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- Chennai current real estate situation - Oct 2008
Experts are saying price can go down anywhere between 20% to 40%. The hindu classified now has only 6 pages as against 18 pages a few months ago. I can see lot of IT professionals selling their apartments & land. I guess it will take a few more months for other folks to realize the price is really going to go down.
- Experts may be wrong!Originally Posted by ravisankarsExperts are saying price can go down anywhere between 20% to 40%. The hindu classified now has only 6 pages as against 18 pages a few months ago. I can see lot of IT professionals selling their apartments & land. I guess it will take a few more months for other folks to realize the price is really going to go down.
We have seen this trend from Jan 2008. People are always in Denial mode. Like the proverbial Ostrich which hides its head in the sand and assumes that, since it sees no danger, there is none!!! :D
So, evertyime the market fell 2000 points, the experts on TV came and told everyone, this is a bottom, this is a real bargain time. So they said this at 17000, then at 15000, then more forcefully at 12000 (impossible to come down any further since our fundamentals are so strong, REAL BARGAIN they said). When it went to 10000, they started getting a little doubtful. Then when it fell to 7650, EVERYONE GAVE UP HOPE! Now the experts are wondering what hit them and how to cover this embarassment :).
On the other hand, when the Sensex was over 20000, closer to 21000, I told all my clients to SELL EVERYTHING and indicated 2008 would see 12000 - 15000 and 2009 may see 8600 to 10000. Saw 8600 as bottom. I WAS WRONG!!! Now with 7650 seen in 2008 itself, I can see bottom coming in as low as 6300. If that is broken, do not be surprised to see 4250 Sensex. If that happens, the world will have gotten to being a very dangerous place :(.
This is classic human behavior of denial till situation becomes too late. I'm sure many of you have seen this in one context or another.
So, in the Real Estate market, same thing started with so called experts saying property will never fall for next decade (actually people in the RE business who thought, since they were building or selling property, they knew everything about the Economic Climate! How wrong they are turning out to be).
So, they said, impossible! Prices will NEVER come down. Here are the many reasons given:
1. Land is limited
2. Economy is booming
3. Most of our consumption is internal and so we are de-couple from the world economy (can't rerally figure out how people were fooled by this one! After all, if we were strongly coupled when times were good, don't you think we will continue to be strongly coupled when things go bad? :D)
... so on and so forth.
Then, grudgingly (after prices started falling already and showed 10% - 15% fall) they said, 15% would be the maximum and this is a real bargain time (same stock market story repeated with a lag - remember, I told you guys about how the RE market behaves differently from stocks and there is first an year or so of volumes crashing but not price. And then, when jobs are lost and banks get tighter and RE companies cannot hold properties any longer, prices start crashing? Well its starting to happen!)
So, here we are, with people NOW telling everybody that the fall will be 20% to 40%. WRONG AGAIN! Denial again!
Folks, this will be a much deeper and longer fall than we think now. Situation in the World's Financial markets are only getting MUCH WORSE now! IMF has jumped in wholesale and even the money they have $250 Billion is not even close to being enough. Now the US is using taxpayers money set aside to bailout US banks, to provide help to OTHER COUNTRIES ($30 Billion each to Brazil, Mexico, South Korea and one more). The US taxpayer is goign to get VERY ANGRY at this and there will be HELL to pay.
I reiterate my target by the end of this debacle. 50% to 80% fall in RE in prime bubble areas. Then buy as it would give you a lifetime opportunity!!!
- Realty in Chennai
Looks like you have done lot of research! well done mate.Indian GDP% is exclusive running 4 times of europe and america and even asia pacific.Such a robust growth will slow down to a .5%-1% as IMF reports and statstical financial data from Govt.
When there is such a growth and consumption still hungry for moving positively in future decades-do you think such a major crash would happen?May be a small correction balancing the RE. Many a times ban on indian economy for Nuclear tests and diplomatic issues failed!It succeded through its own consumption. I think banks are on safer side by mortgaging only for Government guideline and not for market value.If such a big crash happens only the black money will be erased out of economy and thus resulting in less inflation and GDP growth as stated.India has yet to develop a lot.Its millions of villages needs infrastructure .Millions migrating to cities every year making demand in RE .I think the positive factor of indian economy is its Educated mid-groups.India survived past era in modern world without any competitive manufacturing sector,but now service sector of IT boosts its economy.I conclude there may not be a huge crash ,am not saying india will decouple from recession ,but its root doesnt affect daily lives anyway!COMMENTS WELCOME.CommentQuote0Flag
- Salim99 has been very precise in narrating the current situation and future trend. Last June I sold a premium underconstruction flat in Velacherry at Rs4000/sft. My advertisement to sell in Hindu hardly evoked any response and I had just one serious buyer and after a lot of follow up and negotiations I was able to sell. Based on news paper reports and real respnse situation I thought the price may come down at 10% and in no way it could go up 10% to 4400/sft and so it will not cover the bank interest. But the builders never yielded inspite of no demnand at that time. They could wait without selling but will not lower the price.
And this year when I visited India I find the price go upto nearly 8000/sft, almost double! The phenomenon described by salim played its part. I do not think prices will go down to even 2007 levels whatever happens to the economy. Developers have stronger will power than buyers and they exploit public psychology. Still they state that the construction cost has gone up while in the past 3 months alone all rawmaterial costs have gone down by over 30% to 70% - like steel (70% down) other metals (50%) plastics (30%) and Cement. The construction cost must have gone down by an average of at least 30% in the past 4 months alone but the builders keep lying. Foreign funds are still pumping money from earmarked funds in the highly overvalued Indian realty which is a tragedy. Both the funds and the public will lose money at the end and the developers and in between players will make money. But it is 4 to 5 years away in my opinion. Unlike commodities no one price of real estate does not fall when there is fall in demand but goes up quickly when there is rise in demand as buyers do not wait once they decide but sellers have the tendency to delay very long unless they cannot raise money from any other source. Buyers requirement is that piece of land/property which is unique whereas sellers need is money which can be raised by selling or pledging. If they cannot sell the proerty at a particular rate they say they could not sell but they never keep reducing prices until it is saleable. This is the nature of real estate and so this is different game. As Salim mentioned I feel that economictimes predictions of price fall is made without assessing this nature. I am baffled by this power of builders to keep such absurd prices and letting people patience get over and make them buy. The culprits are foreign funds who are recklessly pupmping money and P. Chidambaram, Alan Greenspan of India, who is blissful of such speculative rigging of prices be it stock market or real estate. Lehman bros pumped 760 crores in Unitech just a few weeks before it went bankrupt. You should hang these guys who were responsible for such recklessness of throwing out money when their own house was burning, irrespective of who lost who gained.CommentQuote0Flag
A clever one but how many you can lure to buy your story?..It's painful but you must face the RE crash:)..Get your money out if you can and run away..pl. allow the upper middle illiterates to save their life..CommentQuote0Flag
- Salim, why the confusion? Wait!Originally Posted by a_salim_99Chennai real estate has surprisingly resilient while developers admit their sales fall and have cut back on prices in many parts of the country, we are entering a phase where neither have been before.
Next time, you read in economic times that builders are borrowing money upto 50% interest rate, you know who is going to foot the bill. YOU !
I know it is not a great news, neither for me. I am another buyer waiting on the sideline. If the developers don't reduce the price, I have no choice.
Salim has brought out some very interesting thoughts ... and fears! Let us address them :).
Salim, EcoTimes just today (3 Nov) had an article that Builders (at least in Bangalore) are now approaching miners (who had made humongous profits and are now wondering what to do as mining business has come down 50%!) to take money at 40% to 50% interest. This is because ALL avenues (Banks, PEs, MFs) are closing down towards RE. There you are.
But let me first put out the fears your harbor, straight away. About the prices bottoming out and running away, do not fear. For them to run away you need the co-ordinated, global, run-away credit bubble that was the hallmark of the 2003-2007 period. The way the Global Credit deflation is happening, this is a near impossibility (at least in the medium term).
As an example of deflation, here is an interesting statistic. In the Jul-Sep Qtr of 2007, Volvo (the largest European trailer truck manufacturer and a defacto indicator of Transportational and therefore, business volumes) sold 41970 trucks. In the same period this year their sales was 155 trucks, a 99.63% decline!!! So, rest assured, there is a MASSIVE global deflation going on. And India is not going to miss this party.
WHERE IS THE MONEY PARKED? AND HOW MUCH IS LEFT?
Next comes the so-called large sums of money people are sitting on due to the 2003-07 boom! Let is see exactly where this money is parked:
1. Is it in cash/near-cash form earning 4% pa? Most probably maybe 5% of the surplus is parked there.
2. Is it in the Real Estate market? Probably 50% of the money is parked and locked into the RE market at an average price matching probably 2006-2007 levels. Remember, large bulk of the home buying was in the 2005-2007 range. So, I'm taking the mean as mid-2006.
3. Is it in Stock Market? Probably 30% is in the stock market. Again, I'm taking average entry price as mid-2006 as most investments have happened between late 2004 - early 2008.
4. Is it in Fixed income securities. Maybe 15% is in there. Since only in mid-2008 did people find enough reason to get into it (stocks crashing)
Salim says that much of this money is waiting to get back into the market. Now, let us see how much of this money is still left with investors and how this will affect their risk-taking ability..
a. Let is assume that the average stock portfolio has declined by say, 60%. That means about 18%-20% of total wealth has evaporated.
b. Now, let us assume there is an average of 10% of RE prices coming down (reasonable?). That takes out another 5% of total wealth from the total.
So, on a conservative basis, the wisest of people have lost around 23% to 25% of their wealth (notionally). This is a significant number and will have some impact in risk taking ability going forward.
WHO IS THE BUYER TODAY?
Salim is telling us that the 25-35 age group people will take risks at this time and will plunge in and buy anyway? Well then, Salim, why then is volumes falling 80% or more if people are plunging in believing that prices are going to run away. Well let us see why ...
WHICH WAY IS THE WORLD'S ECONOMY HEADED?
- The Credit markets all over the world are contracting crazily. Volumes are falling because banks are TIGHTENING credit standards back to 2001-02 days which puts out a large majority of people out of buying homes as they cannot borrow. Here is the statistic on what banks are doing about loans today:
+ Down payment norms have increased amounts substantially (upto 40% of price)
+ EMIs have risen sharply due to interest rate hikes (double or more)
+ Loan amounts permissible, calculated as "times gross salary" has declined sharply as this ratio has been reduced
+ Years of service in last job has just been bumped up so that longevity of service (and therefore somehow ability to hold job longer as an indication of payment capability) norms has been tightened
- The Economy is slowing down perceptibly. Here is why:
+ In Qtr ending Sep, Corporate India continued to see sales growth. But Operating Margins have declined nearly 6%. And PAT has also shown a decline. In fact this quarter may be a good one since the real slowdown was seen only at the end of Sep. The next quarter, in my opinion will see significant slowdown.
+ Most RE companies are slowing flat sales growth and slightly (10%) declines in PAT. The company that has seen serious breakdown is Parsvanath which has seen a decline from 400 crores to 250 crores in sales and PAT from 102 crores to only 21 crores. We may have seen a 40% decline in sales and a 90% decline in PAT.
I can see almost all of the other companies heading that way into the next 2 quarters. As you can see, when EPS comes down from Rs.30 - 40 down to Rs. 3 - 7, the PE ratio also drops from 20 - 30 times all the way down to 5 - 8 times. So a share priced at Rs.1200 can easily come down to Rs.60 (which is 5% of peak value). Parsvnath has already shown it is starting to happen.
As we have also seen, Indian Business Leaders, who have been showing confidence in continuing growth are now starting to falter. NRN, who so confidentally said there would be NO PINK SLIPS in IT is now rapidly backtracking. Today he says, IF trend continues, Salaries will take a big hit in 2009. Also, Infy will become very tentative in hiring. Other companies will outright retrench people in increasing numbers.
What will really queer the pitch is the INCREASING PROTECTIONIST policies that countries will start taking (despite public statements to the contrary). With manufacturing contracting THE LARGEST IN RECORDED HISTORY in the US, resulting in the LARGEST DROP IN CONSUMER CONFIDENCE in the US, Obama (I assume he will be President) will take back significant number of jobs to US. This will really ruin things for us leading to massive job losses - something we have NOT faced so far.
JOB LOSSES SCENARIO
Let me translate that for you. We will cut workforce sharply in 2009. Since Govt is telling companies "Do not cut" or "Cut in small quantities", we will do it in other ways. We will slash salaries (which are too high anyway), hire less (another form of retrenchment) and will gradually cut workforce - especially the high cost ones, which will hit the exact segment that is in a position to buy homes.
Finally, the Global deflation can neither be controlled by Bush or EU leaders or Dr. Singh/FM OR EVEN BY A TEAM COMPRISING OF ALL OF THEM TOGETHER. So far, the response to this crisis has been terrible. What they have done is tried to solve a crisis of EXCESS CREDIT by throwing EVEN MORE MONEY at it. This will end only one way. By getting much worse and take much longer to deflate than otherwise.
IMPACT ON REAL ESTATE
All of the above scenarios may further take our wealth loss from 25% all the way to 40% or even 50%. And with US and EU already in declared recession the ball has already started rolling. Here's a question for you. With a potential wealth loss of 50%, sharp cuts in salaries, tight lending conditions and a very uncertain outlook on job security, do you really think that there will be large numbers of 25-35 year olds ready to take risk and jump in? Somehow, I do NOT!
Please recollect the RE decline (bear market) model I have shown in other posts.
First volumes will come down sharply in the first 12-18 months. I believe this has already happened largely. In this post itself we see people talking of 90% declines without being challenged. We already see Bangalore having at least 100000 flats vacant and available for sale. A side-effect will be the sharp job cuts this will bring to RE business.
Then, when builders cannot take it anymore, they will rush to market to sell at any cost. Simultaneously, with salary cuts and job losses mounting, many recent homeowners will start to lose their entire life-saving when prices decline below the loan amount. Finding they cannot afford the EMI in a losing situation, they will come rushing in large numbers to liquidate and save whatever possible. The combined impact of these two will CRASH prices from current 10% - 15% to as low as 50% to 80%. It will take the same 25-35 year olds a loooong time (by then they will be a much wiser 35 - 45 year olds) to start taking risks again.
HOW TO TAKE ADVANTAGE
Simply put, if you wanted to put down 15 lakhs today and buy a home for 75 lakhs (with a 60 lakh loan), consider holding back, letting the price to fall to around 35 lakhs over next 12-24 months, increasing the down payment to 20 lakhs and only taking a loan of 15 lakhs. With strong DEFLATION by that time, EMI would have crashed to 20% of current EMI and would become highly affordable. And in reducing loan by 45 lakhs, you end up saving another 45 lakhs in interest you avoid paying to the banks.
This is to Harry1979 as well, who was thinking we guys are over-reacting to the situation. Harry and Salim, this is a once-in-a-lifetime crisis and opportunity. Waiting patiently and striking only when builders are going bust will you take the best of it and make a killing.
Apologies for making this post so long :)
- Originally Posted by a_salim_99Chennai real estate has surprisingly resilient while developers admit their sales fall and have cut back on prices in many parts of the country, we are entering a phase where neither have been before. Developers and buyers (not speculators) are playing poker - whoever blinks first loses. We know the developers have got problems, but I don't think many buyers are seeing what the developers are seeing - the other side of the coin I mean.
The truth is it is just not the developers that are nervous, buyers are nervous too. The big question is - what if they get it wrong and the price starts raising again in the future and wish they had bought now ?
Just like me, there are lots of buyers adopted a wait and watch policy after reading economic times and many articles posted in the web, that many developers may default and have liquidity problems et al. But economic times has been running such stories for about 2 years now, so far they have not been accurate and I don't think they will are going to get it right this time around.
The reality is that people still have got money (thanks to inflation and bull run over the past few years) and those who can afford a home between now and within the next year, don't want to miss the bus. I doubt whether there is another boom like 2004-2007 period ever for a foreseeable future, that's another story. :D
Plus, the age group we are talking about is between 25-35, all those who can afford and will risk taking a plunge.
The cost of rentals have gone past Rs. 7000 (at least) for a decent 2 bed flat in Chennai, near the OMR area. It raises the obvious question, why rent when you can *afford* to buy.
I know the *recession* sentiment factor is playing against the developer - an unknown unknown. Once these jitters subside and US / UK are into recession officially, the fear will actually subside. Living a fear is much easier after all. It becomes a known unknown. This will play for the developer.
On top of all these, with inflation on the back burner and other countries are cutting down the interest rate, RBI will also join the party - sooner or later. It will push liquidity in the economy. I doubt the developers may have liquidity issue as early as this month end or it will be resolved in the coming months. But postponing handover by few months is nothing new for buyers. :)
I wouldn't be surprised if developers even increase the price by Rs. 50 to Rs. 100 in the coming months, just to put up a show. Realty is a slow moving market, things take time to go up as well as down. I don't think the buyers are going to stick around on the sidelines for long - they will loose patience and start buying, unless things turn poor to worse for the developers from here on.
Next time, you read in economic times that builders are borrowing money upto 50% interest rate, you know who is going to foot the bill. YOU !
I know it is not a great news, neither for me. I am another buyer waiting on the sideline. If the developers don't reduce the price, I have no choice. :(
What makes you think if people cannot afford it now, they will be able to afford it when the real estate goes even higher Is it not a fact that prices are falling because people cannot afford it?
There are many in the USA who said it will not happen in 'my state, in my city, in my county and in my block'. Now the crash is full blown, no longer I see this kind of talk here in USA. We are entering the first phase in the downturn in India. Denial. Next anger, bargain, depression and then acceptance.
It doesn't matter if the builders are playing 'who will blink first' game. Banks are going to tighten their lending standard. This will force many out of the market. It will get worse. Wait and watch.CommentQuote0Flag
- Wonderful Insights and Knowledgeable writing.
The words from WISEMAN is an eye-opener. Keep up your good job.CommentQuote0Flag
- Wiseman is really a wiseman.
We want his insights every now and then. Good job wiseman.CommentQuote0Flag
- Very nice forecasting !! Thanks.CommentQuote0Flag
- Don't worry Jaya. If it is in the range of Rs. 4000 to 4200/ sq. ft. or so, the prices may not come down appreciably. At best it can be down by 5 to 10 %. Which you can make up in another year or so. Velachery flat is always a good investment.CommentQuote0Flag
- Originally Posted by vensun999
If they cannot sell the proerty at a particular rate they say they could not sell but they never keep reducing prices until it is saleable. This is the nature of real estate and so this is different game. .
It is not the case. They can not keep holding the flats for ever. They need cash at some point of time to pay back loans or for turn over.
So at one point, distress sale will happenCommentQuote0Flag
Wiseman, A very nice and careful post indeed!. Also appreciate your call of saving the hard earned money of middle class.
A careful look into some websites of premier builders will clearly show that prices have already fallen. I have seen prices coming down by 2 ~ 5 Lacs in East tambaram, Mogappair etc.CommentQuote0Flag
- How about people who can handle the deal in cash. Whether they can buy now or wait and then buyCommentQuote0Flag
- Someone sane on this board. I appreciate what you write. Wiseman is the typical bear and he will have to say what he is saying. Ofcourse one NRI from USA telling me that price falling to 2004 levels since that is the case in USA does not understand anything. In India, in Bangalore in 2004 prices of land shot almost 5 times in NO TIME. Salaries in India have gone up almost 2 to 4 times in last 4 years. So for 2004 prices to reappear in India salary of fresh software engineers has to come to Rs 2K to Rs 5K. If that happens then all this logic can happen. A physician in India in 2003 would earn a salary of Rs 10K to 15k, not sure what it is today. It wont matter if realestate crashed to 2004 levels if salaries crashed that way.
Unfortunately all these USA, Australia and INDIA comparisons are terribly wrong. In India during crashes, rupee will be depreciated badly. So I will imagine a land costing 1crore today will probably fall to 80L but in USD terms will come crashing. That is because 1:40 has become 1:50 in just 1 month and I wont be surprised by 1:200 in 5 years if Indian govt does not manage it. So Indian Indian Investor meaning Indian living in India investing in India will not have much to worry. Ofcourse my friendly NRIs whose behaviour is unpredictable can always confuse themselves and others in their own special style.CommentQuote0Flag