Manoj Misra

There are numerous articles and news on price reduction in market or likely market crash. Without doubt, in the current scenario, several builders are offering discounts. Should one buy at these discounted prices or should one wait for the prices to crash further is a big question!!!

Given the fact that a project that is being sold at a discounted price or is likely to be a sold at discounted price, will the project reach satisfactory completion? Do you see that price reduction will directly impact the construction quality - comprise by use of lower cost material?

Will it be safer to invest in a high value (no price reduction/least price reduction) properties than in one that is discounted (and may never see completion or will be of inferior construction quality)? Ram, WiseMan, John, Rex, Diwakar, Rashim and all of you, what do you say?

Regards,

Manoj

__________________
Manoj Misra

Get a different view...

wiseman

There is no such a thing as a right price. And there is generally no sure way to catch the bottom or the top. That said, there are a few thumb rules you must follow to ensure that you do not suffer later on in life since you did a bad deal.

1. Ensure that your payout on Property is not greater than 40% of your take home (together with all other EMIs! ). This will ensure that you have enough money to eat and some to stash away for the rainy day. This is absolutely essential and is the single rule that is most often broken by people (much to their detriment later)

2. Ensure that the price rise over recent years has been stable and not over the 10% to 12%, which is the long-term average Compound Rate of Return. Meaning, don't buy into a raging bull market since, in the long run these markets come down and you will be caught holding property at a high price.

The problem with us is that, now-a-days, we (especially the youngsters who underestimate how much expenses will rise in their future with marriage, kids, etc) tend to become more and more like the Americans in our consumption. We have started consuming the money we expect to receive tomorrow all the way into 20-30 years from now. This entails a huge risk since there is no guarantee that we will have an healthy earning stream over that time period.

This entices us to bite off more than we can chew (and fall for marketing propaganda). Instead of staying within our limits, we see our short-term salary hike for 2-3 years, extrapolate the same rise over 20 years, and go for broke in our buying behavior! Where a 2 BHK in a middle class locality would be a good starter home for say 25 lakhs, we go for the 80 lakh 4 BHK in the fancy location to keep up with the jones'. To compound the problem, we also take that expensive cruise and foreign vacation on (high interest) instalments and buy that Corolla on EMI. Soon, we find that, even with a sky-high salary, we end up eating curd-rice much of the time to make ends meet !

Now, no international arbitrage opportunity that provides you and me a 2-3 lakh/mth salary (for a large number of people) will remain so for long. Hungry people in other countries with similar (or better) skills will mobilise and start whittling away at your business, advantage and high pay. And when such a severe recession comes along, the whittling will become wholesale chopping.

Suddenly, you will find that the EMIs put together, which was 70% of your take home, becomes 120% of your take-home (if, that is, you take home anything at all). Curiously, you will also find that a whole lot of others like you are also facing the same situation. And your home's price (and paper-profit), which you depended along as your buffer for so long, suddenly vanishes and even becomes a paper-loss theoretically wiping you out.

When the inevitable happens, salaries go down and the debt trap closes shut, you are left with no wealth, low/no income and no health. Game Over (but this is no video game!!! ).

This is why you must wait patiently, gather as much cash as possible and when prices reach attractive levels (that level depends on you entirely), and the situation is stable, you buy keeping in mind the rules described above.

Coming to your question - has price declined far enough for you to buy - each of us has to do our research and make our decisions. This is my opinion and my decision based on my opinion:

Price is dependent on supply and demand. Till recently, supply was high and growing. But, due to the free money policy and "artificial" boom, demand also remained high and ahead of supply. But much of this demand was speculative (or euphistimically called "investment" based).

Now, with this uncertainty and fear coming into the markets, this investment demand has fallen off sharply, leaving a huge and increasing over-supply. Till this oversupply is eliminated, prices (whose increase depends on demand over supply) will not increase.

And when will this oversupply be eliminated? And how much will price come down by?

When this fear and confusion disappears. When salaries and jobs come back in plenty. When enough genuine money (NOT easy-money) comes back into the market again for lending. When volumes pick up on rising prices, then the market will have put the bottom behind it and start rising long-term.

But these will not happen till the problems ravaging the west (US, EU and othe countries) also start receding. And this is not expected to happen till 2010 - 2012 (some talk of a decade-long bear market in the West!!!).

So, I expect that prices will fall in waves, fall a lot, stagnate/rise a bit, fall a lot, stagnate/rise a bit and so on. I expect prices to fall (especially in place where it has risen 300% to 500%) by as much of 80%. Which means, prices may go back all the way to 2002 or even to the late-90s levels. Also volumes will remain low and get lower during the slump.

Why am I talking like this? I regularly meet some very senior people in the Financial, Business, IT and other industries (Retail, Banking, Insurance, etc). Their feedback from the US is terrifying! I believe that, though my views seem extreme, I will ultimately be seen as conservative! Things are only getting much worse in your biggest export markets. The Dollar is ultimately expected to decline over the next 2-3 years to around Rs 25 per dollar (this is an unimaginable scenario which might actually wipe out export profits in entire industries). This will decimate our IT and other export industries and lead to very sharp salary and job losses - which will, in turn, lead to huge distress sales of all assets, including property and therby a sharp drop in prices of all asset classes - called deflation.

To me, these are the conditions to be met (and the property to be of very attractive value - even a bonanza price) before I get to buy.

I'm firm in my view after having watched this scenario unfold over the last 2-3 years and fear the worst for the markets before bottom appears. So, I will wait ...

What will you do?

cheers

miliindpawar

Wiseman,

I am truely mesmarized by your analysis and briliance and now visit this forum just to read your post. I have postponed the decision to buy any property for some more time.

I am learning so many things from each of your posts. to me, in no way, you ever sounded like a fear(bear) monger . thanks for your valuable insights! Keep posting...

In addition to your observations about economic state of US. i would suggest you to watch the documentry/movie "the 11th hour". It does look at US economy or rather western way of living in scientific, technical and spititual (yes, i felt so!) angles. In these days when all the western economies, based on excessive consumerism and greed are facing recession, this movie makes even more sense.

cheers

miliindpawar

Hi Wiseman,

I am truely mesmarized by your analysis and briliance and now visit this forum just to read your post. I have postponed the decision to buy any property for some more time.

I am learning so many things from each of your posts. to me, in no way, you ever sounded like a fear(bear) monger . thanks for your valuable insights! Keep posting...

In addition to your observations about economic state of US. i would suggest you to watch the documentry/movie "the 11th hour". It does look at US economy or rather western way of living in scientific, technical and spititual (yes, i felt so!) angles. In these days when all the western economies, based on excessive consumerism and greed are facing recession, this movie makes even more sense.

cheers

Manoj Misra

Thanks Wiseman for detailed response. Key issue I am trying to understand - will price reduction lead to developers using inferior quality material or will risk project completion? Any thoughts on those lines will be really appreciated.

Regards,

Manoj Misra

wiseman

Financial health is the key here. So, if you wait long enough for the market bottom to clean out the weaker builders, then the ones remaining can be trusted to be reasonably stronger - till then you never know for sure. You also need to check the trustworthiness of the builder through other means before deciding.

cheers

Manoj Misra

Thanks Wiseman. Let's see if there are other views!

Regards,

Manoj Misra

Friends, more thoughts on this subject please?

unlikely

hello friends,

The timing for investment in RE will greatly be influenced by the fact whether the money is borrowede or not.

If you are paying in cash and the property is for own use, then timing is not so important.Getting the right kind of property is more important .

However, if you are borrowing to buy a house it is better to wait for the
latest boom to go bust !!!!

paul1970

My answer is a Big Wait. There is no a long way to Go. Be patience.

What we hear and see about the financial crisis in the media may be only 20-40% true, the rest (real story) is unknown. So the worst is yet to come. No accounting guy will tell the real truth in case of a serious problem.