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- Bubblenomics: After gold, it may be the realty market next
Bubbles at first are built with a genuine foundation that then expands to levels where the foundations turn shaky and then, on some trigger, the foundation collapses. The beginning of the 21st century saw many such bubbles being built and then bursting. The first of the bubbles was the rise in emerging market equities from China to Brazil, which saw equity indices in these countries rise manifold before collapsing in 2008.
The equity market collapse of 2008 that saw indices across the globe crashing by 50 percent or more was due to the bursting of the housing bubble in the US. That crisis saw holders of mortgage-backed securities going bankrupt and having to be bailed out by the US government.
The growth of emerging nations, especially the BRIC countries (Brazil, Russia, India and China), saw yet another bubble in commodities build with prices from oil to copper touching record highs. The commodity bubble crashed when growth in these nations came off sharply due to various excesses and commodity prices are trading anywhere between 30-60 percent off their highs.
Property prices in places where there is no water, power and other basic infrastructure are the most vulnerable to a sharp fall.
Gold is the latest bubble to go phut, with prices falling by over 25 percent from peaks seen in 2011. Gold prices had more than doubled in the 2008 to 2011 period when there was talk of a collapse of the eurozone, hyperinflation due to central banks printing money and hedge fund managers, including George Soros and John Paulson, leveraging on rising gold prices. Soros bailed out when he saw that gold prices were unsustainable at higher levels while Paulson is continuing to bleed ($ 1 billion and still counting).
Gold prices fell, as markets did not see the euro collapse and inflation expectations trended down rather than up. In fact the TIPS (Treasury-Inflation Protected Securities) market in the US has been on a five-year selloff as inflation hedgers bailed out on the back of inflation expectations trending down rather than up.
In India, gold was seen as a salvation for all the ills faced by the public from high inflation to a weak rupee. Gold imports rose nine times since 2008 while trading in gold futures in the commodity exchanges rose to record volumes. Gold ETFs (Exchange Traded Funds) recorded strong inflows and assets grew by over 1,500 percent as the gold bubble grew. Gold finance companies such as Mannapuram and Muthoot Finance saw their market value grow manifold.
Gold is now hurting. Investors are losing money, speculators have taken big losses, ETFs are losing assets and gold finance companies have lost most of their market value. The gold bubble-burst is causing pain exactly as in many other asset classes.
It is the turn of the property market bubble in India to burst?
Gold prices have come down, so why not property prices. India’s property market has defied logic. The country’s economic growth has come off from 9 percent levels seen from mid-2000s to levels of 5 percent in 2012-13. Equity markets are down, bonds are weak, the rupee has tanked and property prices have gone up multi-fold. The reasons for property prices going up is less land in relation to size of population, no fear that prices will crash due to vested interests, black money going into property and many other such reasons that usually come up when there is a bubble being built.
Cold reality is hitting the property market now. Lenders are busy writing off loans or disposing attached property due to defaults. Transactions have dropped by over 50 percent in many parts of the country. Prices have come off in many speculative areas from Hyderabad residential to new airport land in Navi Mumbai. Property prices in places where there is no water, power and other basic infrastructure are the most vulnerable to a sharp fall.
Real estate firms have lost most of their market value while many companies have seen their debt being downgraded to junk. In fact one can safely say that the Indian property market has collapsed for many big real estate firms and now it is the turn of the smaller fry to face the heat. Unfortunately the tax-paying Indian who has put his or her life savings in property will also face the repercussions of the property bubble bursting.
Bubblenomics: After gold, it may be the realty market next - FirstpostCommentQuote0Flag
- An excerpt from Warren Buffets 2012 shareholder letter
This is an interesting read:
"The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer's hope that someone else -- who also knows that the assets will be forever unproductive -- will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century.
This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce -- it will remain lifeless forever -- but rather by the belief that others will desire it even more avidly in the future.
The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.
What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As "bandwagon" investors join any party, they create their own truth -- for a while.
Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices. In these bubbles, an army of originally skeptical investors succumbed to the "proof " delivered by the market, and the pool of buyers -- for a time -- expanded sufficiently to keep the bandwagon rolling. But bubbles blown large enough inevitably pop. And then the old proverb is confirmed once again: "What the wise man does in the beginning, the fool does in the end."
Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce -- gold's price as I write this -- its value would be about $9.6 trillion. Call this cube pile A.
Let's now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?
Beyond the staggering valuation given the existing stock of gold, current prices make today's annual production of gold command about $160 billion. Buyers -- whether jewelry and industrial users, frightened individuals, or speculators -- must continually absorb this additional supply to merely maintain an equilibrium at present prices.
A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops -- and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil (XOM) will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.
Admittedly, when people a century from now are fearful, it's likely many will still rush to gold. I'm confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B."CommentQuote2Flag
- Guys pl don't turn so pessimistic. RE is here to stay, such ups and downs are part of every thing that we do. If you make smart moves in RE and don't buy just on speculation, but intrinsic value, we should be good.CommentQuote0Flag
- Originally Posted by joydeepr1Guys pl don't turn so pessimistic. RE is here to stay, such ups and downs are part of every thing that we do. If you make smart moves in RE and don't buy just on speculation, but intrinsic value, we should be good.
This is usual .. when gold was over 30k per gm, we read umpteen reports on why we should have investment in gold, why its a good hedge against inflation, currency devaluation / printing etc etc.. and now once its falling, the same "knowledgeable" analysts and reporters are saying it will go in a multiple year bear run etc etc..
When will we learn and accept that no one has much idea about the markets and the future..
Its like I will tell today that rajarhat unitech will sell for 15k psf in 10 years.. if it does not I will have 100 reasons why it did not and if it achieves that in even 15-17 years, I will say see I told u so..CommentQuote2Flag
- Sorry guys this is not about pessimism. In fact I don't buy into so called pundits. But when Mr. Buffet has to say something I read. I can't predict what will happen to RE otherwise I will make millions just doing that. Check Paul Johnson who made $15 Billion betting against US RE boom.
In fact I myself is heavily invested in RE. At the same time I am not buying into 15 % year or year growth for next 20 years in India. In general growth should beat inflation. If it is for end use you lock in a fixed payment for life. Don't have to worry about rent hikes 20 years from now. Once its paid for its free.
My point is gold doesn't produce any income. Most Indians buy gold as end user jewellery etc which is not investment as it hardly ever goes back to market except a few extreme circumstances.
Most of the price increase is not based on Demand or Supply rather paper gold.
A few years ago prudction cost of gold was only $600.00/oz. Over the last 5 years during the boom the production cost of diamond has gone up to around $1100/oz (mainly because once miners started to turn profit everyone wanted a good share and cost of production has gone up). So at $1800-$2000/oz thats a 80-100 % profit.
Read about diamond. As it turns out Diamond is after all not that rare. In fact it is in such abundance that releasing the supply in the market will plummet its value so the keepers of the diamond release it at a controlled pace to keep prices high.CommentQuote2Flag
- I like the last two articles above just because they present a balanced view. Keeping pessimism apart, I guess important point is what do we learn from recent downside in Gold. (By the way Disclaimer- my neighborhood Jewelery shop is doing brisk business over the last 3/4 days; much more than his previous month's average daily sales !!)
Besides Location, Builder, Site plan, gated community and nearby Infrastructure, I guess there is another principle that should also be followed - Take advise of everyone else, but listen to yourself ONLY.
Just listen to other's comments and be assured that sometimes they are coming out of vested interests, sometimes pure knowledge sharing and leadership demonstration etc etc... Consider these as 'External Forces'. These forces have a combined effect if all of them are saying/pointing to the same thing. And, I have seen that the probability of these external forces succeeding in influencing a decision point is much more higher.
Taking a real life example from last couple of weeks from your IT sector only - If all of these External Forces were saying Infosys will not produce a better Qtr4 results but TCS/HCL will, only a few heard them. There was a reason though, just after Qtr3 results, Infy jumped from 2200 to 2900. So, these people who didn't hear these forces out, they lost big time, when Infy lost in capitalization again to 2200 in a matter of day.
Bottom line - Hear them out and take your decision; By hearing them out, you will know the intrinsic value of the property. If it suits your budget and matches other key parameters, Buy it. You will hardly ever lose on that.
Another point -
1. A good construction cost is approx 1200-1400 psqft and the rest is all land. Now if cost is 3000/- psft ( you know 1600/sqft is your land cost) . Since both these price parameters are as low as possible, you know you are getting it at RIGHT price.
2. However, if price has already bubbled up in anticipation of future potential while in reality, there is nothing in sight for next 5-7 years, and cost is say 5000/- psqft, then you know, someone is eating his profit out big time. Then you shouldn't buy.
3. However, if a well developed location charges 5000/- to 6000/- then you know that the land price will again match its intrinsic value and there is absolutely no anticipation. Then buy itif you need it.
Also they say - be prepared for the worst and hope for the best. While the first is always within your control, the second part is not. What if job scenario in Kolkata never ever gets up better than what it is today? Where will your buyers come from when you decide to sell. I guess, it is prudent to keep sale price attractive rather than big - why not buy two 3000/- sqft properties instead of one if you have an appetite for 6000/-? These are just a few things that might help in any analysis.CommentQuote1Flag
- Looks like another assest class, land will follow gold in WB. With most of the 'Chit' funds invested in land and the development of last week mean prices of all their holding will go down because of distress sale by many of them.CommentQuote0Flag
- Originally Posted by sumanbLooks like another assest class, land will follow gold in WB. With most of the 'Chit' funds invested in land and the development of last week mean prices of all their holding will go down because of distress sale by many of them.
That's interesting view point. However, on the contrary, I was under the feeling that minor correction in Gold would lure Investors towards Realty in general.CommentQuote0Flag
- Originally Posted by joydeepr1That's interesting view point. However, on the contrary, I was under the feeling that minor correction in Gold would lure Investors towards Realty in general.
But in this article is telling a different story ..
- Figured I should revive this headline. And I am not here to say I told you so. I think gold has more downside in the coming months. Look for next support at $1000/OZ. If it breaks that its bad news.
How it will affect real estate its hard to predict.
However short term look for large builders to struggle with cash flow which is unrelated.CommentQuote0Flag