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Are Chennai Property Prices Fall Going To Fall In Near Future?

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Are Chennai Property Prices Fall Going To Fall In Near Future?

Last updated: January 7 2010
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  • #71

    #71

    Re : Are Chennai Property Prices Fall Going To Fall In Near Future?

    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 . 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

    Comment

    • #72

      #72

      Re : Are Chennai Property Prices Fall Going To Fall In Near Future?

      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

      Comment

      • #73

        #73

        Re : Are Chennai Property Prices Fall Going To Fall In Near Future?

        Thanks a lot wiseman for letting me to learn certain things.

        Comment

        • #74

          #74

          Re : Are Chennai Property Prices Fall Going To Fall In Near Future?

          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.

          Comment

          • #75

            #75

            Re : Are Chennai Property Prices Fall Going To Fall In Near Future?

            Originally posted by wiseman View Post
            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 . 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.

            Comment

            • #76

              #76

              Re : Are Chennai Property Prices Fall Going To Fall In Near Future?

              Good you asked !

              Originally posted by nepolian View Post
              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

              Comment

              • #77

                #77

                Re : Are Chennai Property Prices Fall Going To Fall In Near Future?

                Looks like it is starting to fall in Chennai too

                Looks like prices started to fall.

                http://www.expressbuzz.com/edition/s...cfsoAfeg==&SEO=

                Comment

                • #78

                  #78

                  Re : Are Chennai Property Prices Fall Going To Fall In Near Future?

                  what is the right time to buy a flat..

                  To Wisemen....


                  If you can please tell me the right time to buy a flat....And in what location(in chennai) we can find a good bargain...

                  Comment

                  • #79

                    #79

                    Re : Are Chennai Property Prices Fall Going To Fall In Near Future?

                    And if you go to the great australian desert maybe you can buy the entire desert for a few thousand australian dollars. One has to think about density of population. The beggar in Tirupathi can yet sleep on the floor in the night, the cold is tolerable, but can a beggar do that in Australia? Indian conditions are some of the most ideal ones in general explaining the high population here. So dont compare India with Australia and regarding boycotting. It is clear that a. You are pissed off that you cant sell your Australian home and buy even a flat in India...pity you. b. You want Indian realestate prices to crash to satisfy your ego...damn you.
                    In net your post can be provided to the kangaroos.

                    Comment

                    • #80

                      #80

                      Re : Are Chennai Property Prices Fall Going To Fall In Near Future?

                      Dude in 2003 a top guy with the best qualifications (CEO,VP, GM level) was earning about 25 to 30L p.a. In 2007 any donkey picked up such salaries and the top guys talk in Cs not Ls. So if your american comparison has to happen I will be able to recruit fresh engineers from campus for Rs 2K to Rs 5K per month salary. That is assuming realestate prices come to 2004 levels in USA.
                      I am getting sick of these Bald Eagles and Kangaroos comparing India with their adopted countries when they dont know anything about India except that they probably were born here or raised here, by their overbearing parents who would not have let these dudes even know how to earn a rupee on their own till they left the shores of India. So these dudes need to learn how to wash their neighbouring cars and pick up pocket money like the american 16yr old or live in India like me to understand either country. NRI-Non Real Indian.

                      Comment

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