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No Crash 225 Downside

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No Crash 225 Downside

Last updated: March 24 2011
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  • #11

    #11

    Re : No Crash 225 Downside

    Crashes need a basis ..

    Crashes need a reason.

    Like you said, even if supply ran way ahead of demand (like it has in some cases now), that by itself will not result in a crash; maybe a slow downward move with decline in liquidity.

    RE makets headed for a crash FIRST crash in terms of volumes. Then prices crash. I've posted many times on this and its because of the nature of the transaction.

    The biggest catalyst for crashes (in most markets) is the excess leverage coupled with inablity to service the leverage.

    If you notice even the US RE crash, inability yo service debt was the reason. People thought they could keep on buying at higher prices because prices would still go up and they could cash out the difference to live a life of endless luxury and also pay off the mortgage!!!

    Extreme stupidity when you look at it in hindsight, but thats always 20/20.

    I believe the crash will come when supply has run up much higher than it has today, the job market takes a severe beating and the debt market dries up with banks suddenly tightening up seeing the kind of trouble their loan porfolios are headed into.

    This may happen in the 2012 - onwards period when the world starts giving up the recent gains in stimulus-driven profits and India suddenly finds itself in recession again (like the rest).

    cheers

    Comment

    • #12

      #12

      Re : No Crash 225 Downside

      Originally posted by wiseman View Post
      Crashes need a reason.

      Like you said, even if supply ran way ahead of demand (like it has in some cases now), that by itself will not result in a crash; maybe a slow downward move with decline in liquidity.

      RE makets headed for a crash FIRST crash in terms of volumes. Then prices crash. I've posted many times on this and its because of the nature of the transaction.

      The biggest catalyst for crashes (in most markets) is the excess leverage coupled with inablity to service the leverage.

      If you notice even the US RE crash, inability yo service debt was the reason. People thought they could keep on buying at higher prices because prices would still go up and they could cash out the difference to live a life of endless luxury and also pay off the mortgage!!!

      Extreme stupidity when you look at it in hindsight, but thats always 20/20.

      I believe the crash will come when supply has run up much higher than it has today, the job market takes a severe beating and the debt market dries up with banks suddenly tightening up seeing the kind of trouble their loan porfolios are headed into.

      This may happen in the 2012 - onwards period when the world starts giving up the recent gains in stimulus-driven profits and India suddenly finds itself in recession again (like the rest).

      cheers
      Wiseman, you wisely said the key aspect of crash... overly leverage and inability to serve the liabilities.

      Now look at the players in RE market

      1. Classification of builders
      a. Small players with few small projects in hand, in business for many years. They don't advertise, their projects are sold purely on word of mouth.
      b. Small players but want to expand too fast... Amrapali
      c. Grey builders... with multiple connections... probably their sole purpose is making colored money white... there are too many ..)
      d. Established players, who are in business for many years.

      2. Classification of buyers

      a. True end users ... those middle aged service class person dreaming for their one and only dream home.
      b. Semi end users .. those young chaps started their life with very good salary... they are ready to encash their house for profit.
      c. Small time investors .. like punters, many IT guys etc, who has one or two home and want to make quick money by flipping their RE investments. This category got two sub types, one overly leveraged and the other having multiple lifelines.
      d. Those seasoned HNI type of investors ... (SBajaj bhai comes immediately in mind) These people are toooo rich, they are able to buy an entire area, forget about project!!


      Now you know who is leveraged and how much ..) Not many in Indian RE market are overly leveraged, at least as of now.

      Comment

      • #13

        #13

        Re : No Crash 225 Downside

        Originally posted by ondabhai View Post
        Wiseman, you wisely said the key aspect of crash... overly leverage and inability to serve the liabilities.

        Now look at the players in RE market

        1. Classification of builders
        a. Small players with few small projects in hand, in business for many years. They don't advertise, their projects are sold purely on word of mouth.
        b. Small players but want to expand too fast... Amrapali
        c. Grey builders... with multiple connections... probably their sole purpose is making colored money white... there are too many ..)
        d. Established players, who are in business for many years.

        2. Classification of buyers

        a. True end users ... those middle aged service class person dreaming for their one and only dream home.
        b. Semi end users .. those young chaps started their life with very good salary... they are ready to encash their house for profit.
        c. Small time investors .. like punters, many IT guys etc, who has one or two home and want to make quick money by flipping their RE investments. This category got two sub types, one overly leveraged and the other having multiple lifelines.
        d. Those seasoned HNI type of investors ... (SBajaj bhai comes immediately in mind) These people are toooo rich, they are able to buy an entire area, forget about project!!


        Now you know who is leveraged and how much ..) Not many in Indian RE market are overly leveraged, at least as of now.
        Gbhai,

        The reasoning is good but not airtight. The type d is the first one to get out of the market once things start downhill. I will give you a first hand example, in Mulund-Mumbai on LBS marg 2 projects are not able to find 'holders'. The first person in value chain who buys from the builder in large volumes.

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        • #14

          #14

          Re : No Crash 225 Downside

          Originally posted by dhoom View Post
          Gbhai,

          The reasoning is good but not airtight. The type d is the first one to get out of the market once things start downhill. I will give you a first hand example, in Mulund-Mumbai on LBS marg 2 projects are not able to find 'holders'. The first person in value chain who buys from the builder in large volumes.
          Nothing in this world is airtight, technically it can not be done.... it's same like absolute zero temperature.

          I would say there are always exceptions... but generally the HNIs has a very deep pocket and a wonderful network... specially in Mumbai those Kacchi, Kathiwadi groups, diamond traders... their network is really amazing and they always help each other in need.

          It is very hard to break that cartel and these cartels are everywhere...

          So you wondered how come all the nice apartments are already booked in the very first day?

          Comment

          • #15

            #15

            Re : No Crash 225 Downside

            Originally posted by ondabhai View Post
            Nothing in this world is airtight, technically it can not be done.... it's same like absolute zero temperature.

            I would say there are always exceptions... but generally the HNIs has a very deep pocket and a wonderful network... specially in Mumbai those Kacchi, Kathiwadi groups, diamond traders... their network is really amazing and they always help each other in need.

            It is very hard to break that cartel and these cartels are everywhere...

            So you wondered how come all the nice apartments are already booked in the very first day?
            How will the registry of 16000 flats in NOIDA which were registered this month effect the market.
            Earlier POA was the only option but now salaried persons can go in for a loan and ready to move in flats in prime locations.

            Comment

            • #16

              #16

              Re : No Crash 225 Downside

              Originally posted by loneranger View Post
              How will the registry of 16000 flats in NOIDA which were registered this month effect the market.
              Earlier POA was the only option but now salaried persons can go in for a loan and ready to move in flats in prime locations.
              NOTHING... price may increase a bit as more people will be able to afford those now, due to availability of loans.

              Do you think all those 16K flats are vacant at the moment? or all the owners will rush to sell as if they stuck a lottery?

              Comment

              • #17

                #17

                Re : No Crash 225 Downside

                We may be heading for the cliff ...

                Originally posted by ondabhai View Post
                Wiseman, you wisely said the key aspect of crash... overly leverage and inability to serve the liabilities.

                Now look at the players in RE market

                1. Classification of builders
                a. Small players with few small projects in hand, in business for many years. They don't advertise, their projects are sold purely on word of mouth.
                b. Small players but want to expand too fast... Amrapali
                c. Grey builders... with multiple connections... probably their sole purpose is making colored money white... there are too many ..)
                d. Established players, who are in business for many years.

                2. Classification of buyers
                a. True end users ... those middle aged service class person dreaming for their one and only dream home.
                b. Semi end users .. those young chaps started their life with very good salary... they are ready to encash their house for profit.
                c. Small time investors .. like punters, many IT guys etc, who has one or two home and want to make quick money by flipping their RE investments. This category got two sub types, one overly leveraged and the other having multiple lifelines.
                d. Those seasoned HNI type of investors ... (SBajaj bhai comes immediately in mind) These people are toooo rich, they are able to buy an entire area, forget about project!!


                Now you know who is leveraged and how much ..) Not many in Indian RE market are overly leveraged, at least as of now.

                GBhai,

                The key words you used are "overly leveraged".

                This has two parts ...

                1. Having low amount of loans that you are capable of covering with your current income (as well as having high equity in the asset)

                2. Having large enough income that even a high amount of loan can be covered - as of now

                I suspect that the (a) high prices builders are holding up as well as (b) the stable job/salary situation is hiding the cracks in the ecosystem. We may already be overly leveraged but these 2 factors ( which are currently buoyant due to many years of wealth or temporary money transfer from the West in search of earnings) from may be covering that fact.

                In my view India is ecessively leveraged at every level (Govt, Private Individual, Corporates, Farmers) and the soon-to-be-seen slowing down of money pumping into our economy will expose this fact. The recent lack of interest by foreign moneybags in our quest for Trillion Dollars for infrastructure may be a trend developing towards a general slowing down (oe even exiting) of hot money currently lying with us, which is giving Indians such a positive wealth effect!!!

                The high prices (like in RE in the US back in 2005) may be giving confidence to banks that their loan portfolio is well covered by asset value.

                IF (or WHEN), the world's economy starts nosediving again, ad the ripple effect sees a big enough impact on our job scene (especially of high-paying jobsector like IT which is most susceptible to global crises), you will see a sharp shift in sentiment of potential buyers AS WELL AS a crisis in ability to keep paying off those large loans.

                The real problem will start then when the industry enters a vicious downward spiral.

                First volumes will dry up ...

                Then, as distress mounts, many houses will start getting repossessed and come up for auction, just when buyer interest starts declining

                This will suddenly increase oversupply and start putting pressure on prices (you will start seeing discounts in innovative ways; BMW/Porsche cars were being given away for free with houses back in 2007-08)

                Banks will start seeng decline in asset values (as well as NPAs rising steeply) and will pullback in lending - both to builders as well as buyers

                This will put even more pricing pressure all around and the whole cycle will repeat ...

                In addition, since many homes in recent times were bought as investments, these will come to market in greater distress as prices decline to such an extent that the "home debtor" is underwater at least in their investment home. There is real danger of losing everythin in case of repossession (unlike stocks where, even after 60% drop you will at least recover the remaining 40% - the dangers of acquiring a large asset on large debt with your last penny as down payment).

                We are seeing that already in many other parts of the world since 2005 and there is no reason why we should not see it here ...

                I can't say what effect Black Money will have on this. This whole thing about India having billion people and demand will always exceed supply is a little flaky. At least 700 - 800 million of these people will NEVER own a home. A few dozen million already have a home. And most of the people looking to buy can easily put it off when dangers like job/salary uncertainity come around.

                The so-called demand can easily be shifted to next year and will sudden seen to disappear.

                I expect these things are going to happen in the next couple of years as global economy starts sinking again (once stimulus is forced to end due to excess debt OR inflation takes the economies to the cleaners).

                cheers
                Last edited March 23 2011, 02:31 PM.

                Comment

                • #18

                  #18

                  Re : No Crash 225 Downside

                  Originally posted by wiseman View Post
                  GBhai,

                  The key words you used are "overly leveraged".

                  This has two parts ...

                  1. Having low amount of loans that you are capable of covering with your current income (as well as having high equity in the asset)

                  2. Having large enough income that even a high amount of loan can be covered - as of now

                  In my view India is ecessively leveraged at every level (Govt, Private Individual, Corporates, Farmers) and the soon-to-be-seen slowing down of money pumping into our economy will expose this fact. The recent lack of interest by foreign moneybags in our quest for Trillion Dollars for infrastructure may be a trend developing towards a general slowing down (oe even exiting) of hot money currently lying with us, which is giving Indians such a positive wealth effect!!!
                  Wiseman, I completely differ. We Indians are very prudent, specially when you look back just a generation back... our parents!

                  Let me share one of my experience during the last recession. Two of my friends were retrenched and both purchased their house recently in overseas, where we stay. The EMI was quite high when you convert into INR, in lakhs. Then again, we all and their parents/relatives helped each other and it was over.

                  Again another friend in India, he was retrenched and his father came in to rescue him. Our parents may not be that rich but they can definitely help with few EMIs at any point of time.... and many of them without even going to the bank!!

                  Never underestimate the capabilities of your parents and relatives. When there is an emergency, they really help as a family. This is precisely the reason why you never had any distress sale during the last recession by those IT people.

                  Definitely no one will prefer to beg to their parents but emergency is different..... and I believe this trend will not change in next 10-15 years, until our old generation is still around us!!

                  Comment

                  • #19

                    #19

                    Re : No Crash 225 Downside

                    Gbhai,

                    your reasoning looks a little flacky....
                    i think people in USA, DUBAI , JAPAN , EU all have parents and still...

                    when market was at 21000 in fag end of 2007 ,then if somebody tells that
                    market is going to be down then people laugh in disbelief...
                    and i think you must have said even though everybody positions are down and margins calls are getting activated ,even then parents will come to cater to these margin calls..........

                    nothing personal.....

                    Comment

                    • #20

                      #20

                      Re : No Crash 225 Downside

                      Originally posted by vatsalbajpai View Post
                      Gbhai,

                      your reasoning looks a little flacky....
                      i think people in USA, DUBAI , JAPAN , EU all have parents and still...

                      when market was at 21000 in fag end of 2007 ,then if somebody tells that
                      market is going to be down then people laugh in disbelief...
                      and i think you must have said even though everybody positions are down and margins calls are getting activated ,even then parents will come to cater to these margin calls..........

                      nothing personal.....
                      Hope you read the entire thread rather than commenting prematurely based on partial reading.

                      I said "We Indians are very prudent, specially when you look back just a generation back... our parents!"

                      unfortunately I can not say the same thing about those people in US or EU... they live for today and our parents always lived for tomorrow

                      new generation are changing and we are moving toward "live for today as if there is no tomorrow" ..... and thats why I said the trend will not change until our parents are there and then we all will follow the same fate like US/EU/Dubai/Japan .....

                      Comment

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