Why real estate prices cannot fall AT ALL….
Why do I find so many attractive targets to write about?
Just found an article on Rediff.com saying ‘Six reasons why property prices WILL NOT FALL in your city’.
Let us look at it reason by reason?
“Property prices across the country are unlikely to see significant price corrections of more than 10 per cent in the coming few years.”
YOU NEED GUTS TO MAKE SUCH A COMMENT…RAW GUTS.(my comment!)
Reasons given in the article:
1. Because it is a cash haven for BLACK MONEY: come on Indians know that now you pay 30% Income tax and 10% short term capital gains tax. Long Term cap gains is 0% – much easier to convert and invest wherever you wish. Even in cities like Mumbai, only some locations can you do a 70:30 (Cheque: Cash) transaction. Much, much easier to do small transactions in gold.
2. Investors are willing to pay the high interest rates: Complete nonsense. Seen a deal where a builder borrowed Rs. 200 million @ 28% p.a. for 2 years. This builder would have happily given a 35% discount on his rack rate – but needed a big committment from the buyer. As it was not forthcoming, it got converted to a secured loan at 28%.
3. Inflation: I did not understand this as a reason, pardon me.
4. Wages have gone up, thanks to NREGA – so labor is not available….
I think the author means that because of inflation and non availability of labor prices cannot come down. Funny, prices of existing housing stock will fall – because the builder may be going out of business!!
5. Contrary to popular belief only a few builders are leveraged: Do not have enough audited figures to dispute this, but take a look at the balance sheets of listed companies – there is surely some leverage, and further loans are JUST NOT AVAILABLE for builders…
6. You are likely to get about 18% p.a. return: Did this working over the last 25, 30, 35 years…did not find any location where property prices doubled in 4 years…feedback welcome. And I am not even talking about interest cost, borrowing costs, term insurance, maintenance, ….etc.
the bold print is in the article – the normal print is my view. Sorry rediff, find it difficult to agree…
Now I know a bunch of people who have LOST money in real estate transactions – bad builder, bad timing, …many reasons and in many locations too! Pune, Chennai, Bengaluru, Mumbai, Navi Mumbai…..will do specific stories…not sure when!!
here is the link
shinu
Sir,
you are listening to the wrong person. which businessman will say his business is going to slump in the coming years & that too a dump..
Ashal Jauhari
Dear Subra, the author of the article is related with real estate himself. Owner of portal http://www.estatelister.com . So I feel his views are biased & on a lighter note – he is not getting enough business now so trying to increase the same by writing such rubbish stuff.
Thanks
Ashal
Praveen
People in our hometown says
“There are more people who lost money in stocks then in realestate”
mahesh
I do not read rediff.com for any article but for the comments and the entertainment they provide. Sheer Fun.
people bashing each other, making irrelevant comments. and this forms the basis for next 6 slide articles in Rediff the next week.
Thank god it’s not same here 🙂
SAM
Subra,
Lethal Article! I loved your response! We just need once crash -like the 1920s Florida land bubble – especially in good old Mumbai!
RR
What about Thane ? Prices have shot up to almost double in the last 4-5 years. Current prices are at 8000/- to 10000/-. I know several friends who invested in Thane and bought 3BHK for 40 lacs – now they are sitting pretty at 90lacs to 1 crore.
Indian Thoughts
I also personally know ppl who lost in NCR region.
subra
Thane is a good case in point. A friend had gone to see some property with a not so great builder. He saw 5 flats – he was quoted X per sq ft. He did not respond to the builder.
Guy who went was rich and builder suddenly realised that – he offered X/2 if he bought all 5 flats, 2 days full payment.
Oh! I am contradicting the headline, sorry!!
Deepak Shenoy
Great article, Subra!
The real estate fellows are asking though, why this kolaveri, kolaveri, kolaveri da?
anon
@subra: are such thane-like deals available for the “aam aadmi” or only for rich folks who can do the down payment ? How about returns in the short term – couple of years or so.
People have recommended me to buy into a project in initial stage in Bangalore now sell for double the rate in a couple years. Thrown in was the remark that no MF will get you those kind of returns!
Ashal Jauhari
Dear Subra, If there is Rediff then there is ET in this world – read the following article as a counter to the rediff one.
http://economictimes.indiatimes.com/markets/real-estate/realty-trends/will-property-prices-come-down-now/articleshow/10792400.cms?intenttarget=no
Thanks
Ashal
subra
Sure anon such deals are available to anyone who can sign a cheque of Rs. 6.5 crores ONLY…:-) ‘aam aadmi’ – the man who owns the groves..not who sees others eat mangoes 🙂
akshat
so what can the ‘aam aadmi’ (who watches others) do ?
Suresh
Some thoughts..
As some one said Rediff is a good place for entertainment not analysis, usually the person writing an article has something to promote.
Yes Thane does give great returns provided you bought in mid 90s and want to sell now. Thats about 15 years. No special money required. 8 times price now. Of course the only people who bought at that price in Thane at that point of time were practically penniless. Another talebian random event which makes people arrive at RoI conclusions.
Some one from Barclays came to peddle a Real Estate investment fund- ASK – Asit and Samir Kotecha investment fund. only 28% admin costs, 72% return for the investor. ticket size starting at 25 lacs, payable in about 6 months. Pls ask Barclays!! Currently it is giving a claimed 28% RoI.p.s : no clear exit option.
Welcome to the real estate bandwagon.
Piyush
Couldn’t agree more. My two bits on this as below:
1) Lack of funding: Banks unwilling to restructure developer loans, especially when already under pressure from several sectors on NPAs. Speculative funding cycle from investors broken, PEs already aware of high prices and factoring a lower price while funding.When global investors benchmark India with global markets, they would find the prices shocking. (I mean how would you justify to investors a normal South Mumbai flat at same price as a flat in iconic Burj khalifa)
2) Inflated prices, high interest rates, job and economic uncertainty,and wealth effect all compounding the problem. In 2008-09, prices did not fall much because builders had money from IPOs, PEs, banks restructured their loans,buyers had witnesses boom periods with high salaries and bonuses, and hence comforable taking leverage. People had made money in stock market and some of it was put in real estate. No longer are these true.
3) Unofficial funding to developers comes at exorbitant prices (20-40% p.a.). What if even after a year, the said property is unsold.
4) Mumbai property market shows little buying even in festival season. Clear indication of slowdown
5) To afford the same flat costing 80 lacs in Mumbai in 2008 with 75% loan, ur earning should be around 1.3 lacs pre tax to qualify for the loan (assuming 55% of net salary given as loan). Today if the same flat is for 1.2 crs in Mumbai, the pre-tax salary should be around 2.4 lakhs p.m. Wondering if such salary hike has happened in last 3 years. (Rough calculations, but not too far off from accuracy).
6) Enough supply , even in Mumbai. Builders have huge land banks (even 300 acres in certain areas like Thane. Godrej has 3000-4000 acres in Vikhroli.) they merely slow down supply to pretend scarcity.
This and many more.. Prices are going to correct big time in my opinion, whether in nominal terms quickly or in real terms through a long and painful time correction.
Piyush
Just to give some examples on the above:
Rentals in commercial projects in Lower Parel (Mumbai) were 300-350 psf at its peak in 2007-08. Recently, Yes Bank rented ofice space in same area at 110 psf.
Lodha bought land in Wadala at 180 crs per acre 1.5 years ago. Today, DLF is getting a bid from Oberoi at 137 crs per acre in Worli/Lower Parel, a far superior area (Based on market rumours).
Most of the so-called premium projects in Mumbai are selling only 5-10 flats per quarter. Unsold inventory stands at 40 months.
Builders are desperately trying to obfuscate data and confuse people. Raising rates repeatedly when no sales are happening is one such attempt. They forget that at some level, it comes down to affordability of end buyers, which is simply not thr.
People also conveniently forget that real estate prices have fallen before, EVEN IN MUMBAI (remember late 90s or even the recent 2009?)
And they say ” REAL ESTATE PRICES NEVER FALL IN MUMBAI” All I can say is “We’ll see.” 🙂
IsItPossible
Just wait for Euro crisis to unveil by 2012 and soon we will see recession all across the globe which might be trigger for housing bubble bust in India and China…
Jsan
Subra, I agree to you. Property is a clear bubble and when considering other costs like Interest, Term Insurance, Property Insurance, Pain, Time, etc. and most importantly, Risk Reward ratio, it does not makes sense to invest in property. Also, I have only heard people saying that my FRIEND invested in some place and at some X rate and not it is 2X or 3X, I have hardly seen any one telling that I HAVE BOUGHT. So Someone who has made some money in Property, is friend to 100 people and this 100 people are friend/relative of another 100 people. So when one person makes money then 10K people end up saying that “My friend made money ” 🙂 (Power of compounding)
krish
I am not sure about Mumbai but here is my take about other cities/towns in South India. I was looking to buy properties at reasonable price and this what I had seen in last 5 years.
1. For Gulf based NRIs, the property investment is the first option as they can not own fixed asset in Gulf unlike US and Europe. We can presume any Indian headed to Gulf is a property customer creating the demand.
2. Most of the incomes in Indian urban families rose thanks to rise in domestic salaries or families having NRIs and these families are in no hurry to sell the property. The holding power until the right price is certainly seen in the market.
3. Many people are still flocking to urban centers in search of jobs fuelling demand for rents and own homes.
4. Huge tracts of land is not available for expansion with most of the cities and it is no brainer that price may shoots up given the limited resource. Each passing day suburban areas are inching closer to urban areas. Almost every city is facing huge problem of identifying the land for garbage disposal. Land is never as critical as today.
5. Tax breaks : Some people falls for this break as they get fed up with landlords or forced savings.
6. Legal hassles : From owning a land to permission to construct a home or an apartment is not a cake walk these days. Too many licenses and under the table transactions. This has to be incurred by all and is passed onto the customer. Inflation is also applicable to bribes and hence price rise.
7. Land acquisition costs : With government and farmers fixing heavy premiums to buy the land, we are starring at the high base price with out any construction itself.
When owning a home is made as dream (indeed it is today), it is hard to think prices would fall.