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Real Estate prices - On the way down?

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Real Estate prices - On the way down?

Last updated: June 18 2012
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  • Real Estate prices - On the way down?

    An interesting article:


    The safest argument for higher property prices is the corruption factor. The nexus between real estate promoters and politicians is always spoken of when there is talk of unsustainable high property prices.

    Politicians invest black money in property and it is in their interests to keep property prices high. Politicians also pressurise bankers to go soft on loan defaults by real estate promoters and that leads to the promoter being able to maintain prices despite a clear lack of demand.

    These arguments for property prices staying high and going higher may hold true in the very short term, but in the longer term, it does not hold true.

    Lack of funding to the real estate sector forces builders to resort to the informal markets, where costs are usurious. Reuters
    In fact, the corruption factor has become a selling point for builders, while investors justify paying high prices citing corruption. But buying property based on the corruption factor can only lead to disaster.

    Corruption actually kills property prices

    Corruption has costs and these costs impact property prices adversely. For example, a bank forced to restructure loans to real estate will cut down its exposure to the sector leading to a lack of bank funding to the sector and high cost of loans for consumers.

    Lack of funding to the real estate sector forces builders to resort to the informal markets, where costs are usurious. The builder usually cracks when servicing debt becomes unmanageable. The result is half-way constructed buildings or unsold inventory leading to depressed sentiment in the markets.

    The high cost of loans for the consumer leads to postponing of genuine purchases leading to demand coming off. The consumer who is aware of unsold inventory will keep away from making purchases on hopes of builders lowering prices down the line. High supply coupled with falling demand leads to prices coming off down the line.

    How real estate stock investors react

    Equity investors, in comparison, do not factor in corruption when selling real estate stocks when the going gets tough.

    Equity investors look at balance sheet strength, growth potential and return on capital; when all three signs show of stress, they sell the stock. The BSE Realty index is down 88 percent from its high of 13,848 hit in January 2008 and is currently trading at around 1,650.

    The sharp fall in the value of realty stocks is in stark contrast to property prices either staying high or going higher.

    Equity investors are assigning lower property values to builders, while property investors are assigning higher property values to builders.

    Property prices usually follow equity prices on the way down as builders cannot get access to equity capital for leverage and with both sources of funding — equity and debt — cut off, builders will have a tough time staying afloat.

    Ultimately, market forces win

    The market is a great leveller. Equity markets have levelled the highflying ambitions of realty companies, which built up huge expectations of unfettered growth.

    Real estate markets will do the same as the patience of investors (whether it is a politician investing in black money or a speculator seeking to make leveraged gains) wears off on the extension of a return horizon. Investments made with a three-year time frame have now been extended to six years.

    The time factor brings down returns and with interest rates high in the system, the opportunity cost becomes higher. The market then follows the supply-demand principle: with supply far higher than demand, there is a fall in prices.
  • #2

    #2

    Re : Real Estate prices - On the way down?

    Intersting article. However, it does look like RE prices in Bangalore ( especially residential land ) are steadily increasing and do not show any signs of decreasing.

    Comment

    • #3

      #3

      Re : Real Estate prices - On the way down?

      Great article, but when is this going to happen?

      Comment

      • #4

        #4

        Re : Real Estate prices - On the way down?

        Originally posted by agopal View Post
        Intersting article. However, it does look like RE prices in Bangalore ( especially residential land ) are steadily increasing and do not show any signs of decreasing.
        Situation mentioned in this article may very well apply to RE in area like gurgaon.

        In bangalore, there are more end users than investors and that is the reason for steady increase in price.
        Also Bangalore market does not rise at insanely high speed as compares to other RE markets. Thi may be due to good demand from working class people.

        Someone rightly said "RE in Bangalore does not rise at high speed and also does not fall" So it is a steady growth like Fixed deposits But lately the trend seems to be changing and any fast growth in prices should not be sustainable.

        Comment

        • #5

          #5

          Re : Real Estate prices - On the way down?

          Originally posted by Rddh12 View Post
          An interesting article:


          The safest argument for higher property prices is the corruption factor. The nexus between real estate promoters and politicians is always spoken of when there is talk of unsustainable high property prices.

          Politicians invest black money in property and it is in their interests to keep property prices high. Politicians also pressurise bankers to go soft on loan defaults by real estate promoters and that leads to the promoter being able to maintain prices despite a clear lack of demand.

          These arguments for property prices staying high and going higher may hold true in the very short term, but in the longer term, it does not hold true.

          Lack of funding to the real estate sector forces builders to resort to the informal markets, where costs are usurious. Reuters
          In fact, the corruption factor has become a selling point for builders, while investors justify paying high prices citing corruption. But buying property based on the corruption factor can only lead to disaster.

          Corruption actually kills property prices

          Corruption has costs and these costs impact property prices adversely. For example, a bank forced to restructure loans to real estate will cut down its exposure to the sector leading to a lack of bank funding to the sector and high cost of loans for consumers.

          Lack of funding to the real estate sector forces builders to resort to the informal markets, where costs are usurious. The builder usually cracks when servicing debt becomes unmanageable. The result is half-way constructed buildings or unsold inventory leading to depressed sentiment in the markets.

          The high cost of loans for the consumer leads to postponing of genuine purchases leading to demand coming off. The consumer who is aware of unsold inventory will keep away from making purchases on hopes of builders lowering prices down the line. High supply coupled with falling demand leads to prices coming off down the line.

          How real estate stock investors react

          Equity investors, in comparison, do not factor in corruption when selling real estate stocks when the going gets tough.

          Equity investors look at balance sheet strength, growth potential and return on capital; when all three signs show of stress, they sell the stock. The BSE Realty index is down 88 percent from its high of 13,848 hit in January 2008 and is currently trading at around 1,650.

          The sharp fall in the value of realty stocks is in stark contrast to property prices either staying high or going higher.

          Equity investors are assigning lower property values to builders, while property investors are assigning higher property values to builders.

          Property prices usually follow equity prices on the way down as builders cannot get access to equity capital for leverage and with both sources of funding — equity and debt — cut off, builders will have a tough time staying afloat.

          Ultimately, market forces win

          The market is a great leveller. Equity markets have levelled the highflying ambitions of realty companies, which built up huge expectations of unfettered growth.

          Real estate markets will do the same as the patience of investors (whether it is a politician investing in black money or a speculator seeking to make leveraged gains) wears off on the extension of a return horizon. Investments made with a three-year time frame have now been extended to six years.

          The time factor brings down returns and with interest rates high in the system, the opportunity cost becomes higher. The market then follows the supply-demand principle: with supply far higher than demand, there is a fall in prices.
          lol - for a 10L property one plans to invest - the global or indian RE scenario will have minimum or no impact.ppl who will keep waiting to buy property in blore waiting for thr price to fall will continue waiting.its no rocket science - just invest anywhere in blore and you will reap benefits 5+ yrs dwn the line

          Comment

          • #6

            #6

            Re : Real Estate prices - On the way down?

            Property prices is based on the buyers also and not only sellers. If the buyer is there for certain price, that becomes the base price then on. I know a couple of people who invested some 3-4 years back and have put their flats for sale since last 1 year, which is still waiting for last 1 year as they are not getting buyers. In the end, they are renting it out so that they get some rental income, which is 2-3% of what they invested and they don't even get their EMI worth of rent.

            For end users, who are buying to stay, it doesn't matter if the rates stays same of goes up.

            Prices did crash nearly 30% in 2008, so property prices have tendency to go both ways, and not just UP. That made the investors wary of investing, hence the rates in Bangalore don't increase much in less time. With the economy down, many companies are still struggling to show profits, remember that the current companies that are announcing the results are already affected and have reduced guidance for next FY. That will certainly affect the job market.

            But the rates have again gone up to those prior to 2008 levels. But now it is the end users who are buying ready-to-move-in (RTMI) flats and not investors. Investors look more to under-construction or newly launched projects. We see many advt from builders who had launched for less rates but now ready to sell for slightly less than market rate or approached by brokers.

            If someone sees value and has a stable job, then any price is good as long as that person wants to stay there for sometime. Investment decision should be made carefully.

            Originally posted by mithun View Post
            lol - for a 10L property one plans to invest - the global or indian RE scenario will have minimum or no impact.ppl who will keep waiting to buy property in blore waiting for thr price to fall will continue waiting.its no rocket science - just invest anywhere in blore and you will reap benefits 5+ yrs dwn the line

            Comment

            • #7

              #7

              Re : Real Estate prices - On the way down?

              Originally posted by Gaurav2k101 View Post
              Situation mentioned in this article may very well apply to RE in area like gurgaon.

              In bangalore, there are more end users than investors and that is the reason for steady increase in price.
              Also Bangalore market does not rise at insanely high speed as compares to other RE markets. Thi may be due to good demand from working class people.

              Someone rightly said "RE in Bangalore does not rise at high speed and also does not fall" So it is a steady growth like Fixed deposits But lately the trend seems to be changing and any fast growth in prices should not be sustainable.
              Bangalore RE has also lately been infected by Investors-Virus, and this virus has come from North. Now supply is getting many times more than demand. Bangalore does not have any industry of its own and survives on IT - which is on a very weak wicket. With further fall in IT income, Bangalore can once again regain its original status of being a 'city for retired'

              Comment

              • #8

                #8

                Re : Real Estate prices - On the way down?

                Originally posted by Mulmule View Post
                Bangalore RE has also lately been infected by Investors-Virus, and this virus has come from North. Now supply is getting many times more than demand. Bangalore does not have any industry of its own and survives on IT - which is on a very weak wicket. With further fall in IT income, Bangalore can once again regain its original status of being a 'city for retired'
                Mulmule ji , .... Bangalore is still the biggest IT hub of India and accounts for 35% of IT jobs in India...
                So it cannot be the city for retired people...
                It will further grow and the worst that can happen is that the new launches may get hit but ready to move in in a better place will never go down to that bad level ... If it goes then i'll buy Adarsh Palm meadows villa in 50 lacs ruppees which now costs 5 crore.

                Comment

                • #9

                  #9

                  Re : Real Estate prices - On the way down?

                  Marketing in India is through propaganda/panic/fear. Take for instance a moisturizer or a facial cream. The way it works in india is 'create a humiliating scenario'. Show a girl with pimples on her face and she is booed by all her classmates. Or a guy is ridiculed for his dry skin. Then the cream is presented 'if you want to save your self from that embarrassment, better use this cream'. propaganda in RE is 100 times worse.

                  Prices are shown/ published in newspapers and create a sense of panic among people that prices are increasing everywhere. Buy NOW. Else you are gone. And they publish 10% increase in prices in news papers . Look at Saturday real estate edition of newspapers. There is a list of RATES. Earlier , there used to be JUST for Mumbai ( or local city). Now the list covers EVERY city in india.

                  This is a propaganda. The BIGGEST scam in the history of India. Unfortunately no political outfit is daring this malice.

                  But what seem to be happening is , for every 10% increase , probably 20% buyers, exiting the market. So you see the same ad for months and some times years together. It is beyond any one's comprehension how and why these builders and realtors are convinced that any one would buy the flats at these rates.

                  Comment

                  • #10

                    #10

                    Re : Real Estate prices - On the way down?

                    Tulips, in Bangalore big builders are not bringing down the price at all.
                    Economy is tanking but real state is going up in Bangalore.

                    Comment

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