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Why Are Chennai Real Estate Prices Falling?


Why Are Chennai Real Estate Prices Falling?

Last updated: March 24 2009
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  • Why Are Chennai Real Estate Prices Falling?

    1.House prices will keep falling because those prices are still too high compared to incomes.A safe price is a maximum of 3 times the buyer's yearly income, yet price have been 5 to 10 times income in the last few years.

    2.It's still much cheaper to rent than to own the same thing.It's still much cheaper to rent than to own the same thing.Yearly rents are less than 3% of purchase price in most of the places in chennai and interest rates are close to 12%,even if you deduct income tax benefits it costs twice as much to borrow money for a loan than it does to rent. Worse, you should add taxes, parking,registration etc to the cost.

    3. It does not make sense to buy when more jobs will be lost and the price people can pay will decrease. Unemployment drives housing prices down. It also does not make sense to buy when your own job is in danger.

    4.Buyers borrowed too much money and may not pay the interest and principal because impending of job loss and pay cut.This will lead to banks seizing the properties and more supply in the market.

    5.Extreme use of leverage. Leverage means using debt to amplify gain. Most people forget that losses get amplified as well. If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If he has to sell due to job loss or an interest rate hike, he's bankrupt in the real world.

    6.Shortage of first-time buyers. High house prices have been very unfair to first-time buyers. It is literally impossible for them to buy at current prices.

    7.Surplus of speculators.Most of RE were booked by speculators and not to live in.These people drove prices like crazy.
  • #2


    Re : Why Are Chennai Real Estate Prices Falling?

    From MoneyControl

    CONVENTIONAL economics says a crash is bad. In reality, however, it’s a boon. A real estate crash is an economic blessing for billions of people and the country.

    Two years back, no one would have imagined that real estate prices could crash by 50 per cent. Today, it’s a fact. Compared to peak prices of 2008, you can expect a correction by 70 per cent in the coming years. Despite that a lot of properties will be lying vacant as there is a huge oversupply – in India and all over the world.

    Many builders and brokers will probably send me hate mails for saying this but the fact remains that a 70 per cent crash is a good time for them to create much more wealth and to tap a large market. This crash is excellent for home buyers, businesses, and the entire economy.

    Reason: A lot more cash is available for more productive activities in the economy such as building roads, electricity, etc.

    How is that?
    Let us say earlier a property you wanted to buy was being quoted at Rs 1 crore. To get money to buy this, you might have to scour your entire life savings and take additional loans. You and your family might have to slave for at least 20 years to pay off the EMIs to banks. A lot of your savings gets sucked into unproductive assets like real estate.

    Today cost of construction per square foot is only around Rs 600. Based on this a 1000 sq. ft apartment should cost not more than Rs 6 lakhs to construct. Just imagine a flat that cost barely 6 lakh to construct is being sold for Rs 1 crore. A few might argue – that we need to consider land costs.
    Land cost is artificially inflated across the country – India has an abundance of land all across. Just move out of the major cities and you will see thousands of acres of vacant land.

    Now imagine if that same property is available for Rs 20 lakh, which is the fare value for such a property. Now there is an additional Rs 80 lakh available in the economy for more productive uses.

    What happens to this surplus of Rs 80 lakh?
    Previously, only a small minority of builders enjoyed this surplus of Rs 80 lakh but now it can be invested to boost consumption.

    Roads, factories and new service industries can boom if each family uses this Rs 80 lakh more productively. Electricity, roads, water, health care and education will get a huge boost from this money. No amount of interest reduction or artificial stimulus package can have the same effect as this.

    When property prices go down, automatically the ‘black cash’ element would disappear. People would not see the need to find the back alleys to pay Rs 20 lakh.

    The question, you should ask!
    Today, a place like Dubai, which has sunk billions of dollars into unproductive real estate, is on the verge of collapse. Had they utilised this money for better use, the economy would have been much better today.

    A lot more to a crash that is excellent for the economy. The real estate crash has not yet happened in India and is still to come and will probably surprise a lot of people.

    India has a bright future ahead and millions of new jobs are going to be created. A lot of new capital also is going to be used productively thanks to this global economic crash. I’ll once again stress that this is one of the best opportunities in history to create immense wealth for all those who are armed with knowledge and have a little bit of patience.


    Have any questions or thoughts about this?