Hi

In chennai the prices of plots or even a flat for that matter is going beyond the reach of a common man. Is there any chance for the prices to correct in near future?

With a salary of 15k, it is beyond the capacity of common man to buy a house or flat
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  • Banks Act

    Banks waive off loans to this Big RE Developer. For what ? For cheating the customer !!! But at the same time if you miss 2-3 EMI due to the present economic scenario your sweet home will be a bankers property.
    What a shame on this Financial Institutes ... Basically they are taking money from you and giving to uncuth RE developer. And as you know most of RE developers/agents are "anghutha Chap" (Thumb Impression). But this idiots enjoy one of the most LUXARY life.
    "Think Again and Again Before You Give Your Money To This Builder"
    CommentQuote
  • link for the ET

    Hi Wiseman,

    If you have the link for the report you are refering from the Economic Times, please post it here
    CommentQuote
  • You seem to be really confused :)

    Originally Posted by Natarajg007
    Hmm this gentleman tells that he predicted stock market at 20K (I think he meant Sensex!).

    Well I had told all and sundry to exit at 5900 on Nifty. Now it is at 3000s. That does not mean realestate in India is going to collapse. That is why keeping a name like Wiseman does not make people wise! Forget the marsupials, but in India we have blatant liars on boards, who can write anything. This is a buyer ONLY board in general and folks like to hammer down the price of realestate. REason is simple. They sold stocks and want to enter realestate.

    In effect if you talking of India vs US, Singapore etc, you are comparing Whales and Lions, not even Whales and DOlphins. Ofcourse on this board filled with NRIs who neither care for India nor for their new country, who have probably studied in some college but will talk as if they got into an IIT they can predict anything. I dont care.

    All I can say for sure is. IF YOU HAVE MONEY TODAY BUY LAND IN MDS, BLR etc. IT will be more difficult for you to buy them tommorow than today.
    Fullstop.



    Dear Natraj,

    Your obsession with RE going upward is such that you are exhibiting several logical conflicts in your arguments.

    When I said I predicted a fall at 20000, I assumed everyone would know what I was talking about (it was NOT the price of Tomatoes!). And that mention was to indicate that predictions follow the irrational behavior of markets - stock as well as RE, or anything for that matter.

    You took that literally and figured out (did you do it all by yourself or did you take some help?) that since Stock Market did not have anything to do with RE, I was being disingenuous at best. You have NO idea how many ways you are wrong. Anyway, shooting off before thinking is a dangerous passtime.

    You say that you also predicted people exit at Nifty 5900. Why did you do that? If you really gave that call ( I think you cooked that one up), its probably because Stock assets had exceeded their fair value. As you have seen markets corrected 60% and you were proven right.

    By now we all know that RE prices had exceeded all connections to realism and were at purely speculative levels. Now we know that if ever you happened to buy flats at 1 crore in a remote location where even MARSUPIALS DREAD TO GO :D , that is NOT because you had the money. Its because some banker was stupid enough to give you 30 times your salary as loan without knowing whether you were worth it! Now, even RBI is telling Builders that interest rate reductions is not enough. Significant price cuts (and NOT freebies) is the only way for them to save themselves. Do you consider yourself wiser than the RBI Guv? Dream on!!! Maybe I'm not wise, but at least I'm cash-rich having sold RE at the 2007 heights (which I'm sure you are not probably being stuck with some property where Marsupials fear to tread!!! .

    Why don't you use the same wisdom of a 5900 sell call and similarly give a (rather belated) RE sell call? I think you really DID NOT give that Nifty call. You probably just cooked it up to show you too gave a correct call in retrospect :) . I can show some really reputed people who will vouch for my claim. Can you?


    Secondly, you are looking into the past and projecting into the future. Buying in remote areas is highly risky. Generally speaking, lower the price, more remote the area and this is BECAUSE risk is high (that price is low). You might wonder what kind of risk. The risk I'm talking of is that of development NOT proceeding in the direction you have anticipated. You are merrily advising youngsters to buy in remote areas with the surety of development proceeding in that direction. Well you are making the CARDINAL ERROR of driving looking into the Rear View mirror - and you know where that lands you :D.


    Thirdly, you are showing the crazy salary inflation as a justification for land prices going up. That is reversing the cause and effect. That is putting the cart BEFORE the horse. Next few years will show you dear chap, that the 100 times increase in you salary from 87 to 03 was PURE FICTION. That because of that India is rapidly pricing itself OUT of the export markets. And that that salary increase may itself correct by 50% on a long-term basis. Count on it.


    Fourthly, Natraj, you have the color-changing habit worthy of a chameleon - well if you introduced Marsupial, why not I introduce Chameleon?) . I never saw you EVER post that prices will decline even by a rupee. Now, I suddenly see you sliming in a 50% decline as YOUR prediction. Can you show me ANY post of yours where you talked of ANY decline (leave alone 50%). Is this the same as your 5900 Nifty call? Pure imagination AFTER THE FACT!!!


    LASTLY, I think you have either a deep stake in the RE business OR you have bought beyond your means and are stuck. And you are trying to talk up the RE market. Wish you luck, which you are going to need. As Parsvanath has just shown (and other RE companies are going to show in the next 2 Qtrs), their Stock Market behavior is going to be a very accurate indicator of their business performance - a disaster. When they come to market in distress, and when widespread job losses leads to another avalanche of distress sales (would we be seeing you selling at that time?), we will see who is the really wise ones!!! :D

    To repeat what you said (with a difference)
    All I can say for sure is. IF YOU HAVE LAND TODAY SELL PROPERTY IN MDS, BLR etc. IT will be MUCH more easy for you to buy them tommorow than today.

    And as far as I can see, the blatant liars (that you point to) are NOT those who, never having predicted a fall in RE prices OR a Nifty 5900 sell call before, suddenly turn around and slime it into their post AS THOUGH they have been claiming it all along (do you take other readers to be stupid or something? )

    And what do you have against IIT guys? After all they worked to get where they are!!!

    You must remember though that, any joker can be foul mouthed. But it takes wisdom and experience to be a real wise man!!! :D

    cheers
    CommentQuote
  • Ouch!

    Originally Posted by wiseman
    Dear Natraj,

    Your obsession with RE going upward is such that you are exhibiting several logical conflicts in your arguments.
    ....

    LASTLY, I think you have either a deep stake in the RE business OR you have bought beyond your means and are stuck. And you are trying to talk up the RE market. Wish you luck, which you are going to need. As Parsvanath has just shown (and other RE companies are going to show in the next 2 Qtrs), their Stock Market behavior is going to be a very accurate indicator of their business performance - a disaster. When they come to market in distress, and when widespread job losses leads to another avalanche of distress sales (would we be seeing you selling at that time?), we will see who is the really wise ones!!! :D


    cheers


    :D :D I smell fear in realtors posting in these forums.
    CommentQuote
  • One must always be humble! Or invite the wrath of the heavens :)

    Originally Posted by metroplots
    Dear Mr.Wiseman, Your postings are simply mind-blowing and I can feel the amount of care and knowledge that goes into these articles which you write. They need considerable time and effort and discipline from your part to post these messages in this forum.

    We are a website here in chennai. We cater to the requirements of different Residential and Commercial clients, and what you say in your articles are helping us and our customers to make some good decisions when investing in RE, especially in Chennai.

    Keep up your good work and Congrats......!



    Folks,

    Thank you all!!! You have no idea how much pleasure it gives me to see that some one at least derives some benefit from my wild rants :D!

    Yes, I do spend a while (sometimes it takes 2 hours or more) to think, research, write, edit, spell/grammer check and tune the post to say exactly what I meant to say. But the aim is to make each one a work of art :), so that when you revisit them again in future it still has timeless value (otherwise whats the use? ;))

    I personally follow my convictions through my actions. And this way I have always managed to keep the food on the table and a (non-leaky) roof over my family's head (and maybe put away some cash for the proverbial rainy day).

    When I see that others have used my posts to make good decisions, it humbles me that the good Lord has given me the ability to learn from my mistakes (I have made several of them as well) as well as talk about them in a way that people appreciate and find useful.

    I'm also very unhappy and apalled that sometimes I use my written language skills in taking off on people (shows poor judgement and culture). If anyone is hurt (Natraj, maybe?), my unconditional apology . And it will not be seen again!!!

    CAVEAT
    Nevertheless, I would request everyone to make the FINAL CALL about their investment decisions THEMSELVES and take full responsibility for them. I am specifically referring to Chataara and others to not get carried away with what I post ALONE (I know you also do your own research and thats good). Do you own homework and do the right thing. And of course, take the help of various posts of experienced people (like Pinnacle who is a prolific poster with much useful information on RE, unlike me who just gives fact-based arguments about direction :). While one tries to see the "what to do" and
    "why", the other sees the "how" and "when").

    I try to convince with my logic. If I'm convinced other's logic is better, I adopt their logic, abandon mine and change my position and actions to reflect the new learning.

    The only thing that brings more pleasure than having your own home is having your own home with NO DEBT! And since homes are the assets on which most people take on mind-blowing loans and run the greatest risk, if I can help you guys be smart and get a house as well as keep the loans low, well, why not? You will have achieved what very few people do on their own (live a minimum-debt life).

    I will continue to post to the best of my ability so that people come out with a profit from this global crisis and secure their future for a long time to come. That is the ultimate goal.

    cheers
    CommentQuote
  • Originally Posted by wiseman
    Folks,

    Thank you all!!! You have no idea how much pleasure it gives me to see that some one at least derives some benefit from my wild rants :D!

    Yes, I do spend a while (sometimes it takes 2 hours or more) to think, research, write, edit, spell/grammer check and tune the post to say exactly what I meant to say. But the aim is to make each one a work of art :), so that when you revisit them again in future it still has timeless value (otherwise whats the use? ;))

    I personally follow my convictions through my actions. And this way I have always managed to keep the food on the table and a (non-leaky) roof over my family's head (and maybe put away some cash for the proverbial rainy day).

    When I see that others have used my posts to make good decisions, it humbles me that the good Lord has given me the ability to learn from my mistakes (I have made several of them as well) as well as talk about them in a way that people appreciate and find useful.

    I'm also very unhappy and apalled that sometimes I use my written language skills in taking off on people (shows poor judgement and culture). If anyone is hurt (Natraj, maybe?), my unconditional apology . And it will not be seen again!!!

    CAVEAT
    Nevertheless, I would request everyone to make the FINAL CALL about their investment decisions THEMSELVES and take full responsibility for them. I am specifically referring to Chataara and others to not get carried away with what I post ALONE (I know you also do your own research and thats good). Do you own homework and do the right thing. And of course, take the help of various posts of experienced people (like Pinnacle who is a prolific poster with much useful information on RE, unlike me who just gives fact-based arguments about direction :). While one tries to see the "what to do" and
    "why", the other sees the "how" and "when").

    I try to convince with my logic. If I'm convinced other's logic is better, I adopt their logic, abandon mine and change my position and actions to reflect the new learning.

    The only thing that brings more pleasure than having your own home is having your own home with NO DEBT! And since homes are the assets on which most people take on mind-blowing loans and run the greatest risk, if I can help you guys be smart and get a house as well as keep the loans low, well, why not? You will have achieved what very few people do on their own (live a minimum-debt life).

    I will continue to post to the best of my ability so that people come out with a profit from this global crisis and secure their future for a long time to come. That is the ultimate goal.

    cheers


    Wiseman,
    Looks like SBI cheif agree with your view on Indian RE. Just like you, he also thinks that RE price in India to fall 50% atleast.

    This is what SBI cheif has to say
    http://www.financialexpress.com/news/realty-prices-to-fall-50-says-sbi-chief/383260/
    CommentQuote
  • Least in city centers ... most in outskirts

    Originally Posted by arun1288
    Mr.Wiseman your post are fantastic.do you think the prices of land in prime localities like anna nagar,kilpauk,besant nagar and others would come down?
    recently i checked out a new flat in anna nagar near SMF hospital,the builder's price is 10500/sq.ft and for a 1500 3BHk flat it cost more than 1.65 cr including all the deposits.its shocking to hear such huge price for a flat.



    Thanks Arun.

    In My Opinion, city centers are least affected mainly for following reasons:

    1. They have taken the longest time to gain in value (remember Fort St.George was built over 400 years ago)

    2. They have the best infrastructure (relative to outlying areas)

    3. They are owned by people across a wide spectrum of industry as well as people with more wealth (generally) who have ability to sustain themselves financially thru crises. Therefore, even if one or two industries goes down, the effect will not be so sharp as the case if IT goes down on properties in South Madras (being an oldtimer I still like the name Madras, it has its own charm, though the Fort was apparently built between two fishing villages known as Chennai patnam and Madras patnam and therefore the names :).

    Most importantly it must not go down because I have some property on Radhakrishnan Salai and would hate to lose money :D.

    Property is the second best choice of investment (Stocks being the best, though for many people who consider stocks to be a gamble including my 70+ father :), land still remains the best. But gains are best when they happen gradually over time since they rarely decline much later. Property that have seen sharp and undue rise in a short time (due to speculation) generally wait for these kind of declines and fall enough to ensure that they too show slow and steady gains over longer durations.

    In modern times, since speculative intent has soared sharply, naturally the gains as well as declines are bigger. So, entry timing is crucial IF you want your land assets to give you an above market return. Even though most people say that they are buying for posterity and will not sell their land and therefore it should not be treated as a short-term asset, wouldn't you like it if your property gave you good gains from the time you picked it up (after all you never know when an emergency may require you to sell it!!!)


    cheers
    CommentQuote
  • Thank you for sharing useful topics.You might want to consider creating some type of entity, such as an LLC, to manage the trust. Hell, some people even create a S-corp to manage the LLC. It all depends on your investing goals. You should talk to a CPA and a lawyer who specializes in real estate investing for advice.
    CommentQuote
  • See this. Real estae prices in chennai are bound to fall
    ===============================================

    Global fin crisis to slow worldwide 2009 IT spending

    Press Trust of India / Silicon Valley November 13, 2008, 15:15 IST


    Worldwide spending on information technology, especially in the United States will slow "significantly" in 2009 due to the global financial crisis, a leading IT market intelligence firm has forecast.

    Worldwide IT spending will grow 2.6% year over year in 2009, down from the pre-crisis forecast of 5.9% growth, according to a newly revised forecast from IDC.

    In the United States, IT spending growth is expected to be 0.9% in 2009, much lower than the 4.2% growth forecast in August.

    "Although all the economic forecasts went from up slightly to down drastically in a matter of days, the good news is that IT is in a better position than ever to resist the downward pull of a slowing economy," said John Gantz, chief research officer at the IDC.

    "Technology is already deeply embedded in many mission-critical operations and remains critical to achieving further efficiency and productivity gains. As a result, IDC expects worldwide IT spending will continue to grow in 2009, albeit at a slower pace."

    On a regional basis, spending growth in Japan, Western Europe, and the US will hover around one per cent in 2009.

    In contrast, the emerging economies of Central and Eastern Europe, the Middle East and Africa, and Latin America will continue to experience healthy growth, but at levels notably lower than the double-digit gains previously forecast.

    On a sector basis, software and services will enjoy solid growth while hardware spending, with the exception of storage, is expected to decline in 2009, the IDC said in a press release.

    http://www.business-standard.com/india/storypage.php?tp=on&autono=49471

    http://www.business-standard.com/india/storypage.php?tp=on&autono=49473

    BT to cut 10,000 Jobs; may impact IT jobs in India

    BS Reporter / Mumbai November 13, 2008, 15:22 IST


    BT Group Plc, the UK's largest phone company, aims to cut about 6 per cent of its workforce by March 2009, to improve profitability after reporting a slide in second-quarter earnings.


    Most of the 10,000 cuts, out of a workforce of 1,60,000, will be in the area of “indirect labor'' such as agency, contractors, subcontractors and offshore workers, the company said in a statement today.

    BT’s earnings before interest, taxes, depreciation and amortisation fell 1.3 per cent to 1.43 billion pounds ($2.1 billion) in the second quarter.
    A lot of the offshore work for BT is done by Tech Mahindra, BT’s IT services joint venture with the Mahindra Group, which focuses on IT solutions for the telecom industry, and some other IT companies in India.
    BT surged the most in six years in London trading. The economic downturn makes it more difficult to win new clients and complete contracts, CFO Hanif Lalani said in a TV interview today.

    About 4,000 positions of the planned 10,000 have already been slashed, BT said. Job cuts among people working directly for BT will be largely achieved through natural turnover, the company said.

    BT gained as much has 14.2 pence, or 13 per cent to 126.7 pence, the biggest intraday surge since September 2002. The stock, which had lost 59 per cent this year, traded at 124.7 pence as of 8:38 am in London today.

    CommentQuote
  • This Boom is not really a boom!

    Originally Posted by kar27us
    Dear wiseman

    If the interest rates are reduced will there be a boom again in real estate in india,if that is so then why is it in US even after they cut interest rate to 1% the prices of property are still falling.



    Hi,

    These 2 cases are entirely different, though it seems they are similar in terms of interest rate. The whole thing has to do with debt and the impact of leverage on business. Lets see how:

    Say you are doing business with 1 lakh and are having a profit of 25000 (return on equity/capital employed of 25%). Now, say the bank lets you borrow another 2 lakhs at an interest of 15%. So, after deploying a total of 3 lakhs, gross profit is 75000. After bank is paid interest of 30000, you are left with profit of 45000 giving you a return on your equity of 45%. You see the effect of leverage of 2:1 on your capital? Nearly doubles profit.

    If the interest is brought down to just 5%, the increase in profit will be as high as 20000, which is nearly the original 25000 profit you got with only your own money. So, with Greenspan crashing interest from 5.25% all the way to 1%, the economy was set to pick up and get out of the 2002 recession. But that alone was not enough. People needed cash money to start business moving. So, he flooded the system with cash. And so the economy boomed. In which direction? Real Estate! He created the RE bubble!!!

    He lent heavily to the RE sector which started a building boom. It all looked so nice that everyone was now able to afford a house. Time passed. And slowly criminals started gaming the system. Lenders started all kinds of tricky instruments like NINJA (No Income, No Job) loans, Neg-Am (Negative Amortization) loans, zero-down-deferred-interest loans, so on and so forth. Basically getting the EMI so low that people who would not normally be able to buy, could now afford the loan. And seeing how people could afford more and more, they started jacking up the prices and selling property as though it was getting into short-supply. But there was a catch! These low rates would RESET after 2-4 years. When they reset, normal interest rates would apply and the EMI would jump by x%.

    But fate intervened and ensured that interest rates also jumped. How? When interest rates are too low, there is hyperactivity and everyone is borrowing madly and making profits hand-over-fist. The economy quickly overheats and inflation soars and to cool it interest rates are raised so borrowing (and thereby activity), comes down.

    So, to answer your specific question, interest rates are used as a throttle - to raise or lower economic activity along with printing more notes and lending more or less). But with a lag effect. If you effect rates today, result is seen after 6 months or so.

    So, when resets started happening, instead of a 40% increase (even which most could not afford) people started seeing doubling of EMIs.

    Can you see the similarities with Indian RE market?

    But the problem was that these buyers were NOT earning more and affording more. They only felt that they were. People thought that prices would rise endlessly and so started taking humongous risks by "flipping" homes (buying as investment and selling shortly to take profits). But all good things will come to an end (especially when you fool around).

    As a result of economic activity slowing, people also started losing salaries and jobs and demand for RE started tapering off. But builders were still building madly. This led to a dangerous oversupply of homes.

    Meanwhile, the banks which lent, instead of holding the mortgage papers, basically put them into a bhel-puri-like machine, churned them together, sliced them like shawarma-like slices and sold them off the other banks and companies. In this lot of high-grade loans, they also mixed a bit of low-grade (or sub-prime) loans (chilli powder?). And forced the Rating Agencies to rate these kichidi-mix as Aaa or best quality debt. Of course, when all was okay, payments were being made and there was no default. But when payments started getting into default, homes were foreclosed and this Aaa debt started getting bad with a foul smell emanating from the vaults of the buying banks :D. To make matters worse, banks were allowed to borrow upto 30 times (in Europe it was 40 times) the capital and put these into these risky debt. If there was even a 4% default, the capital of the bank is wiped out. Today, to give you an idea, even prime debt are seeing default rates of 6% and above. Basically the banks are on life-support and have become zombies (which is why lending has come to a total halt).

    To cut a long story short, this whole thing snow-balled and we have this humongous credit freeze problem. As the economy crashed, interest rates are once again being throttled down to re-start the economic engine. But this time the American is truly bankrupted and is unable to borrow. This is why, this time the recession will likely turn into a depression which could last a decade or more.

    I can see many parallels in our economy. Basically we have severely overpriced ourselves in the export market (and used this money and excess leverage to buy at astronomical prices). Anyway, with this global crash, exports are getting hit sharply and this will be a prolonged hit. So, with the advent of rising job losses and salary cuts, a whole lot of us, who also over-extended by taking huge loans thinking prices will rise forever will now become unable to pay EMI and unable to sell as, even if we can find a buyer the loss will bankrupt us. This results in a severe volume drop which we are already seeing (as banks tighten). Now, as the debt burden squeezes the life out of builders, they will come to market to DUMP! At increasingly lower prices. When builders get into that situation, expect prices to crash rapidly (example, Prestige Shantineketan, sold originally around 1600 was going at 4200 an year ago. 6 months ago it was 3600 (14% drop). last month 3200 (24% drop). now 3000 (29% drop). You can see price drops accelerating.

    Expect a huge supply of new and used homes into the market with no buyers. Resulting in severe crash in prices.

    Checkmate!!!

    So, even if our interest rates go down, do not take this as a signal to buy since the medium term outlook is very bleak. In fact I do not see interest rates go down much, until the economy slips into deep recession, by which time prices would have crashed and GDP growth willbe negative.

    cheers
    CommentQuote
  • the right/wrong time to buy

    hi everyone,

    i find many of the posts in the forum r informative and well
    researched.i specially thank wiseman and arin and several others
    for their thought provoking posts.
    in 2006, i looked to buy a home and found that it was entirely
    a sellers market.i finally decided it put it off when i encountered a specific
    incident.we had looked at an independent house in chrompet
    for which the seller,a doctor, expected 31 lakhs.within a few days
    we discovered that the doctor had sold it for 40 lakhs.something
    sinister was at work,for which buyer would offer more than what the
    seller was offering ?on further investigation we found a group of
    real estate agents had made an agreement with the seller and had obtained
    power of attorney to sell the property.clearly a cartel was
    operating to move prices higher and higher.we shelved our plans for buying and now after two years
    when we tried to search we found the following two things..
    1. it is no longer a seller's market.
    2.there is a palpable sense of fear in real estate players.
    not being very clear if this is the right time,iam closely following
    developments in this sector.hope to receive valuable inputs
    from u all,

    thanx and regards,
    unlikely
    CommentQuote
  • Thanks a lot wiseman for letting me to learn certain things.
    CommentQuote
  • Mortgage Insurance

    Mr.Weisman
    Virtually every North American Mortgages are insured by Mortgage insurers such as Fenny may, CMHC(Canada), Genworth Financial. If the banks were insured ( Although Borrower Pays the premium) against the loses , then how come the banks are losing money.
    CommentQuote
  • Originally Posted by wiseman
    Hi,

    These 2 cases are entirely different, though it seems they are similar in terms of interest rate. The whole thing has to do with debt and the impact of leverage on business. Lets see how:

    Say you are doing business with 1 lakh and are having a profit of 25000 (return on equity/capital employed of 25%). Now, say the bank lets you borrow another 2 lakhs at an interest of 15%. So, after deploying a total of 3 lakhs, gross profit is 75000. After bank is paid interest of 30000, you are left with profit of 45000 giving you a return on your equity of 45%. You see the effect of leverage of 2:1 on your capital? Nearly doubles profit.

    If the interest is brought down to just 5%, the increase in profit will be as high as 20000, which is nearly the original 25000 profit you got with only your own money. So, with Greenspan crashing interest from 5.25% all the way to 1%, the economy was set to pick up and get out of the 2002 recession. But that alone was not enough. People needed cash money to start business moving. So, he flooded the system with cash. And so the economy boomed. In which direction? Real Estate! He created the RE bubble!!!

    He lent heavily to the RE sector which started a building boom. It all looked so nice that everyone was now able to afford a house. Time passed. And slowly criminals started gaming the system. Lenders started all kinds of tricky instruments like NINJA (No Income, No Job) loans, Neg-Am (Negative Amortization) loans, zero-down-deferred-interest loans, so on and so forth. Basically getting the EMI so low that people who would not normally be able to buy, could now afford the loan. And seeing how people could afford more and more, they started jacking up the prices and selling property as though it was getting into short-supply. But there was a catch! These low rates would RESET after 2-4 years. When they reset, normal interest rates would apply and the EMI would jump by x%.

    But fate intervened and ensured that interest rates also jumped. How? When interest rates are too low, there is hyperactivity and everyone is borrowing madly and making profits hand-over-fist. The economy quickly overheats and inflation soars and to cool it interest rates are raised so borrowing (and thereby activity), comes down.

    So, to answer your specific question, interest rates are used as a throttle - to raise or lower economic activity along with printing more notes and lending more or less). But with a lag effect. If you effect rates today, result is seen after 6 months or so.

    So, when resets started happening, instead of a 40% increase (even which most could not afford) people started seeing doubling of EMIs.

    Can you see the similarities with Indian RE market?

    But the problem was that these buyers were NOT earning more and affording more. They only felt that they were. People thought that prices would rise endlessly and so started taking humongous risks by "flipping" homes (buying as investment and selling shortly to take profits). But all good things will come to an end (especially when you fool around).

    As a result of economic activity slowing, people also started losing salaries and jobs and demand for RE started tapering off. But builders were still building madly. This led to a dangerous oversupply of homes.

    Meanwhile, the banks which lent, instead of holding the mortgage papers, basically put them into a bhel-puri-like machine, churned them together, sliced them like shawarma-like slices and sold them off the other banks and companies. In this lot of high-grade loans, they also mixed a bit of low-grade (or sub-prime) loans (chilli powder?). And forced the Rating Agencies to rate these kichidi-mix as Aaa or best quality debt. Of course, when all was okay, payments were being made and there was no default. But when payments started getting into default, homes were foreclosed and this Aaa debt started getting bad with a foul smell emanating from the vaults of the buying banks :D. To make matters worse, banks were allowed to borrow upto 30 times (in Europe it was 40 times) the capital and put these into these risky debt. If there was even a 4% default, the capital of the bank is wiped out. Today, to give you an idea, even prime debt are seeing default rates of 6% and above. Basically the banks are on life-support and have become zombies (which is why lending has come to a total halt).

    To cut a long story short, this whole thing snow-balled and we have this humongous credit freeze problem. As the economy crashed, interest rates are once again being throttled down to re-start the economic engine. But this time the American is truly bankrupted and is unable to borrow. This is why, this time the recession will likely turn into a depression which could last a decade or more.

    I can see many parallels in our economy. Basically we have severely overpriced ourselves in the export market (and used this money and excess leverage to buy at astronomical prices). Anyway, with this global crash, exports are getting hit sharply and this will be a prolonged hit. So, with the advent of rising job losses and salary cuts, a whole lot of us, who also over-extended by taking huge loans thinking prices will rise forever will now become unable to pay EMI and unable to sell as, even if we can find a buyer the loss will bankrupt us. This results in a severe volume drop which we are already seeing (as banks tighten). Now, as the debt burden squeezes the life out of builders, they will come to market to DUMP! At increasingly lower prices. When builders get into that situation, expect prices to crash rapidly (example, Prestige Shantineketan, sold originally around 1600 was going at 4200 an year ago. 6 months ago it was 3600 (14% drop). last month 3200 (24% drop). now 3000 (29% drop). You can see price drops accelerating.

    Expect a huge supply of new and used homes into the market with no buyers. Resulting in severe crash in prices.

    Checkmate!!!

    So, even if our interest rates go down, do not take this as a signal to buy since the medium term outlook is very bleak. In fact I do not see interest rates go down much, until the economy slips into deep recession, by which time prices would have crashed and GDP growth willbe negative.

    cheers

    -----
    wiseman - I agree with you .. when it starts raining it will pour. We need to keep watching watz going to happen to all these greedy RE developers.
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  • Good you asked !

    Originally Posted by nepolian
    Mr.Weisman
    Virtually every North American Mortgages are insured by Mortgage insurers such as Fenny may, CMHC(Canada), Genworth Financial. If the banks were insured ( Although Borrower Pays the premium) against the loses , then how come the banks are losing money.



    Hi Nepolian,

    It is actually the "Federal National Mortgage Association (FNMA)! and therefore nick-named Fannie Mae.

    Anyways, to come to your question:

    ABOUT INSURANCE

    Did any of you know that the Insurance companies themselves are technically bankrupt? The main "monoline" Insurance companies - Ambac, MBIA - have a total capitalization of $22 Billion (recently further reduced by losses for both these). The total amount insured by these are $ 1.2 Trillion! If there is even 2% default (amount being $24 Billion), the entire Insurance Industry will collapse.

    So, dear Napolian, do not think Insurance is so sound. Actually everyone did huge, risky deals and DUMPED the risk on the buyer as well as Insurance Cos thinking they can get away with the swindle. Now it is coming back to bite them!!!

    Why then are Banks making losses?

    Coming to why banks are making losses. Well, remember the banks made kitchidee mixes of these loans, rated them as Aaa and sold them to others? Well, when the borrowers stopped repaying, these loans started defaulting. Now, insurance holds true if the deal is done without any hanky-panky. With Aaa starting to get smelly, the buyer returns the instruments (CDOs) and asks for their money back (because Aaa does not default and therefore the bank told them a lie). By this time, the CDOs lose value (they are known to have lost value from 30% all the way to 100%!!!

    Now comes the real crunch:

    Banks had borrowed money upto 30 times and done business. So if their capital was $ 100 million, they borrowed upto $ 3000 million more, lent this money to home owners, sliced-n-mixed these loans and sold off these to others and kept doing this again and again for years!!!

    Imagine that now 50% of those sold came back and were valued at 25% less. Simplt math to compute that the losses will be

    $3100 million X 50% X 25% = $3100 million X 12.5% = $387.5 million LOSS!

    With a capital of only $100 million, bank is TOAST!!!

    cheers
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