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Are Property Price Going Down Drastically in Chennai?

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Are Property Price Going Down Drastically in Chennai?

Last updated: December 1 2010
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  • #61

    #61

    Re : Are Property Price Going Down Drastically in Chennai?

    Repeating myself

    Originally posted by Raghavan.aiyangar View Post
    I came across a completely different angle why Indian Realty is in crisis in one of the blogs. Check this one out and tell me whether it's true or imagination
    http://soviblogs.blogspot.com/


    It is so HARD to convince people that even a 15% hit on conspicuous consumption (cars, homes, plasma TVs, Bose systems, wine at 1 lakh per bottle, weekend pub bills of Rs 2000, ...) will have a much greater effect on the overall picture.

    One of my avatars is in Direct Marketing. We have an analytical frame called the Pyramid, where we fit the number of customers, revenue and profit of a company into 3 stacked pyramids side-by-side.

    Without exception we find that 20% of the top customers account for 60% to 80% of revenues and 90% to 130% of profits. You might wonder 130%??? How's that possible. Well, its possible if the remaining 80% only cost more than they return in revenue, leading to losses.

    Point I'm trying to make is, I keep hearing the argument that 65% of India is rural and so we will avoid the effect of the tsunami. Little do we realise the falacy in this argument that, yes, the rural population will definitely miss the effects because anyway they lead a life of shortage and poverty. How much poorer can a poor man become.

    But even a 15% drop in consumption of these goods mentioned above will eliminate the margins of all the companies that make and sell them, upon which we are building the entire edifice of economic prosperity! When this core element (Corporate Profit) collapses, it has a severe cascading effect on Corporate stock performance, hitting share prices bringing them to 10% of their peak values or lower, which decimates peoples false wealth, which leads to banks recalling their loans on margins, which will lead to further distressed selling, leading to further depressed prices and so on.

    To give you an example, there was a great, cash-rich shipping company called GE Shipping (still there ). Fabulous management, great performance for years. Cash rich, etc. Old man went his way, cousins quarelled and split up the group. One got the RE company. At the peak, his controlling stake in this company was worth around say Rs 800 crores. So, he pledged all his shares and borrowed around 500 crores to leverage his other interests. Well, guess what! The decline has brought his valuation to around 450 crores leading to margin calls for more money, or else. But he has nothing more to give (all this is in the papers so its public knowledge). So far he is okay since the creditors have not liquidated. But the sword is dangling on a thin thread as he is in technical default and technical bankruptcy. If price declines further OR time goes by increasing interest burden, the creditors will sieze the shares and sell them. This person worth 800 crores is now technically bankrupt all within less than 2 years. This is the effect of overleverage coupled with bad timing !!! Why do we think this cannot happen to us when we have a salary of 10 lakhs and take loans of 1 crore? If the property, which we bought at 1.1 crores declines by 20% (and most of us are thinking that is very possible), then you are technically bankrupt since you owe more (say 95 lakhs since you must have repaid some principal) that the value of the property (88 lakhs). If you lost the ability to pay instalment (remember today EMI on 1 crore can easily be 1 lakh!), you give up house as well as lose your deposit!

    The (credit-led) boom has been mainly in the urban areas due to a large amount of unaffordable borrowing based on the premise that prices will always go up (and by super-leveraging we can make super profits - remember, buying with cash is like walking on 3 foot wall while buying with high leverage is like walking in 300 foot wall; one slip by both and only one survives!!!). These buyers happen to be mainly software people but recently also others industries which export or which provide ancilliary services to these exporters (food, taxis, etc).

    I will add to soviblogs analysis with what I had already said - that the real slide will come when jobs start going downhill in large numbers. This will be the main trigger but not the entire cause!!! His assumption is that demand will fall, thus bringing down prices. Partly correct.

    But what soviblog missed is that the builders themselves are heavily in debt (he misses that important point). See front page of EcoTimes today. Sobha is on the hook to return 800 crores some today and all within 2 months itself. They must have run out of cash already (remember I mentioned this around 2 months ago in one of the posts). Unitech is in much worse position (which is why its stock is 28 today and falling much faster than the market). Market is much smarter than we think.

    So a combination of demand crashing as well as inability of builders to hold on and not sell, because of large debt obligations will together force the liquidation of a large number of flats, etc. When the market is not able to absorb this large numbers in such quick time, the price decline will be even more pronounced than if there was proper absorption by the market.

    So, everything will look normal till 1 week before the crash (like US banks which kept telling till the last day that everything is normal, we are capitalised well, etc). Suddenly, next day the headlines are EXTRA LARGE FONT ABOUT THE COLLAPSE!!! Seemingly surprising everyone, but not us . Now we know that we will not be surprised when it happens, right?

    cheers

    PS: Btw, I'm not being overly scary or pessimistic. I have used figures that many people in this forum use daily. 1 Crore price, 10-15 lakh salary, etc. I also use logic that everyone finds reasonable. But when you connect the dots the picture looks scary - as it well should as the example hits home.
    So, why are people surprised by the end result? Because we don't anticipate that putting harmless Nitrogen (important fertilizer) and harmless Glycerol in the right mix, we get one of the most volatile and deadly explosive (Nitroglycerine) !!!

    Comment

    • #62

      #62

      Re : Are Property Price Going Down Drastically in Chennai?

      Originally posted by kar27us
      dear wiseman

      i recently saw a article which said during the housing bubble in US the property prices went up only by 50% where as when compared to india it went up by 300% is it true?

      karthik
      Not true. Even in US property price went up by 100, 200 and 300%. I live in Washington DC metro and the price between 2001 and 2006 went up by nearly 100 to 200% depends upon the type of house. Anyway price has already dropped nearly 30% and expected to drop another 20% by the end of next year.

      Comment

      • #63

        #63

        Re : Are Property Price Going Down Drastically in Chennai?

        True and false ...

        Originally posted by strongsville View Post
        Not true. Even in US property price went up by 100, 200 and 300%. I live in Washington DC metro and the price between 2001 and 2006 went up by nearly 100 to 200% depends upon the type of house. Anyway price has already dropped nearly 30% and expected to drop another 20% by the end of next year.

        kar27us,

        Price increase in US, just like in India, varied widely. In some cases rise has been like Strongsville said. In some areas it is more like what you had said.

        People thought that, since price had not risen much, the fall also would not be too much. This has been true in the past and looks logical. And this is the rule generally followed out there.

        But the severity has been so large this time that in many cases, localities in the Us which had not risen too much also had a significant fall, though not as badly as Florida, Nevada, California, Michigan, etc.

        Strongsville, I was in DC late 2006 on work. At that time I had told my cousin (with whom I stayed) as well as some friends in the Virginia area to be careful as a big crash was coming. They told me that in this area - since its politically heavy and Govt funded people live , there would not be a crash. How wrong they were!!!

        In India too, it looks like prices will fall only in IT/ITES/Export heavy locations. But remember, even in places where these people have gone and invested (and speculated the prices up even before real movement of IT boom into these areas) assuming that prices will rise later, like Mysore, prices will correct significantly to reflect the new reality in realty !

        cheers

        Comment

        • #64

          #64

          Re : Are Property Price Going Down Drastically in Chennai?

          But what soviblog missed is that the builders themselves are heavily in debt (he misses that important point).
          I guess soviblogs has mentioned this..."With banks already starting to twist-arms of the construction companies, the panic selling will start. Builders will start selling apartments at whatever costs they can".

          Wisey, I agree with you that this is not pessimistic view but is realistic!

          Comment

          • #65

            #65

            Re : Are Property Price Going Down Drastically in Chennai?

            Originally posted by Maheshk View Post
            Though I wish that the RE prices would come down to 2003 price range, I really doubt whether a flat would come down to 15-20 lakhs unlike current price of 40-50 lakhs. Also i really doubt whether there would be more than 20% correction.
            The rationale behind my doubt is that as the RE was pumped by the IT folks to unreachable heights in the past few years, it would crash to 2003 prices only if the IT population is reduced to the same # (or close) as 2003. And of course the salary should also be reduced to the same range.
            If the average software engineer is still going to earn around 25k/month, i think he can still afford to buy a flat within his two years of employment and it would automatically keep the demand high.
            Note: I am one of the person who missed the RE boom bus @2003 and still repent for it.

            Mahesh K
            Ofcourse flat prices may not go Rs 15-20 lakhs. Considering inflation factor it will come to Rs 25-30 L range

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            • #66

              #66

              Re : Are Property Price Going Down Drastically in Chennai?

              there is no change on the ground. i am sick of all these theories and what should it be analytically.

              chennai brokers are living in a world of their own!

              when will prices actually fall. is there a real case of such thing!

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              • #67

                #67

                Re : Are Property Price Going Down Drastically in Chennai?

                Thats the trouble with theories ...

                Originally posted by yeskrish View Post
                there is no change on the ground. i am sick of all these theories and what should it be analytically.

                chennai brokers are living in a world of their own!

                when will prices actually fall. is there a real case of such thing!

                Yeskrish,

                Thats the problem. Each of us wants to know the future so we can make the right bet now.

                But the only commonly understood way seems to be to use regression analysis - something like driving forward looking into the rear view mirror. And of course, also giving time for events to unfold.

                Sick or not, we just have to wait and see if we were right, partially right, partially wrong (whats the difference?) or totally wrong - and learn from this latest event.

                I go with the belief that I may have been completely wrong. Or that I may have started right, but the arrival of a Black Swan made me go completely wrong.

                Want to know what a Black Swan is? Read the book by Nassim Nicholas Taleb, which essentially states that sometimes in life we face events that have never semingly happened before. Eg. People always thought there were only white swans, black swans didn't exist. Till one day, a black swan actually landed in their backyard. Then the entire theory was overthrown simply by a real event rubbishing all the theory. Always possible. You never thought Citibank could go bust, did you? Well, last week, the black swan just descended .

                Patience.

                cheers

                Comment

                • #68

                  #68

                  Re : Are Property Price Going Down Drastically in Chennai?

                  Any Multibagger investment suggestions?

                  Wiseman,
                  I enjoy reading your thoughtful posts and learned a lot. Since you have mentioned that you do invest in stocks and other asset classes, can you provide some US Stock/options recommendations for the benefit of the fellow forum members?
                  I believe lot of good companies with good potential future earnings are selling at very low prices. Growth stocks and commodity stocks that sold sometimes 50 times earnings are selling for less than 5 times earnings. If we invest in 10 companies and even if 3 or 4 of them click we can gain 500 to 1000% in the next 2 years.
                  You have good and long experience and I would like to get your thoughts on this and potential recommendations if you have.
                  Thank you in advance.

                  Comment

                  • #69

                    #69

                    Re : Are Property Price Going Down Drastically in Chennai?

                    Here's an example. But we are not supposed to do it here

                    Originally posted by tellshiva View Post
                    Wiseman,
                    I enjoy reading your thoughtful posts and learned a lot. Since you have mentioned that you do invest in stocks and other asset classes, can you provide some US Stock/options recommendations for the benefit of the fellow forum members?
                    I believe lot of good companies with good potential future earnings are selling at very low prices. Growth stocks and commodity stocks that sold sometimes 50 times earnings are selling for less than 5 times earnings. If we invest in 10 companies and even if 3 or 4 of them click we can gain 500 to 1000% in the next 2 years.
                    You have good and long experience and I would like to get your thoughts on this and potential recommendations if you have.
                    Thank you in advance.

                    Tell Shiva,

                    So, I'm telling you!!!

                    While it is not exactly proper to do so, here is but one example of a prime ten-bagger. There are so many more in the market today. But time is still not ripe to buy:

                    Company: Guj Fluorochem
                    Face Value: Rs 1
                    Book Value: Rs 86 (thats humongous!!!)
                    EPS: Rs 28 (thats humongous too!!!)
                    52 Week Hi/Lo: 400 / 60 (fallen 85%!!!)
                    Current Price: Rs 60

                    Dividend: 350% (Wow!)
                    Dividend Yield: 5.83% (impressive) - up rom 1.75% at peak price
                    P/BV: 0.70 (you are getting a rupee worth for 70 paise)
                    P/E : 2.14 (can you believe it?!) - fallen from 14.28 times to 2.14 times!

                    You simply can't go wrong in this stock at this price. Of course, you might see even lower prices. But this is easily a ten-bagger and maybe even a 100 bagger in next 15-20 years.

                    My best buy was Cipla for Rs 200 (face value 100) in 1986. The stock has given me a 2200 times return (call it a 2200-bagger ) in 22 years and I haven't even included dividends which is considerable. Imagine a 100 times for each year that I held it!

                    Do not look for short-term trading if you get the right stock, since you will lose the real gain if you sell too soon. I learnt that you invest mainly to build a dividend portfolio. Capital Gain will always come automatically. Its the dividend that really matters in the long run. Will explain the involved logic later.

                    We will take this offline now before the admin kicks me out .

                    cheers

                    PS: And someone says I'm bearish on India, can you believe it?

                    Sorry, I'm clueless about US stocks. And firmly believe India is probably the best place to invest - at least for me!
                    Last edited November 26 2008, 10:50 PM. Reason: More info

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                    • #70

                      #70

                      Re : Are Property Price Going Down Drastically in Chennai?

                      Should the market be timed?

                      Wiseman,
                      Your posts are excellent.I have learned a lot by just reading them.Many thanks to you for devoting so much time to share your insights,analysis and experiences on the current RE and financial market.Its of immense value and use to people like me who would like to be well informed before taking risks hoping to invest in a secure future.Your lucid style of stating the facts, analysing them in terms of global economy, relating them in india's context and comparing them against historical happenings with supporting statistics whilst ending them on a note leaving the reader to make their own judgement is truly praise-worthy.

                      I personally have witnessed the appreciation of RE multifold times to its current level since 2004, and am one of those who are in wait and watch mode.I will like to hear from you to know when to wake up and make the move?

                      suppposedly, prices have crashed more than 30%.Is it prudent to wait longer till the prices crash further down to rock bottom?what are the indicators?is it the price rising again?

                      Also, Is there any possibility that the price will reduce below the guideline value assigned by the government for a location .Can it be used as the yardstick?Even the government wanted to capitalize on the boom and revised the guideline value in 2007.

                      I have read and heard from various experts in various articles and forums asking to never time the market.If the investment is for personal use, the only factors to look is location/price and affordability.One should go ahead if we come across such a prospect.Also, the argument is that returns from RE is highest next only to stocks in the long term.how true is this?

                      your opinion would be of great help.

                      Thanks in advance.

                      Comment

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