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Repeating myself 
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) !!!
Originally posted by Raghavan.aiyangar
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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/
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) !!!
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