 6.05% inflation adjusted numbers for a 10 year period 1998-2008. To keep up with the compounded inflation of 6.05% annual inflation 100 rupees in 1998 should be worth Rs 187.71 in 2008, a total return of 87.71%%. If DLF is correct prices have to be roughly 1.87 times 1998 prices. A 3 bed room apt worth 20L in 1998 should be worth 37L in 2008, however we have seen that this apt is now worth 80L, a 400% return over a 10 year period instead of an 87% percent return. This apt has to drop 50% from the 2008 level to revert to the inflation adjusted number of approx 40L.

Even we we assume the alternative inflation number of 8.1% listed in the document for 1995-2004 and assuming an 10% inflation number for 2004-2008. We still have an inflation number of 9% compounded leading to a return of 137% over a 10 year period, still far cry from the 400% number we have seen in real estate pricing.

Either prices have to fall 50% to return to mean, or DLF is making statements they don't believe in.

Real estate using leverage is a great investment when money supply is infinite and loans are granted without scrutiny. Under any other situation, the game is going to end only one way, with a big thud. If this was not the case, we wouldn't see block buster ipo's of 2007 now trading at 5% of their peak value in a period of 15 months. For all the perma-bulls like Dilip who are still hanging by the thread of godly deliverance and hope, I have a bridge to sell.

I just started reading this article on economic theory and I hope Dilip reads it. He is probably surfing at 28.8k bits right now so expecting him to read and understand it is akin to asking a caveman the boiling point of water. Many people didn't buy over-priced real estate and missed the big boom. However they ended up leaving the apartments mentally bankrupt folks who are now keeping awake all night worrying about EMI's, while they the smart ones are sleeping soundly in their rental bliss.

Housing bubble comparisons - US vs India

Rediff.com has an article bankbazaar.com on the reasons why the US housing bubble went bust. At the end of the article there is a paragraph which downplays the impact of the Indian housing bubble and focusses on the Indian tendencies towards home ownership among other things. What the article fails to mention is the meteoric rise in prices over short period of time, the affordability issue in cities like Mumbai, Delhi, the black money aspect of the construction business and finally the steep drop in realty construction company stock prices. This the exact soft marketing which we have discussed and now see in action.

The lending scenario in India - Bankbazaar.com

A subprime crisis of this nature and magnitude is unlikely to occur in India, thanks to some very strict bank policies that are in practice.

As a general rule the borrower needs to pay a down payment that covers 15-20 per cent of the cost of the property. This by itself is a test of the borrower's credit worthiness and enables him to have a stake in the property. Also, the bank safeguards its lending interests by ensuring that the money lent is below the market value of the property making allowance for a nominal dip in property prices.

Another important factor is the initial screening banks conduct to confirm the eligibility of the loan seeker for the requested loan amount. Banks make sure that the EMI of their loan applicants does not exceed 50-55 per cent of their monthly incomes. This ensures that as long as the borrower is able to maintain his current income levels, he will have no trouble in making his monthly payments.

Moreover the Indian sentiment revolves around buying a house and spending a lifetime there. Home buyers looking to live in the house purchased rarely change homes in short time frames while in a place like America embracing change is second nature. A situation like this may be far away for India, as we are a growing economy, where mortgage levels are not comparable to developed economies.

We also have strict regulatory bodies like the Reserve Bank of India [Get Quote], which ensures that loan products that could produce systemic risk never make it to the market. Besides this aspect, a favourable market does not exist in India for similar loan products like the Option ARM. The psyche of the Indian consumer does not easily accept debt instruments and a loan is usually high priority and the focus is usually on closing it as early as possible.

Sobha, Unitech offload assets to pay debts

Cash-strapped realtors look to offload assets

Livemint.com reports

The developer has debt obligations worth Rs2,500 crore coming due by the end of March

Bangalore / New Delhi: India’s second largest developer by market value, Unitech Ltd, is selling parts of its 14,000-acre land bank, leading a trend among realty firms putting up parts of their properties for sale to tide over a financial crunch and repay debt.

About 30 plots of the company in the National Capital Region centred on New Delhi, that are part of Unitech’s mixed-use developments and were dedicated for building hospitals and schools, are now up for sale.
“We are selling some of the plots but not all of them,” a company spokesperson said. “We have already sold two such plots.” He declined to give further detail.
Unitech had earlier said it was looking at “monetization” of some of its completed properties to meet debt commitments. The company is trying to sell land parcels in Noida and Gurgaon, both on the outskirts of New Delhi, to meet its debt obligations, analysts say.
The developer has debt obligations worth Rs2,500 crore coming due by the end of March. Unitech is trying to raise funds to repay this debt through several measures such as selling some hotel, office and retail assets and by diluting equity at the company and at the project-specific levels.
Unitech, which is holding an extraordinary general meeting of its shareholders on Monday to seek approval for an enabling resolution to raise up to Rs5,000 crore through various means, has to repay Rs1,100 crore in the next two weeks and meet further debt obligations of Rs1,500 crore over the next three months, according to a 15 January report by BNP Paribas Securities.
“The management has hinted that it is in the process of raising Rs800 crore to tide over the near-term liquidity crisis,” Sandeep Mathew, an analyst with BNP Paribas, wrote in the report. “Failure to do so could lead to forced sale of underlying assets (primarily land).”
In the heart of Bangalore’s business district, a 1.5 acre plot has been put up for sale by Sobha Developers Ltd, a leading developer in south India.
The land, strategically located close to the city’s main shopping and business district of MG Road, at the junction of Church Street and Museum Road, is a fetching piece of real estate in an area that is one of the most expensive in the country’s technology hub.
The builders, analysts said, have been trying to sell off the plot for the last four months, where it had initially planned a shopping mall and a hotel. But the high asking price of Rs120 crore has kept away buyers. The money will be pumped into Sobha’s under-construction projects that are delayed and to repay expensive loans.

Realty firms are looking at other avenues to manage cash flows as debt has become more expensive, analysts at Credit Suisse India Research said in a 13 January note. The report states that Sobha, for example, borrowed funds at 24-30% for short-term periods in October-November and seems to have defaulted on some repayments during this period.
Unitech borrowed at 19% in the same period. “These borrowings are due for payment in January which could become a problem for both Sobha Developers and Unitech as volumes in the property sector are yet to pick up. With mutual funds having stopped lending to this sector and private banks reluctant to lend, Sobha is selling off its ‘excess’ landbank,” the report states.
Unitech and Sobha Developers are only two of many such cases of forced land sales in the past few months that have witnessed aborted land deals, low demand and few sales, pushing developers to defer launches, stall projects and scurry for cash to beat the financial slowdown.
Sobha Developers managing director J.C. Sharma declined to comment, citing a so-called silent period firms need to observe ahead of quarterly results announcements.

“The Church Street land was bought on a 60-year lease period and the developer is planning to re-lease it away. But the sale price is too high,” said a Bangalore-based real estate consultant close to the negotiations. The consultant didn’t want to be identified.

“These are land parcels that would have been bought in the last two-three years at steep prices and where construction hasn’t yet taken off. There are some buyers still—mostly high-net worth individuals—who can buy, but are hard bargainers. With demand being low, it is a buyer’s market now, putting developers in a tough situation,” he said.
Tables have turned for developers, who till the beginning of 2008 would scout for land and pay steep prices. Not any more. “Today, I am flooded with proposals from builders wanting to sell some land assets. But where are the buyers?” asked Praveen Kumar, chief executive officer of One Third Earth, a property and land advisory in Bangalore.
“Many developers are selling the licensed land or developed/under construction projects to get working capital,” said Manish Aggarwal, director, land and industrial agency, at consultancy Cushman and Wakefield India.

Developers are selling assets that will fetch the maximum price such as hotels, office or land licensed for residential group housing.

Land prices in the periphery of cities across India have on average fallen by 25-40% over the last few months, said Aggarwal. “Should the landlords or developers decide to price their products rationally, it is expected that there may be an interest for joint development, joint venture transactions for sellable projects starting from July-October quarter this year,” he said.

Builders under pressure as buyers press for refund

Economic Times reports

Real estate boom are now under pressure from buyers and investors who look to exit these projects.

Already in a spot due to unavailability of bank loans and a fall in sales, the developers are less inclined to oblige the buyers who are coming together to mount pressure for refunds in projects that are yet to take off.

Several buyers and investors, angered by the developers’ inability to start work on projects, have stopped payment of installments on their purchases, adding to the companies’ cash problems.

Investors in DLF’s commercial projects in Delhi and Kolkata have come together with the help of brokers to put pressure on DLF to start construction or refund initial deposits. “DLF is way behind schedule in their projects. It should either start work on the project immediately and deliver in time or return our investment with 15% interest,” says Amit Jain (name changed), a senior executive with an MNC who invested Rs 1 crore each in DLF’s projects in Okhla in Delhi and Kolkata.

Mr Jain says since DLF follows a time-linked payment plan, it has been demanding payments from buyers even without starting construction.

The broker, who facilitated Mr Jain’s purchase, says DLF has not even paid the government to convert the industrial plots at Shivaji Marg and Okhla in Delhi into commercial plots. However, a DLF spokesman denied this saying, “We go by the agreement with the buyers signed at the time of booking. The allegations over the status of our projects are not true. We will deliver as per schedule.”

Several projects of Omaxe, Unitech and Parsvnath are also facing similar problems. Akash Verma, a Noida-based garment exporter, had booked an apartment each in projects of Omaxe and Unitech in Noida. He booked an apartment at the ‘soft launch’ of Omaxe’s Noida project in May 2007. Omaxe had promised to launch the project formally a few months later at a higher rate. The formal launch never happened and investors like Mr Verma are stuck. Omaxe has turned down requests for a refund. An Omaxe spokesman, however, said the company has ‘considered and taken care’ of all such requests.

Mr Verma has also been unsuccessfully seeking a refund of his investment in Unitech’s Grande project. “I am paying Rs 4.5 lakh as EMI. Unitech executives say the project will be delivered on schedule, but there is no worker at the site,” he says. A Unitech spokesman said, “We generally discourage cancellations. But if the buyers insist, we refund the money after deducting 10-15% of the total value of the apartment.”

Most realty firms do not encourage refund requests. Till the end of 2007, investors could easily sell their property in open market as the prices were going up. But with buyers disappearing from the market, investors are forced to approach developers for refunds.

Some property buyers are seeking refunds due to their weakened financial positions, while several others do so as they are not sure of the developers’ ability to complete the project. There are a few others who seek refunds as they feel that they can strike a better deal now with prices undergoing a major correction.

Strong headwinds ahead for outsourcing vendors

Its amazing how much critical mass we have amassed on this blog that real estate folks are now watching it with some more scrutiny.

I appreciate all bouquets and brickbats on behalf of the bulls and bears since this platform is only as worthy as its readers and commentators. Observer, BindasBhai, Shailesh, Shrinwas, Anil, Jayaram, M and others who I've missed deserve credit for their comments.

The goal of this blog to cut beyond the marketing hype perpetuated upon us by the builders thru the media. I am tired of reading soft-marketing articles planted in the newspapers/web which tout moronic analysts quoting the usual bullish rhetoric for real estate.

Just three months ago we heard the FM saying we will grow by 9%. I don't know how a crystal ball gazing FM can make such ludicrous predictions. As soon that the FM makes a prediction all the touts latch on to it and make the rest of us believe that growth will spur demand for real estate/stocks etc. Now when the FM changed his forecast to 6%, who will compensate those investors/buyers who predicated their purchases on this crystal ball ? We all all herd at the mercy of the big bad wolves. If only we can understand this, maybe we will know opportunities arise when sentiments change from euphoria to depression. It is only then when money will regain its worth and gold is found.

I'm not predicting a depression in real estate, however I'm saying a serious correction is in progess and any purchase now without a major discount is just bad investment. It is not often that a buyer is in a driving seat but now is the time to bargain hard and get value for your hard earned money.

The bottom line is cashflow, yield, affordability, credit availablity and job security to sustain any boom in any sector. As of today the Sensex is up 300 points. We'll see how long this rally lasts.

Business Standard reports.

Slowdown to shift focus to hard asset-intensive biz: Tholons.

New Delhi, Jan. 5 The global downturn is expected to impact the growth and margins of the vendors in the outsourcing space for the first 2-3 quarters of 2009, before picking up and ending the year on a stronger note as clients look to cut costs and improve revenue, advisory firm Tholons said.

According to its latest report, ‘Top ten trends in service globalisation — 2009’, the slowdown would also see reduced number of start-ups in the services sector as the focus shifts to sponsoring hard asset-intensive businesses.

“There are strong headwinds for vendors in the outsourcing space … It has become increasingly clear that the downturn is impacting revenue and we expect most large firms will see a decline in the quarter-on-quarter earnings,” it said.
Impact already felt

Service providers have already started feeling the effects of decreased margins and employee downsizing, while buyers are reducing IT budget allocations for outsourcing engagements. This is evidenced by drying pipelines, cancelled bookings and increased pressure to deliver value beyond cost.

“Buyers will need to re-assess their outsourcing strategies and implement a better mix of multi-sourcing, combining nearshore and offshore models, while service providers will look to tap growing domestic markets such as China, India, Argentina, Brazil and even the US as a means to hedge against the volatility of existing offshore contracts,” Mr Avinash Vashistha, Global Managing Partner & CEO at Tholons, said.

Clients, with reduced IT budgets, are expected to turn more selective, demanding greater contractual flexibility and output- or result-based payment schemes.
Eye on opportunities

Terming 2008 as a “tumultuous year for outsourcing”, Tholons said that although it continued to advise clients to remain cautious this year, it did not discount the opportunities and potential evident in the market.

It further said that the global downturn is motivating service providers to focus on recession-proof industries such as healthcare and education. “The healthcare industry globally has been a good adopter of global outsourcing in the last couple of years and we see this trend continuing on a steep curve as we look towards 2015,” says Dr Garima Vashistha, President (Healthcare) at Tholons.

Other sectors like manufacturing, retail and telecom would start to look attractive as they come under pressure to reduce cost drastically to survive.

Consolidation in the financial sector is inevitable due to the global financial crisis. Increased merger and acquisition activity in the financial sector would also mean that merged entities would want to integrate their outsourced services — leading to an increase in spending for integration projects — software applications, data centre consolidation and tighter integration of other operational platforms.

With financial institutions such as Lloyds TSB/HBOS and Bank of America/Merrill Lynch merging, service providers would also find themselves bidding against incumbent transnational rivals like IBM, Accenture and HP-EDS for several large-scale integration contracts (valued anywhere between $500 million and $1 billion over five years). Pricing pressures would kick in as suppliers scramble to meet their quarterly target through the year.

Large India-based providers are expected to see EBITDA margins plunge below 20 per cent over the next three years, as they move more IT projects offshore (mostly to India), and struggle to balance operations with rising wages, Tholons said.

How India Avoided a Crisis

NYTimes article on what could have been a super inflated bubble in real estate. The article reproter fails to mention that black money and corruption was responsible for the spike in prices. Reddy left the private equity folks, hedge funds and "Black Money" to take the risk of escalating land prices. These folks are the sub-prime of India. Not the bank.

“What has taken a number of us by surprise is the lack of adequate supervision and regulation,” Rana Kapoor was saying the other day. “This was despite the fact that Enron had happened and you passed Sarbanes-Oxley. We don’t understand it. Maybe it’s because we sit in a more controlled economy but ....” He smiled sweetly as his voice trailed off, as if to take the sting off his comments. But they stung nonetheless.

Mr. Kapoor is an Indian banker, a former longtime Bank of America executive with a Rutgers M.B.A. who, along with his business partner and brother-in-law, Ashok Kapur, was granted government permission four years ago to start a private bank, which they called Yes Bank. In the United States, Yes Bank is the kind of name a go-go banker might give to, say, a high-flying mortgage lender in the middle of a bubble. (You can even imagine the slogan: “Yes is part of our name!”) But Yes Bank is not exactly the Washington Mutual of India. One news release it hands out to reporters who come calling is an excerpt from a 2007 survey by The Financial Express: “#1 on Credit Quality amongst 56 Banks in India,” reads the headline.

I arrived in Mumbai three weeks after the terrorist attacks that killed 200 people — including, tragically, Yes Bank’s co-founder Mr. Kapur, who had served as the company’s nonexecutive chairman and was gunned down while having dinner at the Oberoi Hotel. (His wife and two dinner companions miraculously escaped.)

My hope in traveling to Mumbai was to learn about the current state of Indian business in the wake of both the credit crisis and the attacks. But in my first few days in this grand, sprawling, chaotic city, what I mainly heard, especially talking to bankers, was about America, not India. How could we have brought so much trouble on ourselves, and the rest of the world, by acting in such an obviously foolhardy manner? Didn’t we understand that you can’t lend money to people who lack the means to pay it back? The questions were asked with a sense of bewilderment — and an occasional hint of scorn. Like most Americans, I didn’t have any good answers. It was a bubble, I would respond with a sheepish shrug, as if that were an adequate explanation. It isn’t, of course.

“In India, we never had anything close to the subprime loan,” said Chandra Kochhar, the chief financial officer of India’s largest private bank, Icici. (A few days after I spoke to her, Ms. Kochhar was named the bank’s new chief executive, in a move that had long been anticipated.) “All lending to individuals is based on their income. That is a big difference between your banking system and ours.” She continued: “Indian banks are not levered like American banks. Capital ratios are 12 and 13 percent, instead of 7 or 8 percent. All those exotic structures like C.D.O. and securitizations are a very tiny part of our banking system. So a lot of the temptations didn’t exist.”

And when I went to see Deepak Parekh, the chief executive of HDFC, which was founded in 1977 as the country’s first specialized mortgage bank, practically the first words out of his mouth were these: “We don’t do interest-only or subprime loans. When the bubble was going on, we did not change any of our policies. We did not change any of our systems. We did not change our thought process. We never gave more money to a borrower because the value of the house had gone up. Citibank has a few home equity loans, but most banks in India don’t make those kinds of loans. Our nonperforming loans are less than 1 percent.”

Top city builders meet to discuss slashing prices

This meeting by the builders smacks of an oligopoly where these moneybags decide to raise or drop rates by consensus. The SEBI and other organizations should look into this meeting for price fixing and prosecute the ceo's of these companies. Imagine a meeting between Airtel , Vodafone and Reliance to decide on per minute rates. This is a cartel and should be accountable for monoplistic practices. The biggest irony of this article is the shedding of crocodile tears for the poor laborer who has seen his daily wages drop to 50rs from 150 rs. If these builders who prices apts for 50,000 per sq/ft , they can sure pay a half decent wage to someone who toils in the heat and sun, while these neo-rich bozos sip drinks in the comfort of a 5 star hotel

The 2nd bigger irony is blowing the trumpet of the Times of India, that they were the first to report on the price drops. While they reported price drops, they also reported why prices are going to go up and how 40,000 per sq/ft is real steal for a crappy apt in Bandra. Such irresponsible journalism has made the times of India, the toilet paper of India.


Nauzer Bharucha | TIMES NEWS NETWORK

Mumbai: At least half a dozen of the city’s top builders met at a prominent five star hotel in central Mumbai on Friday night to brainstorm about the one thing that has been worrying them for the past several months—how to kickstart the virtually stagnant apartment sales following the downturn in the real estate market.
Among the several issues discussed was the possibility of reducing prices of flats if it helps sales to pick up. According to industry sources, the Maharashtra Chamber of Housing Industry (MCHI), which has leading developers as its members, is expected to explore this possibility at its meeting on Tuesday, although the matter is not on its agenda. Already, some builders have informally reduced their prices between 12% to 20% in their projects in the suburbs.
However, Mohan Deshmukh, one of the developers present at the dinner meet, denied that builders can ever take an unanimous decision to cut prices. “Every developer has his own priorities and it is up to him to decide on a price cut. The MCHI cannot take a decision on their behalf,’’ he said.
Although the property market began to flatten out about 18 months ago, Mumbai’s builders, by and large, have managed to hold on to their prices. Between 2004-2007, home rates shot up between 100% to 300% on an average, going up to 500% in certain high-end projects. Builders may move Centre to plead their case
Mumbai: Top city builders, who were peeling the pinch after global meltdown, participated in the brainstorming session to decide price cut on Saturday. The meeting commenced at 7.30 pm and wound up only at around 11 pm, sources said.
It is learnt that among some of the leading builders who were present at the meeting included Rajni Ajmera of Ajmera Builders, Dharmesh Jain of Nirmal Lifestyle, MCHI chairman Pravin Doshi (Acme Group) and Deshmukh, who is CEO of Deshmukh Builders and past chairman of MCHI.
There was complete unanimity among the participants that the industry is passing through an “unprecendented’’ crisis. This has affected not only the developers, but a host of ancillary industries, including a large army of unskilled labourers working at the project sites.
“A labourer who used to earn Rs 150 a day is today struggling to barely eke out Rs 50 a day because many projects have come to a standstill,’’ a leading developer told TOI recently. Virtually every Mumbai-based developer is on a cost-cutting drive including retrenching employees across departments.
The Mumbai developers are also thinking of representing their case to the Centre to increase the priority sector lending to home buyers from Rs 20 lakh to Rs 40 lakh. Early this month, the RBI had allowed banks to classify housing loans up to Rs 20 lakh as priority sector advance. The interest rate on such home loans is 1.5% lower than the normal rate of interest.
The downward trend in the property market began in January 2007 when banks began hiking their interest rates, and since then, bookings have continued to drop with every rate hike announced. The crisis worsened after the global economic meltdown affected the Indian market since the past few months.

Property consultants said even existing loan account holders are finding it tough to hang on as EMIs threaten to upset their monthly budgets. Last year, TOI was the first to report that several builders, dealing on a one-to-one basis with home buyers, had begun offering freebies like not charging for parking slots, not charging a premium for a floor rise and, in some cases, even offering to pay the stamp duty.