Supply-Demand is one aspect of how prices settle in RE. It is technical or in other words, decided by voting machine for the moment. Fundamentals are way different. You have to apply principles that you would apply for other assets for valuation. It is a weighing machine. While it differs from stocks to RE, demand-supply is an ephemeral stuff and not a sustainable measure of what the asset is worth. Using demand-supply to support valuation is much closer to greater fool theory and it is completely disconnected to fundamentals. It may be 'fundamental' to some but that is not the 'fundamental' for an asset.

Using supply-demand as a way to buy/sell RE is akin to stock trading based on FII money flows or rising volume or declining volume - all of which are non-sustainable data. Where are the fundamentals?

Chasing demand as a proxy for fundamental has 2 fundamental flaws -
1. It is momentary and short lived.
2. One can predict demand in a medium term or longer

To call 'something' as fundamental, it should be measurable and quantified. No anecdotal guesses. Fundamental should have some determinism. It should stand much longer than few months or a year.

Disclaimer: As the title unambiguously indicate, we are talking of RE as investment. End-use, pleasure buys, compulsive buying, emotional buying, buying because one can buy, buying because of lack of awareness on other assets, are all exempted as many of the reasoning as it applies to RE as investment do not apply to them.
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  • Cross Posting absishek's view on the same topic from another thread:

    In our unregulated RE market where supply is artifically manipulated by government through slow approvals, no infrastructure and township planning, with greedy builders coterie who plan which area to pump and create speculation interest and increase price periodically to fool buyers into thinking there is so much demand that they increased price..One has to put extra effort to see whether one is buying at correct price or at forward/future price to be able to estimate the future returns. Buying a good property now doesnt guarentee future returns. Buying a property that will remain a good property in future is the key to protect the property value. Buying in good location is one such way, but when it is unaffordable to the majority of buyers they have to be aware of other strategies and the context where to apply which notion.

    High Prices means High Demand is a wrong notion. It can give confidence to buy now but does not guarentee higher returns. Which is why people look at over-capitalization, rental yield etc to stay away from such properties. For better returns, One has to look for value buy opportunities. Identify gap between potential and pricing, by putting in some effort to identify the various factors that affect property pricing and the trends of buyer sentiments. When one is leveraging to buy or sending money from abroad there are greater factors like interest costs, inflation, arbitrage risks etc to name a few.

    RE pricing has long ago stopped being a function of supply and demand. I have said many times before, In good locations people are paying more because one is paying to outbid the competing buyer not because it promises higher returns. When the target segment shrinks so does its potential for redevelopment/conversion to commercial etc. Peoples expectation keeps changing which also should be factored. Earlier we had local residents who were willing to travel from avadi to siruseri everyday, but now with many from outside chennai coming to work they see more value in buying near the place of work than staying within the city. It doesnt mean city properties have lost potential, it only means suburbs offers more value at lower prices.
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  • What happens when you chase demand?

    What happens when you chase demand or think demand as a fundamental?

    You chase higher highs. Because demand is your fundamental. When in demand, you never get reasonable prices. Demand does not inform you before it wanes. When it falls, prices correct or stagnate. You would not buy because there is no demand. People who follow fundamentals can see beyond the demand-supply aberration and take advantage of it.

    Following demand is a classic herd mentality in investment parlance - more herds, demand gets magnified and more will follow. More demand increases momentum. Momentum begets Momentum. In a way, demand driven investing is momentum chasing and there is no 'investment' thesis in any form.

    Investing on Fundamentals:

    Often quantifiable through some measures and historical data. Provides some sense on where your margin of safety is. Allows you to sit tight even if temporary supply-demand mismatch causes it to be volatile - because you know over time 'fundamentals' will be recognized and realize the value. Markets may not respect fundamentals at times. Yes, Markets can remain irrational longer than you can remain solvent. Does not mean that you throw fundamentals outside the window.
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  • Certainly demand-supply cannot be fundamental for price especially when the asset has not established its credentials. Once it is built certain performance it may generate demand and hence price (example, many chasing the same hot property though seller may view each offers different perspective). This is probably the case of true investment perspective leaving aside emotion etc...but house or apartments for end use typically follows herd mentality and everyone wants to ride the wave assuming that everyone is not a fool. But the real reality (if manipulated) everyone can be made fools like it happened in most of the RE projects in outter parts of Chennai. The real beauty is that even while most of the RE buyers are losing money they are made to feel that RE gives fantastic returns by discounting, capital management cost, tax, inflation, maintenance etc...as they say, the system convinced everyone that "RE lose" never exists!

    Not sure many would go with this theory!
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  • High Prices means High Demand is a wrong notion. It can give confidence to buy now but does not guarentee higher returns.


    Absolutely. If investment is about returns, chasing demand and equating it to a greater return in future need not have a happy ending.

    Example - OMR in 2007-2008 (Navalur-Kelambakkam and beyond). Buyers saw potential on the size of the IT jobs and had a groundswell in demand and buyers piled on. Result is for all of us to see. Potential did exist but demand bid up the prices which was not commensurate with the infrastructure development. Where it ended up is for all of us to see.

    Moral: In high demand situations, its hard for the buyer to separate the true demand, and hype from excessive interest. In several cases, Demand = Hype or feeds from Hype. Caution is warranted.
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  • ...but house or apartments for end use typically follows herd mentality and everyone wants to ride the wave assuming that everyone is not a fool.


    Above is one instance of how demand can go up - herd mentality. Why those who care about returns should pay heed to the demand? Because your returns are predicated on how long these herds will continue to crowd and keep the demand up - your guess is as good as anybody's. You must be lucky to see your returns. Returns predicated on luck is not an investment.
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  • Technically price is based on demand and supply however in case of India RE is also based on Black money. Today not many can afford a house in India so only time will tell what is going happen however u can safely bet RE price next 60 months is going nowhere in hurry especially apartment market given the unsold stock and inventory overhang as high as 60 months. Will not be surprised this figure touching 100 months soon
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  • Demand for a property is a culmination of various factors like

    1.Intent to buy
    2.Increased affordability
    3.Attractiveness of the asset
    4.Availability of the asset.

    etc

    Supply is constrained because every land is not occupiable. Land zoning and approvals are held to ransom by cartels with vested interest in collusion with government officials. We are still so much dependent on government to plan infrastructre, create industries, jobs, schools, hospitals, civic amenities etc which is the reason city properties that have the facilities demand a premium. In suburb areas where such facility is missing the builders charge hefty cost to provide namesake community. Who is responsible for such plight is debatable..but the reality is buyers today are forced to pay high price for basic things.

    In such environment where profit is the only motive, one cannot expect operation to continue unhindered when the profit is not realized. We see many complexes not operating swimming pool, clubhouse, school, convenience store promised citing no consumer interest. When cost is high and profit is less, smart money moves away. Many companies keep moving around and setting up, closing shops as they please as and when Real Estate price becomes restrictive. If there is no government support and suitable environment all they hype, demand surrounding the development potential may not be realized. The same herd mentality that contributed to hiking of prices will also contribute to tappering when the interest moves elsewhere.

    When one looks RE as investment then we look around and try to analyze to see if our money can be more productive elsewhere in a different investment/asset. Unlike other assets thats constantly traded, RE is a long term haul where the supply of good properties is severely constrained. When there are several similar comparable properties there will be pressure on the seller to negotiate. This is like the best kept secret that no one talks about. One will find people saying I bought for 50K now I sold for 1C but the hidden truth is the person would have sold for 1 crore when new properties in the locality is trading at at least 25-30% higher. There are many who count their profits but dont talk about their losses. If one keeps a long term view then they dont have much to worry but if buyers get carried away by short term bullish sentiments and want to buy and flip in short term they can get royally screwed. If one is leveraging then holding a negative returns asset is very costly and can lead to fault in repayment and loan default.

    Another thing is the real movers of property value are people who are prepared to occupy the property. Not the people who buy it. Someone who is paying 1.5+ crore in the best location to let out the house for 10K+maintainence is doing praiseworthy social service. Such buyers may just buy because they have surplus money and they dont care splurging few lakhs and crores. The motivation can also be personal preference like gentry, lifestyle etc. A few peoples choice sets a beginning and only when more people are able to follow in a sustainable fashion it creates a trend. Poes garden and boat club also came up that way and so did the slums along the canals.

    If one is keeping demand as fundamental for buying then they also have to keep an exit strategy to eject before the demand wanes. Nowadays its not costly to shift base from one location to another. People change jobs and move between cities and countries on an average of every 3-5 years now. Earlier days change happened in 15-20 years cycles, now its as short as couple of years. I know so many people who dont even go to Marina beach. They are happy visiting Elliots or Thiruvanmiyur beach. For such people buying a 1C property near their comfortable habitat is more value than buying 3C property in mylapore. Each locality is becoming self sustained and such locations only will hold value. The idea of CBD is constantly changing and Being at the right place and right time is sometimes being just plain lucky. More than just looking at demand, it has become very important now to see is the demand sustainable and is there enough backing from government, residents. For buyers its important to look and stick only with value buy opportunites, assess risk correctly and take an informed decision.
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  • Why does Demand Supply is not reliable in RE?

    Demand Supply driving the price is a conventional wisdom but the theory works when there is a free, competitive market. See the quote below:

    "Supply-and-demand theory revolves around the proposition that a free, competitive market does in fact successfully generate a powerful tendency toward the market-clearing price."

    One can see why it is highly misplaced in RE market place in India and often skews the demand disconnected from real demand strength. nabishek has put it nicely in his earlier post:

    In our unregulated RE market where supply is artifically manipulated by government through slow approvals, no infrastructure and township planning, with greedy builders coterie who plan which area to pump and create speculation interest and increase price periodically to fool buyers into thinking there is so much demand that they increased price.


    If the demand is manipulated, it becomes a less reliable untrustworthy indicator. Sudden coverage often skews the demand which robs the returns of the next several years. Once Knight Frank knighted the Medavakkam as the place to watch for, do you think you get a fair or reasonable price after the news is out? Medavakkam was in more demand after KF news, but what about returns?

    Moral: For good returns, one has to choose a place with potential that can get in to 'demand strength' radar down the line and not now.
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  • What are the parameters you would look for places that can gain 'demand strength' ?

    Originally Posted by maverick007
    Demand Supply driving the price is a conventional wisdom but the theory works when there is a free, competitive market. See the quote below:

    Moral: For good returns, one has to choose a place with potential that can get in to 'demand strength' radar down the line and not now.
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  • Originally Posted by manojb23
    What are the parameters you would look for places that can gain 'demand strength' ?


    1. Markets are short sighted and prices the area that can get in to prominence in the next 1-5 years more than it deserves. Would look for areas where the potential could realize in 5-10 years or longer.
    2. Proximity catch up - Geographies expand and what is in prominence today will catch up with locations that are in proximity.
    3. Look for areas that have high guide line value (some > Market price) and these are usually dropped by speculators and people with 'color' money. It is bound to get better over time.
    4. Medium term triggers - new access highways, transportation options.

    Investors often fall for immediate or near term gratification of 15% return in 5 years than 20% p.a in 10 years. With time, the discount widens and your return improves.
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  • Originally Posted by maverick007
    Demand Supply driving the price is a conventional wisdom but the theory works when there is a free, competitive market. See the quote below:

    "Supply-and-demand theory revolves around the proposition that a free, competitive market does in fact successfully generate a powerful tendency toward the market-clearing price."

    One can see why it is highly misplaced in RE market place in India and often skews the demand disconnected from real demand strength. nabishek has put it nicely in his earlier post:



    If the demand is manipulated, it becomes a less reliable untrustworthy indicator. Sudden coverage often skews the demand which robs the returns of the next several years. Once Knight Frank knighted the Medavakkam as the place to watch for, do you think you get a fair or reasonable price after the news is out? Medavakkam was in more demand after KF news, but what about returns?

    Moral: For good returns, one has to choose a place with potential that can get in to 'demand strength' radar down the line and not now.


    I agree. Demand and supply theroy is just in theory. In practice RE is and should move on fundamentals, because it is high cost asset clause. Demand and supply are artifically driven factors in RE for short term gains, which is ver very short lived. An average investor will get fooled if he just follow demand. Quality of the product, location and one's requirement shall drive the decision.

    Because supply is more and so price is affordable will one buy a product?
    Because demand is more and.so price is higher, will one buy a product?
    A big no to both.
    Fundamentals- Product quality drives the invest decision and that is more healthy for average investor.
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  • Why City properties' demand is skewed and can affect the long term returns?

    In-demand and sought-after locations are in the city. This raises the interest level and demand and more the demand, the prices are decided by how badly one needs it than what is the property's worth. Nobody cares about the yield or capitalization rate. This is good so long as the demand sticks for ever.

    Why is the lopsided demand supply in city? Our infrastructure growth outside of City has not kept up with our expanding needs. Velachery of today can give a run to Alwarpet on any metric or measure you may choose today. That was not the case 10-15 years before and infra sucked big time in Velachery. It shows in the returns. Alwarpet area may have risen 20X where as Velachery did 125-150X. There are 'n' instance of Velacherys in the same period which trounced the city property values by a huge margin and it is a widespread phenomenon. Virugambakkam, Manappakam, Mogappair etc.

    Regardless of what the absolute returns may show in future, outsized relative outperformance will continue to happen. This evolution and expansion are natural and unstoppable.

    In one way, demand for city property comes from the lack of pace in infrastructure growth of the new areas and bet on city property's demand is not a bet on itself but the bet on the rest outside the City that don't have today. In other words, demand fundamentals of city properties are predicated on attributes, which can be recreated over time in any area. Velachery has done it and so are the other areas. Time is the risk. There is no intrinsic value for a City property that can stick for ever to provide you the same returns forever. So, what you are paying chasing the demand is not guaranteed to stick and the premium is at risk. That explains the difference between 20X and 125X. Your premium do not promise higher returns as nabishek quoted in his earlier post.

    I have said many times before, In good locations people are paying more because one is paying to outbid the competing buyer not because it promises higher returns.


    Moral: When you see the demand, see whether it is intrinsic or depend on lack of strength of others. Can the demand stick hrough the lifetime or more of an asset life at the same level?. If not, premium will slowly dissipate leading to mediocre returns. Check the famed Boat Club and few 'Special Streets' of Chennai between 2004 and 2014 for returns to know what is mediocrity. As we see again, demand at the time of buying means nothing when it comes to returns.
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  • Infact, when OMR demand was slowly peaking, properties within the city were not selling as Hot cakes as they did later when the OMR infra was faced with stiff problems like lack of Metro, Water, Sanitation, lack of link roads leading to HUGE traffic snarls, atrocious tool for the mediocre road etc...The same can happen again if Krishna Pattinam becomes huge port with good roads leading to Container clearance and Seemandra gets special status along with tax breaks....Chennai will not be an attractive place for big business houses any more. Already, CM has made an appeal in this regards to Central Government. We will know the demand situation hence its valuation and fundamentals.
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  • In this Ponneri - Smart City-Implications thread, one can notice how the demand has taken the price levels to the point where it no longer makes investment sense at current prices.

    You summarized a lot of my feelings, RUDE awakening is what i got
    Prices are not cheap any where, there are value pockets but i wont call them cheap
    we can still chase but there is nothing cheap now, there still some values.


    I enquired the going rate with that official, he said the same 1500 rs per sq ft near GNT road or thatchur-ponneri road near velammal residential school.. 1500 rs!!!? I was wrong i believe to quote that these places were cheap then!


    1500 Rs psft for this area after Smart City was announced. This is a culmination of demand chasing prices. It happens often and just that we do not pay attention to it;.

    Demand as a fundamental would make you to chase at these prices because you may believe the market is smarter than you are. But, the market is a collective representation of demand chasers at the moment. How can a market be smarter than a person who looks at value? Investment will make poor returns at these prices.

    Lessons to learn: Don't chase demand in illiquid markets and you are contributing to the madness through participation which misleads one in believing that you are buying some thing in-demand. Has zero correlation to returns.

    How to play: For long shots, demand is some validation of long term potential. Don't take the potential to the bank and pay the price today. Being a long shot, you need not necessarily have to chase now. Keep it in your radar and strike when the prices are right.
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  • @mav to be accurate the prices in velammal school area were trading at 1000+ much before the smart city announcment.
    the acreage pricing has shot up after the announcement, Ponneri to minjur and Ponneri and thatchur roads seems to be the area of activity
    Im not an expert in this area but i went there to explore a few opportunities , i did not like the area i looked at i dropped.
    But my feeling is if acre sells for ~ 3C range in these hot areas how will any one make money.
    In the current operating operating env it costs 5L an acre to just give kick backs for conversion, then there is development cost, advertising, marketing commissions. In these remote areas it costs 4 to 6% commission to marketing staff
    So if any developer or layout promoter enters in current price he cannot price it less than 1500.
    Why ?
    the news has created a hype and artificial demand that has made the acre owners to hike the price from say 2.5C to 3C or 2C to 2.5C
    that causes a chain reaction for price increase, some go for JV some go for outright buy / develop and market models.
    But all these models are predicated on the fact we will get a buyer in the bottom of the food chain at 1300 or 1500 rs a sqft if that fails the whole model collapses.
    This is the state of ponneri now. it is very risky to buy plots now here.
    the best would be to go a bit further and buy acreage under 1C an acre, if that does not present then i will continue to look around
    CTH, Puzhal, Madhavaram, Vadaperumbakkam
    I feel CTH corridor at unde 1000rs a sqft for a CMDA plot would have the biggest bang for the buck under the market conditions.
    Compared to CTH - madhavaram and vadaperumbakkam are trading at higher prices but they are not directly benefitted by 400 ft as much as towns on CTH - this is my honest opinion - YMMV,
    I would like to hear others views on this
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