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Why Property Prices Should Fall and Why They Aren't Falling?

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Why Property Prices Should Fall and Why They Aren't Falling?

Last updated: December 10 2012
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  • Why Property Prices Should Fall and Why They Aren't Falling?

    I have no skin in the game so far. As in Iam not invested in a property but would surely like to. As others, I too am worried if this is the right time or should I defer my decision.

    Below is Knight Frank Chairman - Pranay Vakil's Analysis about why the market wont fall...
    "Let me clarify that we are only talking about the residential market. So let us focus on that. Now the valuation that you talked about is at current market values, and not at cost. Therefore, it is not hurting the developer as much as you might think it will. Now all these developers -- at least 50% of them -- are in a joint venture with the landowner. And have the developers paid for the land? The answer is -- no or very partially. Now when you have not paid for the land -- and land constitutes almost 70% of the sale price -- your ability to hold on is infinite."

    I have relatives/friends who work for some known builders and above is the common theme...either they bought land in past at throw away prices or redevelopment schemes where the above analysis holds true.

    NOW - on the other hand when it comes to investors then every Tom, Dick and Harry and his Grand mum who had money to invest in real estate are already in. So for builders to 'consistently sell' at the typical 1CR plus price there should be a steady stream of folks (first time home buyers) who can afford close to 1L EMI.

    Do you know of enough friends or relatives who earn as much and have not yet bought their first home?
  • #2

    #2

    Re : Why Property Prices Should Fall and Why They Aren't Falling?

    because it is black market real estate money. you have to hide that money somewhere right ? and indian real estate is now the best option for this money which they expect some good returns.

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    • #3

      #3

      Re : Why Property Prices Should Fall and Why They Aren't Falling?

      So you rule in favour of prices not falling.

      What about my key question...how many in your circle can afford 1lac EMI...

      Mind you that's the 1 lac left after life's essentials are paid for...eg Food, Outings, medicine, school fees, car payment, TAX, family maintainance.

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      • #4

        #4

        Re : Why Property Prices Should Fall and Why They Aren't Falling?

        does that also says between the lines that investing in budget homes which middle class can afford is wiser?

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        • #5

          #5

          Re : Why Property Prices Should Fall and Why They Aren't Falling?

          I would always maintain for end users -

          If you have black money, go ahead and buy that property.

          If you are not having black money, and are earning enough to meet the demand of these black marketers (your EMI is not more than 35% of your salary at age range 33-36), go ahead buy it.

          Other wise stay away if you think you would receive stellar returns from the market. Black money is not something to be happy about. It would be like printing a crore rupee and giving it to every indian....so everybody is a crorepati. Everybody knows this would not work...and not the concept of every Indian or sufficient enough no. of Indians would end up earning black money.

          Invest only if you are paying the builder upfront (without taking loan) and getting 50% discount on asking prices. That is a true investor. If you think you would apply for loan and buy a property and sell it after 2-3 years at 20% appreciation, read a book on economics.

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          • #6

            #6

            Re : Why Property Prices Should Fall and Why They Aren't Falling?

            Do builders really have the ability to hold infinitely? If so, then why they need to take the loans at such a high interest rates?

            Also, builders want to sell their inventory before completion of the project because it will harm their reputation if they cannot do it. This is the reason why builders tend to delay the projects so that they have more time to sell the inventory.

            Also, for the real estate bears, the prices in real estate do not come down as easily as stock market. IMO, they are not likely to come down by more than 10%. The reason being, the real estate bubble take long time to burst. The RE prices remained stable from 1998 to 2004 when you could have doubled your money had you put in fixed deposit. The RE prices tend to come down in real terms.

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            • #7

              #7

              Re : Why Property Prices Should Fall and Why They Aren't Falling?

              My belief is that the more inefficient the market, the larger the bubbles and more painful (for ALL of us - builders as well as end users), the recovery.

              Look at Alok Industries makes costly realty exit

              Even if Alok industries made 3% net rental yields (unlikely given property tax in mumbai), they would barely have been able to recover the registration and stamp duty. So if there is no bubble bursting, prices will remain flat for extended period as inflation gradually deflates the bubble (btw, that is one good impact of inflation - it is a last remedy bringing back sanity).

              In any case, 17k psf commercial in lower parel seems to imply that the prices quoted over last year (say 14k in Borivali) are a bubble on top of another - the second will burst, the first will gradually deflate.

              Originally posted by xredred View Post
              Do builders really have the ability to hold infinitely? If so, then why they need to take the loans at such a high interest rates?

              Also, builders want to sell their inventory before completion of the project because it will harm their reputation if they cannot do it. This is the reason why builders tend to delay the projects so that they have more time to sell the inventory.

              Also, for the real estate bears, the prices in real estate do not come down as easily as stock market. IMO, they are not likely to come down by more than 10%. The reason being, the real estate bubble take long time to burst. The RE prices remained stable from 1998 to 2004 when you could have doubled your money had you put in fixed deposit. The RE prices tend to come down in real terms.

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              • #8

                #8

                Re : Why Property Prices Should Fall and Why They Aren't Falling?

                Prices will not fall because , the real estate is a mafia comprising of - builders, netas, media and research firms. It is a well knit syndicate who has stake in every thing related to real estate. The only way real estate prices will come down is when 'LEGALLY REAL ESTATE IS DISCOURAGED' meaning, Govt should discourage people from amassing dozens of flats. This is done by

                - Escalation of capital gains tax ( massive 50% on capitals gains tax across the board)

                - For basic housing ( end use), registration and stamp duty should be at current rates. For investment properties, the registration fee should be 3 to 5 times the normal price

                - Creating better investment opportunities than real estate ( like small businesses).

                If you remember , government discouraged FIXED deposits by decreasing deposit rates. So people brought the money into market.

                Now, because of real estate HUGE HUGE sums of money is locked in real estate capital which needs to come out.

                On the other hand

                Prices will crash because There are not even affordable by person earning 1 lac / annum. Rudimentary 2 BHK apartment costs 40 lacs upwards which means , 10 to 12 years savings of a family go into housing. So , if a person in 30s starts saving, he will be able to buy a house when he is 45.

                So the prices unless crashed to half , can not be sustained. Banks will be exposed because of home loans.
                Last edited December 10 2012, 04:29 PM.

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                • #9

                  #9

                  Re : Why Property Prices Should Fall and Why They Aren't Falling?

                  i don't have any friends that could afford 1 lac EMI. black money is being poured into indian real estate as it is routed through PE firms. and there is no hurry for any returns for this black money investments. they the builders would be able to hold to longer than you think. and hence the prices won't come down unless the govt becomes an honest start investing these things.

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