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Are Real Estate Prices Going To Fall 40% by Mid 2007?

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Are Real Estate Prices Going To Fall 40% by Mid 2007?

Last updated: February 21 2009
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  • Re : Are Real Estate Prices Going To Fall 40% by Mid 2007?

    what has gone up by 1000% in 10 years has to correct atleast 50%

    dear friends,
    I read the articles posted by wiseman with great reverence & interest as he gives ideas from out of the box thinking and really he is a genius.what I feel is "what has gone up by 1000% in 10 years has to correct atleast 50%".property prices have been jacked up by vested interests by more than 10 times in 10 years so now it is the beginning of the end of the upward move, which will correct or fall atleast 50% from the peak.
    let us wait and watch. buyers be patent and reap rich. it is the speculators who will be hurt.companies like DLF and UNITECH have amassed thousands of acres at rock bottom prices. even if they sell flats at 1300-1500 per sqft they will still earn reasonable profit.but they may not earn that 100 % gain they used to have. Government should not give any concession to those companies. Let them reduce prices to normal levels.demand will automatically pick up.construction companies deserve no sympathy.they are shylocks.they have sucked the blood of people and will continue to do so. Govt should put an end to this menace or Govt should provide housing at 1000/ sqft .people must revolt

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    • Re : Are Real Estate Prices Going To Fall 40% by Mid 2007?

      I guess Natara'a'j is different from Nataraj. just a spoof

      Comment


      • Re : Are Real Estate Prices Going To Fall 40% by Mid 2007?

        Aaaah! Finally!

        Originally posted by nabishek View Post
        Hi All,

        Read an interesting article in outlook money, thought should share it.

        They advise, one should buy when

        Rental Yield >= 5%-6%

        Rental Yield = ((Monthly Rent *12) / Market Price of House ) * 100

        (or) Current Price = 2005 Price + 15%

        (or) Current Price = 65%-75% of Peak Price.

        They suggest perhaps, by end of 2009 the prices should bottom out.

        Folks,

        I have already posted a detailed one on P/E ratio for the Real Estate sector similar to the P/E ratio for Stocks; in response to a query by someone on how do we value RE since it is so unregulated.

        There I had mentioned that in RE, the P/E Ratio is actually Price / Rental, which swings in extremes of around 3% (when prices are at leak) to 7% (when prices are least). These are approximations, so don't pick on me .

        Using this argument, I had mentioned that 1 Crore price can easily come down to 45 lakhs in this swing.

        But I also argued that this may not be the real bottom as the prices may in fact come all the way down from 1 Crore to even 24 lakhs. Hows that?

        Well, as supply overtakes demand, even rent will fall. This is the crucial omission the above calculation has missed. So, if you take today's rent, then price will fall by X. But if you reduce rent itself by say 30% (I used 15k to 10k, which is quite possible), then you could see price falls in the range of upto 75%.

        Sadly, when wiseman says it, no one is interested. But much later, when it comes as an article in a popular mag, it becomes the benchmark. Wht to do?

        And did you notice, this expert is so good that he does not even take into account the further reduction of rental into calculation. So he will undershoot and prices will decline even more than he says so and probably take even longer (2009) than he says so.

        cheers
        Last edited December 26 2008, 07:56 PM.

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        • Re : Are Real Estate Prices Going To Fall 40% by Mid 2007?

          PE Calculation

          Dear Wiseman/Financial Experts,

          Please take the following scenario and help to decide a property is worth ?

          Mr X is finding an apartment at the price of 50 Lacs (inclusive of everthing) and has 20 lacs in hand . He can take 30 lacs loan from private bank B and the possible rent that can be generated is Rs 8000 per month.

          Is it worth to go for the apartment ?

          By depositing the 20 Lacs in bank, Mr X can get 7% post tax benefits and there by can earn 1.4 lacs and can pay out 0.96 Lacs as rent (12*8 K) and can be profitted by 44 K per annum.

          Pls help how to factor the interest on 30 Lacs in PE Calculation ?

          Can the P/E Ratio be in negative ?

          Please extend your help to Mr X.

          Cheers.
          Last edited December 26 2008, 10:34 PM. Reason: Correction

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          • Re : Are Real Estate Prices Going To Fall 40% by Mid 2007?

            Here it comes ... Mr. X - or Sethu?

            Originally posted by sethugm View Post
            Dear Wiseman/Financial Experts,

            Please take the following scenario and help to decide a property is worth ?

            Mr X is finding an apartment at the price of 50 Lacs (inclusive of everthing) and has 20 lacs in hand . He can take 30 lacs loan from private bank B and the possible rent that can be generated is Rs 8000 per month.

            Is it worth to go for the apartment ?

            By depositing the 20 Lacs in bank, Mr X can get 7% post tax benefits and there by can earn 1.4 lacs and can pay out 0.96 Lacs as rent (12*8 K) and can be profitted by 44 K per annum.

            Pls help how to factor the interest on 30 Lacs in PE Calculation ?

            Can the P/E Ratio be in negative ?

            Please extend your help to Mr X.

            Cheers.

            Hi Sethugm / Mr. X ,

            I'm making some assumptions. Loan period is 20 years. Interest is a uniform 10% pa computed monthly. So, here are the figures:

            First of all the Rental Yield on the property = 96000 / 5000000 = 1.92%.

            Compare this to the resonable price at 5% yield and you will get Rs 19.20 lakhs. Meaning, currently you get only 1.92% rent yield on the 50 lakh investment. If you want to buy at a reasonable 5% yield (as quoted by the expert in Outlook, price must come down to Rs 19.20 lakhs!!!

            So, straightaway, the price should decline around 62% from here, going by the outlook model. I would agree that it would be a very good price at 20 lakhs.


            Now lets go to the comparison of buy Vs. Rent.

            Based on the assumptions above, your monthly EMI will be Rs 28950 pm. Discounting Rent of Rs 8k, you will end up shelling out Rs 21000 pm, not including the other things like paying for annual maintenance and repairs.

            Now lets go to the comparison of value after 20 years in the buy Vs. Rent situation:

            If you buy, you will have paid a total of Rs 90 lakhs over 20 years (the rental discount is not applicable as you will be staying in the house). Assuming the house prices rise a uniform 8% pa compounded (I'm assuming it falls in first 2-3 years and then stays flat for a while and then rises at a faster rate of 12%), the final value of the house will be around Rs 1.67 crores.

            So, 90 lakhs paid over 20 years and a house worth Rs 1.66 crores (this may go upto Rs 2.3 crores if you juggle growth rates).

            If you invest at 7% and pay 8000 rent (assuming 8k rent initially goes down 2 years and then grows a uniform 5% pa for the rest of the years), you should be left with around Rs 43 lakhs cash after investing 20 lakhs and paying rent on property.


            All of this is a simplification as we have not applied taxes or tax exemptions. But these will generally be the figures.

            Plan A
            As you can see, after 20 years, you will end up with a property worth (say) 1.67 - 2.33 crores for which you would have paid (say) 90 lakhs.

            Plan B
            In the case of renting, after 20 years, you will end up with cash surplus of (say) 43 lakhs.

            So, buying property is much better than investing the cash at 7%. But there is a caveat!

            This is primarily because of the high leveraging provided to you in the form of loan of 30 lakhs.



            Case of bank giving you a loan of 30 lakhs to invest at 7%!!!

            So, if the bank gave you a loan of 30 lakhs and you invested the entire 50 lakhs at 7%, then you would actually end up with a cash surplus of 1.64 crores!!! Now, this is much, much better than the property worth 1.67 - 2.33 crores less 90 lakhs payout (which gives you 77 lakhs to 1.43 crores)!!!

            So, property becomes very attractive mainly because the bank loans you huge amounts of money and this leverage allows you to crank up the rate of return on your money invested in the property. This is the actual magic with property growth - leverage!!!

            I'm also not talking boom, boom, boom (25% growth), because personally I believe that 10% - 12% long term is sustainable. You can always believe whatever you want (25% CAGR over long term )

            Of course, if you bought this property at 20 lakhs. Wow! You will have no bank loan, no headaches about paying EMI and will have the best of both worlds. That is what I'm waiting for !

            Hope all this helped. Any note on corrections of omission are welcome. These are approximations.

            cheers
            Last edited December 27 2008, 12:47 AM.

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            • Re : Are Real Estate Prices Going To Fall 40% by Mid 2007?

              Chennai RE

              But these will generally be the figures.

              Plan A
              As you can see, after 20 years, you will end up with a property worth (say) 1.67 - 2.33 crores for which you would have paid (say) 90 lakhs.

              Plan B
              In the case of renting, after 20 years, you will end up with cash surplus of (say) 43 lakhs.

              So, buying property is much better than investing the cash at 7%. But there is a caveat!

              This is primarily because of the high leveraging provided to you in the form of loan of 30 lakhs.



              Case of bank giving you a loan of 30 lakhs to invest at 7%!!!

              So, if the bank gave you a loan of 30 lakhs and you invested the entire 50 lakhs at 7%, then you would actually end up with a cash surplus of 1.64 crores!!! Now, this is much, much better than the property worth 1.67 - 2.33 crores less 90 lakhs payout (which gives you 77 lakhs to 1.43 crores)!!!

              So, property becomes very attractive mainly because the bank loans you huge amounts of money and this leverage allows you to crank up the rate of return on your money invested in the property. This is the actual magic with property growth - leverage!!!

              I'm also not talking boom, boom, boom (25% growth), because personally I believe that 10% - 12% long term is sustainable. You can always believe whatever you want (25% CAGR over long term )

              Of course, if you bought this property at 20 lakhs. Wow! You will have no bank loan, no headaches about paying EMI and will have the best of both worlds. That is what I'm waiting for !

              Hope all this helped. Any note on corrections of omission are welcome. These are approximations.

              cheers[/quote]
              Dear wiseman, Really good analysis taking so much of your time.
              I agree with you that buying is always the better alternative in the long run and expecting a nominal return of say 12% per annum. Even at the current RE scenario of our expectation of reducing RE values, if one selects a good and most convenient location and of course for personal use, this time is also good like any other time. But if some one wants to invest money he has, into RE now, it is better to wait & watch for a few more months and decide.

              ks2071746

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              • Re : Are Real Estate Prices Going To Fall 40% by Mid 2007?

                X becomes Rs 1.67 crores.

                Thanks Wiseman for the wonderful explanation.

                Kindly clarify me the following point.

                Given the 8 percent CAGR, Property worth of X amount becomes Rs 1.67 crores.

                What is X ? (Is it 50 Lacs or the discounted price) .

                1.08 ^ 20 = 4.66 The property becomes 4.66 times of current price in 20 years. But we expect a price correction of atleast 40 % in the next years.

                35 Lacs * 4.66 times = 1.63 Crores

                So can I assume that you have discounted the current price by 30 percent and so 50 Lac(quoted) apartment is bought for 35 Lacs .

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                • Re : Are Real Estate Prices Going To Fall 40% by Mid 2007?

                  Sethu & ks,

                  Originally posted by sethugm View Post
                  Thanks Wiseman for the wonderful explanation.

                  Kindly clarify me the following point.

                  Given the 8 percent CAGR, Property worth of X amount becomes Rs 1.67 crores.

                  What is X ? (Is it 50 Lacs or the discounted price) .

                  1.08 ^ 20 = 4.66 The property becomes 4.66 times of current price in 20 years. But we expect a price correction of atleast 40 % in the next years.

                  35 Lacs * 4.66 times = 1.63 Crores

                  So can I assume that you have discounted the current price by 30 percent and so 50 Lac(quoted) apartment is bought for 35 Lacs .

                  Dear Sethu & ks,

                  Yes. 50 lakhs starting, down 30-40%, flat for a few years, up at ~ 10 - 12% (giving an average 8% CAGR over the period) which, to me seems the most plausible scenario given the circumstances (some say boom, boom, boom at 200% for next 2 years and 25% CAGR for rest of 20 years giving property prices in the 200 - 800 crores per ground range in 2028!!!) .

                  If you ask me, given that US depression is being given 50% probability - which is almost certainty - the up-move may take a little longer and the down-swing may be a little deeper.

                  Therefore, if you have the ability to sustain, then buying at anytime is okay, so long as its reasonably priced (4% Rent/Price? which is still 50% below current prices) and all other criteria are met.

                  Also, it feels good when you buy at real bargain prices knowing that the EMIs will not be a burden on your head for 20 years - a very long time in any case.

                  So, if I were a youngster now, I will invest and accumulate cash, renting in the meantime, enjoy the cash-rich status and wait for bargain prices and then invest, you have best of both worlds!!!

                  cheers

                  Orange Property wants you to buy a Mercedes for 10 lakhs!!!

                  Book a Villa at 10 lakhs with buy-back guarantee. Get a Merc free (they promised an International Car - whatever that means ROTFL - but put a Merc in the picture). After 2 years, sell back the villa at original price. Keep the Merc for 10 lakhs - quite a bargain !!!

                  Comment


                  • Re : Are Real Estate Prices Going To Fall 40% by Mid 2007?

                    Originally posted by wiseman
                    Sadly, when wiseman says it, no one is interested. But much later, when it comes as an article in a popular mag, it becomes the benchmark. Wht to do?
                    Wiseman, you are our expert columnist in this forum.I frequent this site hoping to read more of your posts and gain more knowledge and learn from you.

                    Originally posted by wiseman
                    If you ask me, given that US depression is being given 50% probability - which is almost certainty - the up-move may take a little longer and the down-swing may be a little deeper.

                    Therefore, if you have the ability to sustain, then buying at anytime is okay, so long as its reasonably priced (4% Rent/Price? which is still 50% below current prices) and all other criteria are met.

                    Also, it feels good when you buy at real bargain prices knowing that the EMIs will not be a burden on your head for 20 years - a very long time in any case.

                    So, if I were a youngster now, I will invest and accumulate cash, renting in the meantime, enjoy the cash-rich status and wait for bargain prices and then invest, you have best of both worlds!!!
                    Very good advise and analysis.Couldn't agree with you more.
                    Last edited December 28 2008, 06:27 PM.

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                    • Re : Are Real Estate Prices Going To Fall 40% by Mid 2007?

                      Tax Benefits

                      Originally posted by wiseman
                      So, property becomes very attractive mainly because the bank loans you huge amounts of money and this leverage allows you to crank up the rate of return on your money invested in the property. This is the actual magic with property growth - leverage!!!
                      One of the main attractiveness of buying a property is the tax benefits one can avail.

                      People prefer saving 30% tax on the taxable income every year to paying that amount towards the mortgage they own and claim exemption for it.Some are also willing to show loss from owned property for the same purpose.

                      This is seen as the best practice to minimize tax for people in the higher tax bracket.

                      To my knowledge this is not permanent.The future governments may not extend this benefit and may focus on providing affordable housing themselves.

                      I seek your opinion on impact of this aspect.Thanks.
                      Last edited December 28 2008, 06:24 PM.

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