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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?

    Dear Wisemen,

    Just one point, If Mr.X is renting he can can invest his surplus money which otherwise would have gone towards his EMIs.

    I made a rough calculation as follows, please let me know if I am wrong.

    20L invested for 20 yr at 7% p.a will become 77L

    If he invest 28950 (he would have paid the same if he would have bought the house) less Rent; for 240 months * 7% p.a= 63.74 L (I have assumed a total rent payment of 30 L over a period of 20 Yrs first two yrs constant at 8K and increased by 5% after that every year)
    Total cash networth would be 77+64=141L

    so, incase of buying his net out flow of 90L become 1.67C
    while renting the same 90L will become 1.41C
    However if Mr.X can invest the suplus funds in some other avenue which gives 8% p.a (like his RE) the same 1.41C will become 1.61C which is marginally lower than 1.67C.

    Your corrections are wellcome.

    Comment


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

      To all real estate bulls,

      What I observed here is the reluctancy to compare US RE burst with Indian conditions. The main reason is, India has less land mass and more population than US. It perfectly valid reason. I agree.

      But lets compare India with Japan.
      Japan has far less land mass and they have only 20-30% live-able area and remaining all mountains. But still they had faced a real estate bubble and burst.

      As per your logic, RE in Japan should continuously grow, as the population density(number of people per square KM) is more than india, there was no reason for RE to fall.

      Please explain me this, why RE burst happened in Japan?

      Comment


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

        Japan is an excellent example of a housing bubble that went horribly wrong, and it has a glaring similarity to what is happening in India. Read on and identify the similarities:

        * The Japanese real estate market boomed from 1985 to its peak sometime in early 1991.
        * During this time, Japan’s property prices rose much faster and more steeply as speculators used paper profits from a booming stock market to invest in property, insupportably leveraging the prices of both higher and higher.
        * The biggest speculators in Japan's frenzy were deep-pocketed corporations, and they pumped up the commercial property market at the same time that home prices were inflating.
        * Japan suffered one of the biggest property market collapses in modern history. At the market’s peak in 1991, all the land in Japan, a country the size of California, was worth about $18 trillion, or almost four times the value of all property in the United States at the time. A commonly-quoted claim was that the land beneath the Imperial Palace in Tokyo was worth more than the entire state of California.

        Then came the crashes in both stocks and property, after the Japanese central bank moved too aggressively to raise interest rates. Both markets spiraled downward as investors sold stocks to cover losses in the land market, and vice versa, plunging prices into a 14-year trough. In 2005, the land in Japan was worth less than half its 1991 peak, while property in the United States has more than tripled in value, to about $17 trillion.

        Homeowners were among the biggest victims of the Japanese real estate bubble. In Japan’s six largest cities, residential prices dropped 64 percent from 1991 to 2004. By most estimates, millions of homebuyers took substantial losses on the largest purchase of their lives.

        By 2004, a prime “A” property in Tokyo's financial districts were less than 1/100th of their peak, and Tokyo’'s residential homes were 1/10th of their peak, and even at this time they were considered to be listed as the most expensive real estate in the world. At the end of the Japanese housing bubble, some $20 trillion (1999 dollars) was wiped out with the combined collapse of the real estate market and the Tokyo stock market.

        Comment


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

          Japan is an excellent example of a housing bubble that went horribly wrong, and it has a glaring similarity to what is happening in India. Read on and identify the similarities:

          * The Japanese real estate market boomed from 1985 to its peak sometime in early 1991.
          * During this time, Japan’s property prices rose much faster and more steeply as speculators used paper profits from a booming stock market to invest in property, insupportably leveraging the prices of both higher and higher.
          * The biggest speculators in Japan's frenzy were deep-pocketed corporations, and they pumped up the commercial property market at the same time that home prices were inflating.
          * Japan suffered one of the biggest property market collapses in modern history. At the market’s peak in 1991, all the land in Japan, a country the size of California, was worth about $18 trillion, or almost four times the value of all property in the United States at the time. A commonly-quoted claim was that the land beneath the Imperial Palace in Tokyo was worth more than the entire state of California.

          Comment


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

            Then came the crashes in both stocks and property, after the Japanese central bank
            moved too aggressively to raise interest rates. Both markets spiraled downward as investors sold stocks to cover losses in the land market, and vice versa, plunging prices into a 14-year trough. In 2005, the land in Japan was worth less than half its 1991 peak, while property in the United States has more than tripled in value, to about $17 trillion.

            Homeowners were among the biggest victims of the Japanese real estate bubble. In Japan’s six largest cities, residential prices dropped 64 percent from 1991 to 2004. By most estimates, millions of homebuyers took substantial losses on the largest purchase of their lives.

            Comment


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

              Originally posted by nabishek View Post
              One of the main attractiveness of buying a property is the tax benefits one can avail.

              I seek your opinion on impact of this aspect.Thanks.
              As we all know that there is a big hand behind the Builder and the Real Estate Sector. I think this move is to not facilitate the Common/Poor man, its rather to make money for politician and Builders.
              For Ex: If you don't Buy the house there is no transaction so there is no money for the to eat for politician and Builders. When the TAX get exempted then GOVT is earning less. Price is same so we are not benefiting. But politician and Builders people are earning money.
              Either land or AIR and FOOD. Choice is yours.

              Comment


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

                Oops. Sorry!

                Originally posted by ajithpkl View Post
                Dear Wisemen,

                Just one point, If Mr.X is renting he can can invest his surplus money which otherwise would have gone towards his EMIs.

                I made a rough calculation as follows, please let me know if I am wrong.

                20L invested for 20 yr at 7% p.a will become 77L

                If he invest 28950 (he would have paid the same if he would have bought the house) less Rent; for 240 months * 7% p.a= 63.74 L (I have assumed a total rent payment of 30 L over a period of 20 Yrs first two yrs constant at 8K and increased by 5% after that every year)
                Total cash networth would be 77+64=141L

                so, incase of buying his net out flow of 90L become 1.67C
                while renting the same 90L will become 1.41C
                However if Mr.X can invest the suplus funds in some other avenue which gives 8% p.a (like his RE) the same 1.41C will become 1.61C which is marginally lower than 1.67C.

                Your corrections are wellcome.

                Hello,
                Yes. You are correct. I had thought I'd included all possibilities. But failed to include the 29k less 8k into the credit side every month.

                Thats because when we do not have the need to put up 20k extra into an EMI we invariably find that the money somehow gets spent, I suppose!

                If you include it, then renting becomes even more of an attractive option.


                Regarding whether we will go the way of Japan!

                There is some comparison about population density in India and Japan (Japan its higher) and whether, since Japan had gone into RE bust, why not us too?

                Well, it is very unikely that India will see anything like the Japan OR US bust in RE. Thats for 2 reasons:

                1. Our people are very conservative and we are thrifty by nature - largely due to the shortage, socialist economy that we had all along. We are also a poor country. We also have one of the highest savings rate in the world. So, despite the recent greed factor being seen in RE, its unlikely that prices will run away downwards (recollect that the FM saw early trouble in RE and asked lenders and RBI to quickly throttle down in lending earlier this year).

                2. Our economic and financial governance is top quality. We have had the phenomenal luck of having some of the finest economists in the world as our RBI Governors, FMs and PMs.

                Unfortunately for both US and Japan, their corporate sector hijacked their policy and regulatory framework. I was recently reading the post about a small manufacturer a hedge Fund owner and a Financial Speculator (insert a big bank name here).

                In the US the manufacturer creates the jobs and propels the real economy by creating local jobs. But he ends up paying the highest taxes and has a crippling cost that he can barely run his business. The hedge fund has the highest tax breaks and can borrow the most and has absolutely no supervision (you can see the results). The speculator is not far behind in attractiveness in contrast to how much he conttributes to the real economy.

                You can now see why manufacturing has almost completely left the US and its now full of speculators and greedy financial manipulators and con artists (insert Madoff here ).

                The powers that be, deliberately brought US to this situation by systematically manipulating regulation and law to make it happen.

                In India, we are far better. Though we have had the beginnings of a bust, its largely because of the domino effect of their problem. Our manufacturing is fundamentally strong. We still have the hunger to compete and grow. And we still have the desire to save (with this bust many, many youngsters who have gone the "pull-out-the-credit-card-by-20th" way thinking their salaries will grow forever will revert to slower spending and heathier savings. Easy money will be not so easy to come by and this is healthy.

                So, we may actually be saved from the worst of this depression and start out ahead when the next boom happens. And most importantly, we will miss suffering the 2 decade-long recession/depression that affects Japan and will soon affect the US.

                Thats my belief. And therefore there is today very few places like India to live in - Fairly good governance, generally peaceful and rule of law prevails, stable inflation, still growing reasonably - all things you can hardly find anywhere else in the world. But there is fear and confusion also about the near future, unmistakeably. This will take an year or two to dispel and prices will become affordable and then the next boom will come up. Be prepared.

                cheers

                Comment


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

                  Originally posted by wiseman View Post
                  Hello,

                  Regarding whether we will go the way of Japan!

                  There is some comparison about population density in India and Japan (Japan its higher) and whether, since Japan had gone into RE bust, why not us too?

                  Well, it is very unikely that India will see anything like the Japan OR US bust in RE. Thats for 2 reasons:

                  1. Our people are very conservative and we are thrifty by nature - largely due to the shortage, socialist economy that we had all along. We are also a poor country. We also have one of the highest savings rate in the world. So, despite the recent greed factor being seen in RE, its unlikely that prices will run away downwards (recollect that the FM saw early trouble in RE and asked lenders and RBI to quickly throttle down in lending earlier this year).

                  2. Our economic and financial governance is top quality. We have had the phenomenal luck of having some of the finest economists in the world as our RBI Governors, FMs and PMs.

                  Unfortunately for both US and Japan, their corporate sector hijacked their policy and regulatory framework. I was recently reading the post about a small manufacturer a hedge Fund owner and a Financial Speculator (insert a big bank name here).

                  In the US the manufacturer creates the jobs and propels the real economy by creating local jobs. But he ends up paying the highest taxes and has a crippling cost that he can barely run his business. The hedge fund has the highest tax breaks and can borrow the most and has absolutely no supervision (you can see the results). The speculator is not far behind in attractiveness in contrast to how much he conttributes to the real economy.

                  You can now see why manufacturing has almost completely left the US and its now full of speculators and greedy financial manipulators and con artists (insert Madoff here ).

                  The powers that be, deliberately brought US to this situation by systematically manipulating regulation and law to make it happen.

                  In India, we are far better. Though we have had the beginnings of a bust, its largely because of the domino effect of their problem. Our manufacturing is fundamentally strong. We still have the hunger to compete and grow. And we still have the desire to save (with this bust many, many youngsters who have gone the "pull-out-the-credit-card-by-20th" way thinking their salaries will grow forever will revert to slower spending and heathier savings. Easy money will be not so easy to come by and this is healthy.

                  So, we may actually be saved from the worst of this depression and start out ahead when the next boom happens. And most importantly, we will miss suffering the 2 decade-long recession/depression that affects Japan and will soon affect the US.

                  Thats my belief. And therefore there is today very few places like India to live in - Fairly good governance, generally peaceful and rule of law prevails, stable inflation, still growing reasonably - all things you can hardly find anywhere else in the world. But there is fear and confusion also about the near future, unmistakeably. This will take an year or two to dispel and prices will become affordable and then the next boom will come up. Be prepared.

                  cheers
                  Dear wiseman,

                  Wonderful. I liked your your above analisys very much, really logical and very useful. My regard & respect to "wiseman" increases day by day with his thought provoking and quite reasonable view points. Thank you for an yet another good analysis, that too in easy English.

                  ks2071746

                  Comment


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

                    thank you wiseman for the thourough analysis.

                    The main indicators of RE bubble is (as per Japan bubble).
                    Majority of the builders start building commercial complex malls and high end premium housing complexes.

                    Today if you see in mumbai, there are malls for every 2 km's.
                    Every residential will have a swimming pool, all modern unnecessary amenities and builder charge premium for that. There are hardly any new economy residential complex in both mumbai as well as bangalore.

                    This is the striking similarity of RE bubble in india and japan.

                    Fortunately in india, bubble burst very early, suppose if this boom had continued for another 2-4 years, we also could have faced the same situation as japan.

                    Comment


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

                      Compound wall height

                      Can Anyone tell me maximum height of the compound wall and from which reference it is taken Both for CMDA(MAster Plan -1) and DTCP rules.In master Plan -1 it is said that maximum height of the Compound wall should not exceed
                      1.5m but with reference from were the height is taken is not mentioned.
                      Please could anybody clarify on heights with refrence to what are been taken both for CMDA and DTCP please.

                      Comment

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