Hereby I will prove how the realty boomers arguments are false.

What are the boomers arguments?

1.) Buy today, houses always increase in value in the long run.
WRONG. House prices cannot increase more than incomes in the long run. This is obvious if you think about it. If house prices go up more than people can afford to pay, buying stops, like it has stopped now.
Even Warren Buffett have pointed out that houses don't increase in intrinsic value. Unless there's a bubble or a crash, house prices simply reflect current salaries and interest rates. If a house is 100 years old, it's value in sheltering you is exactly the same as it was 100 years ago. Then came the maintenance as the house didn't renovate itself. It also has taxes, and insurance - costs that always increase and never go away. The price of the house went up about as much as salaries went up.
To put this is simple perspective, vegetable were costing Rs.5-6/kg when 5 digit salary was a rarity.
Today, the prices have gone up by about 4 times but so have the salaries. So, sounds very much like the reasoning people use now when they talk about how much their father's house appreciated "in the long run" without considering that salaries rose a proportional amount.

2.) Renting is just wastage of money.
WRONG. As said before renting is now much cheaper per month than owning. If you don't rent, you either:

* Have a mortgage, in which case you are throwing away money on interest, tax, insurance, maintenance, costs that increase forever.
* Own outright, in which case you are throwing away the extra income you could get by converting your house to cash, investing in bonds, and renting a similar place to live for much less money. This extra income is sufficient for emergency expenses,retirement etc.

Either way, owners lose much more money every month than renters and that's assuming prices don't correct to very high level & everything is smooth in the economy.

3.) As a renter, you won't have any money left as you will spend them on vacations,cars & hence won't have equity/savings etc.
WRONG. Equity is just money. Renters are actually in a better position to build equity/savings through investing in anything but housing. Renters can get rich much faster than owners, just by investing in conservative stocks & bonds.

* Owners are losing every month by paying much more for interest than they would pay for rent. The tax deduction does not come close to making owing competitive with renting.
* Owners must pay taxes simply to own a house. That is not true of stocks, bonds, or any other asset that can build equity/savings. Only houses are such a guaranteed drain on cash.
* Owners must insure a house, but not most other investments.
* Owners must pay to repair a house, but not a stock or a bond.
* Owners lose their money as house prices reduce. The EMI's remain constant in spite of reduction in rates. At the end of loan tenure, they would have paid almost twice than that of current renters who will buy at logical rates. Keep interest rates in mind. Most of the EMI is not principal amount but interest.

4.) There are great tax advantages to owning a house.
WRONG. Many people believe you can just reduce your income tax by the amount you pay in interest, but they are wrong. Buyers may not deduct interest from income tax; they deduct interest from taxable income. And even then, the tax advantage is not significant compared to the large monthly loss from owning.

If you don't own a house but want to live in one, your choice is to rent a house or rent money to buy a house. To rent money is to take out a loan. A mortgage is a money-rental agreement. House renters take no risk at all, but money-renting owners take on the huge risk of falling house prices, as well as all the costs of repairs, insurance, property taxes, etc.

5.) RE is based on local factors, it's not a national phenomenon. RE of Delhi-NCR,Bangalore & rest of the cities has nothing to do with Pune RE.
WRONG. Lending rates remain the same throughout the country. ALL loans are harder to get. This will drive prices down everywhere.

6.) A rental house provides good income. So, you can rent if you have purchased as investment.
WRONG. Rental houses provide very poor income in hyped areas and certainly cannot cover mortgage payments. Remember there is almost 300% difference between EMIs & rent for the same house.

It's pointless to do the work of being a landlord if you can make more money with no risk, no work, and no state income tax by investing in assured good returns bond.

7.) If owning is a loss in monthly cash flow, but appreciation will make up for it.
WRONG. Appreciation is negative. Prices are going down. It only adds to the injury of already high EMI's.

8.) As soon as prices drop a little, the number of buyers on the sidelines willing to jump back in increases.
WRONG. There are very few buyers left, and those who do want to buy will be limited by increasing difficulty of borrowing now that many house owners are near bankrupt as they don't save anything at the end of the month due to high EMI's.
No one has to buy, but there will be more and more people who have no choice but to sell as their payments rise. That will keep driving prices downward for a long time.

9.) House prices never fall atleast in Pune.
WRONG. If you see the RE scenario of 1996, prices crashed by 50% & took a whole 7+ years to recover.
Exact 1996 scenario may not be there today but strong correction is inevitable across the city.

10.) House prices don't fall to zero like stock prices, so it's safer to invest in real estate.
WRONG. House prices won't be zero, but the equity or the principal amount you paid can be zero or even negative. What you will pay as EMIs later in actual terms is not for the principal amount but only the interest as house prices dip. So, you will be only serving the bank.

11.) Prices will soften gradually, won't crash immediately.
WRONG. Prices are falling off a cliff. No one knows exactly what will happen, but it looks like prices will continue to fall for long time. These are just more manipulation of buyer emotions, to get them to buy even while prices are falling.

12.) The bubble prices were driven by supply and demand alone.
WRONG. Prices were driven by low interest rates and risky loans & good returns for investors in initial phases of boom in 2004-05.
Prices went up, interest rates went up & buyers savings went down. So prices are violating the most basic assumptions about supply and demand.

13.) There is lack of land.
WRONG. Ample of land is available & continue to be even in future in Pune. Sales volume are down. Even in Japan (small country with less land), prices went down. Current prices here are the same as that of 23 years ago. If we really had a housing shortage, there would not be so many vacant rentals.

14.) If you don't own, you'll live in a cheap neighborhood later.
WRONG. For the any given monthly payment, you can rent a much better house than you can buy. Renters live better, not worse. There are downsides to renting, such as being told to move at the end of your lease, or having your rent raised, but since there are thousands of vacant rentals, you can take your pick and be quite happy renting during the crash. There are similar but worse problems for owners anyway, such as being fired and losing your house, or having your interest rate and property taxes adjust upward. Remember, property taxes are forever.

15.) There's always someone predicting a real estate crash.
TRUE, yet irrelevant. There are very real crashes every decade or so. Even a broken clock is right twice a day.

16.) Local incomes justify the high prices.
WRONG. The mortgage should be more than your 3 years earning. It is much higher today. Most are already in danger/red zone.

17.) You have to live somewhere.
CORRECT. But that doesn't mean you should waste your life savings on a bad investment. You can live in a better house for much less money by renting during the down slide in RE.

18.) It's not a house, it's a home.
WRONG. Wherever one lives in it is home, be it apartment, condo, bungalow , mansion or house. Calling a house a "home" is a manipulation of your emotions for profit.

19.) If you don't buy now, you'll never get another chance.
WRONG. History proves otherwise.
Here's a beautiful quote from a analyst:-
"The real issue isn't whether you will be stuck being a renter all your life, she says. Its whether you'll get so scared about being shut out that you'll buy at the market's peak and be stuck in a property you can't afford or sell."

20.) It would take major economic recession or a major earthquake that wipes out this area in order for the price to fall by over 50%.
WRONG. Even today, if the prices fall by 50%, there will still be very few people who can buy at this levels due to uncertainty in jobs & most importantly high EMIs. Also, look at the rental rates for equivalent houses. Which loss per month is larger? EMI or rent?

contd....
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  • Originally Posted by realacres
    Same is the case with Pune,

    First DNA Prop Exhibi,
    Then Times Property Exhibi,
    Latest was Sakal Vastu exhibi.

    Now some more are planned in which the same old projects will be showcased which had FEW FLATS LEFT/SOLD OUT :D.

    Btw, did anyone visit the prop exhibis in Pune held in past 2 months?


    I think, you miss one more property exhibition,
    Magicbricks west suburb property exhibition arranged at Hotel orchid near baner Pune 14 April to 16 April 2011.
    CommentQuote
  • Originally Posted by realacres
    With real estate prices rising to exorbitant heights, the realty market continues to remain stagnant as sales of apartments in the city and its adjoining areas recorded the lowest figures in the last two years.

    According to the report prepared by Liasas Foras, a leading real estate research firm, sales in the first three months (January-March) of this year dropped to 9,000 from 10,500 recorded in the months of October to December 2010 in the Mumbai Metropolitan (MMR) Region, which includes Mumbai, Thane, Navi Mumbai and Raigad.

    Speaking to the Hindustan Times, Pankaj Kapoor, CEO, Liasas Foras, blamed builders for playing a major role in the crises. “The builders have escalated realty prices to such high levels that buying has become unaffordable to the majority of the population,” he added. He said reduction in flat prices was inevitable in the coming days. “They will do that when their holding capacity gets exhausted,” Kapoor said.

    Another factor that has contributed to low sales is the home loan market, where banks have tightened lending norms and also hiked interest rates. “Obtaining a loan, especially after the tightening of rules, has now become a major hurdle for homebuyers,” said Naresh Chheda, managing director, Happy Home Group, a leading group in redevelopment projects in the city.

    He said liberal lending norms would improve the market and also bring significant benefits to both buyers and the state exchequer.

    Though builders agree about the low sales, they rule out any significant price cuts. “We operate according to market dynamics and in the current scenario almost everything, like land prices, material as well as taxes, have gone up substantially,” said Anand Gupta, secretary, Builders Association of India (BAI), the apex body of builders.

    He said price cuts would be barely 5-7% in some pockets across the city. Chheda attributes the poor sales to a large pool of homebuyers who are sitting on the fence. “They are waiting for prices to come down and are hence deferring buying,” Chheda said.

    Home sales at record 2-year low - Hindustan Times


    Sales volume will still lower further..
    Credit policy: RBI hikes repo, savings bank interest rates; home, auto loans to become costlier - The Times of India

    Everything is happening in the favour of real buyer, not speculators. Interest rate hike, further leads buyer to postpone their decision to buy, leading to price correction in downward direction, and ultimately benefiting the real buyer.

    http://www.indianexpress.com/news/rbi-hike-home-buyers-to-pay-penalty/785153/0

    Asked about impact on real estate, Puri of JLL India said: "It will start to have an impact on housing demand because of the increase in interest costs."

    He pointed out that housing demand in bigger cities is already sluggish and the hike in short-term rates would further affect the demand. He said, however, the demand in smaller cities might not be affected as the prices are reasonable there.

    However, real estate consultant Jones Lang LaSalle (JLL) said that developers are unlikely to increase housing prices as demand in bigger cities would be hit due to the RBI's monetary policy.

    On the impact on housing prices, Puri of JLL India said, "Developers would absorb the possible increase in their interest cost by lowering their profit margins."

    Hike in interest affects the buyer due to the reason that, it reduces the amount of home loan the buyer can avail from banks. Ultimately reducing the affordability of home buyer. Only 10 to 20 % of home buyers buy the flat with 100% payment from their own sources. 80% (please correct, if I am wrong) of the home buyers avail home loan for two reasons,
    1. They don't have enough finance to buy
    2. To get Income tax rebate under section 80, on the principal amount paid and the interest on home loan paid(though they may have capacity to pay)


    For e.g. currently IDBI will charge 14.5% rate of interest to lenders. Please refer to following link.
    http://www.business-standard.com/india/news/idbi-bank-hikes-lending-deposit-rates-byto-50-bps/133891/on
    State-owned IDBI Bank today raised lending and deposit rates by up to 50 basis points soon after the Reserve Bank's monetary policy action, a move likely to be followed by other lenders in the coming days.

    In response to increase in cost of funds and keeping in view the market conditions, the bank has decided to increase both base rate and Benchmark Prime Lending Rate (BPLR) by 50 basis points each, IDBI Bank said in a statement.
    With the increase, base rate or the minimum lending rate will be 10% and BPLR would be 14.50%, it said.
    Both new and existing housing, auto and other loans will become costlier by at least 50 basis points.
    CommentQuote
  • More rate hike ahead…

    Yesterday’s hike is not the end. Till year end it may go up by another 50 to 75bps. Then again, by 50bps in Q2 -2012.



    HDFC’s teaser rate scheme, which started in 2009-10 will complete the fixed rate tenure in Q1-2012. It means loans taken in 2009/10 will reset to current rate & will give a big surprise to borrowers. As the teaser rates were offered by many banks the full impact of recent hike for existing home buyers will be more visible from Q1-2012. Where as commercial borrowers (builder) will have immediate impact.
    CommentQuote
  • Realty sales to be hit by interest rate rises

    Realty sales to be hit by interest rate rises

    Real estate developers and home buyers will feel the pinch of higher interest rates, which could slow down home sales. Higher interest will push up monthly installments for home loans for existing as well as new home buyers.

    The National Real Estate Development Council (Naredco) expects interest rates on housing finance to increase to 10.5 per cent for loans up to Rs 30 lakh and 11 per cent or more on loans above Rs 30 lakh.

    More than interest rates, what’s hurting home buyers is that many banks are now funding only 75 per cent of the cost of an apartment as against 85 per cent earlier. “The fact that the salaried class now have to supply a higher contribution to the cost of their homes is having a very tangible impact on demand,” said Limaye.

    Pradeep Jain, chairman, Confederation of Real Estate Developers’ Association of India, said: ‘‘The increase in rates will intensify the cash crunch scenario the industry is facing. The current pressure on prices is global in character and reflects supply-side bottlenecks. The solution is not monetary tightening.”

    Chairman, CREDAI, statement clearly indicating that pressure is building on developers.
    CommentQuote
  • While I agree with vatsal bajpai, real acres and rohit warrren, some aspects of this rate rise are going to have a pernicious effect on the economy and its situation going forward.

    First, my comments on reverse effect of increased inflation in response to increased RBI rates, which goes counter to developed markets, probably holds true in India. There will be a general price rise in everything, because the working capital needs for every company goes up. They pass it on to the consumer - since there is undercapacity in most needs of India economy in durables, FMCG, RE, vehicles, food, fuel - companies are able to pass on the prices successfully. Even metal companies will pass on their working capital costs. Except perhaps cement, everything will pass on. Demand will slow, economy will slow, but companies will maintain margins, stop expansion and within 1-2 years, the undercapacity will increase even more and so consumer will have no choice except pay higher price or do without. With population buiyancy, consumer numbers for company will maintain. Growth in living standards will go down.

    Inflation will increase. A lot. Counter to standard economic theory but seen repeatedly in COngress govt with their license permit raj in 70s, 80s and recently in last 5 years.

    RE: Here, problem with rate rise is never with the ultimate end user. It is actually with the builder, as realacres said.

    Holding cost for builder becomes unmanageable, because they use a lot of leverage which has to be rolled over quarter to quarter and month to month.

    Builder usually responds by retiring debt by selling land bank. He holds on to the flat projects but slows down / stops delivery.

    This creates a delivery bottle neck. Prices of end product does not fall (except with short period liquidity crisis as seen in 2008). Inventory stops getting released, until the desperate buyer pays through the nose for his flat - prices actually end up rising.

    This slowdown in India is more serious in India than slowdown of 2008 as regards economy.

    Let us see how RE price behaves over next 2 years.

    I expect static prices for 2011/12, followed by a massive currency depreciation and destabilization of economy in 2013 followed by massive RE price rise of 100%-500% by about 2014-2015, probably combined with 2014 elections and BJP coming to power in 2014.

    MAssive inflation is inevitable, including RE prices, by 2016 is my opinion.

    Reality - only time will tell.
    CommentQuote
  • You are a great economist! MMS should consult you, so should RBI!
    CommentQuote
  • As usual nice post Venkytalks :)

    Usually people tend to color consequence of most events in either bearish or bullish (based on the orientation).

    Your views have been based on taking cues from history and balanced.

    Any reason why you see currency depreciation in 2013 ? I think rather Govt will eventually allow Rupee to be freely traded and that will result in appreciation of Rupee.
    CommentQuote
  • Originally Posted by Venkytalks
    While I agree with vatsal bajpai, real acres and rohit warrren, some aspects of this rate rise are going to have a pernicious effect on the economy and its situation going forward.

    First, my comments on reverse effect of increased inflation in response to increased RBI rates, which goes counter to developed markets, probably holds true in India. There will be a general price rise in everything, because the working capital needs for every company goes up. They pass it on to the consumer - since there is undercapacity in most needs of India economy in durables, FMCG, RE, vehicles, food, fuel - companies are able to pass on the prices successfully. Even metal companies will pass on their working capital costs. Except perhaps cement, everything will pass on. Demand will slow, economy will slow, but companies will maintain margins, stop expansion and within 1-2 years, the undercapacity will increase even more and so consumer will have no choice except pay higher price or do without. With population buiyancy, consumer numbers for company will maintain. Growth in living standards will go down.

    Inflation will increase. A lot. Counter to standard economic theory but seen repeatedly in COngress govt with their license permit raj in 70s, 80s and recently in last 5 years.

    RE: Here, problem with rate rise is never with the ultimate end user. It is actually with the builder, as realacres said.

    Holding cost for builder becomes unmanageable, because they use a lot of leverage which has to be rolled over quarter to quarter and month to month.

    Builder usually responds by retiring debt by selling land bank. He holds on to the flat projects but slows down / stops delivery.

    This creates a delivery bottle neck. Prices of end product does not fall (except with short period liquidity crisis as seen in 2008). Inventory stops getting released, until the desperate buyer pays through the nose for his flat - prices actually end up rising.

    This slowdown in India is more serious in India than slowdown of 2008 as regards economy.

    Let us see how RE price behaves over next 2 years.

    I expect static prices for 2011/12, followed by a massive currency depreciation and destabilization of economy in 2013 followed by massive RE price rise of 100%-500% by about 2014-2015, probably combined with 2014 elections and BJP coming to power in 2014.

    MAssive inflation is inevitable, including RE prices, by 2016 is my opinion.

    Reality - only time will tell.




    Venky

    Even though what i am going to say you may well know it but still....

    Does anybody think why FED is not ready to increase interest rates...because FED is scared of deflation therefore inspite of heavy flak from world around and USA people ,it is not ready to raise rates.

    whenever a economy reduces interest rates then it boosts the economy in short term by lowering debt costs leading to cheap capital for expansion activities of businesses, it also fosters entrepreneurship and more R&D.
    therefore economy adds jobs and growth continues, however if interest rates are allowed to continue to stay low for longer time ,then lots of business in same sector expands and then comes competition...
    As competition continues and infact increases ,businesses are not able to maintain there margins and price wars start...

    example: telecom sector-- inspite of having lowest call cost in india, telecom companies are not able to increase there prices just becoz of competition,clearly a case of overinvestment rather than underinvestemnt.

    auto sector-- If i remember correctly in 2000 maruti esteem was about 5.5 lakhs, whereas in 2011 any entry level sedan is 5.5-6 lakhs despite 300% hike in cost of raw materials, labour costs etc....

    i can provide some more examples ..like consumer durables etc....

    clearly india is facing a crisis of oversupply rather than undersupply .

    same thing has devloped in RE sector ,contrary to your perception, had it not been overinvestment in RE sector ,one would not have seen flats and plots in areas like kundli ,panipat ,sonipat ,YEA and to justify this oversupply we think of fancy news like HIGHWAY,SEZ etc...whereas actually these areas will not be livable even after 10 years.
    and current prices have already captured that 10 year price appreciation.

    So despite this hike in inflation for the time being ,the biggest enemy is deflation which is a byproduct of overinvestment and overcapacity.


    :bab (6):
    CommentQuote
  • Originally Posted by vatsalbajpai
    Venky

    Does anybody think why FED is not ready to increase interest rates...because FED is scared of deflation therefore inspite of heavy flak from world around and USA people ,it is not ready to raise rates.

    This is the problem - 0% rates in USA vs 7-8% rates in India - it is not sustainable. Something has to give. If you can predict exactly what and how - you can become a millonaire.


    example: telecom sector-- inspite of having lowest call cost in india, telecom companies are not able to increase there prices just becoz of competition,clearly a case of overinvestment rather than underinvestemnt.

    You forget - in late 1990s, single call cost was 16 Rs!!!!! The BJP moved to revenue sharing and cost of spectrum and calls plummetted. Remember - spectrum fee is a tax on the consumer - govt made 10Rs in 1999 each time a person made a call. Rest was cost of the telecom company. Profit for telecom company was a few paise - in 1999 and now.

    Now Congress has auctioned spectrum for 1 Lakh Crore Rs for 3G. Companies have taken massive loan. They will not be able to make any money from this because the govt has taxed the raw material even before it has been used!!!!!!

    How will telecom make money??????

    You can also look forward to loan under-recoveries for the banks which gave 3G loan.

    Raja has cooked the goose which was laying the golden eggs for India

    auto sector-- If i remember correctly in 2000 maruti esteem was about 5.5 lakhs, whereas in 2011 any entry level sedan is 5.5-6 lakhs despite 300% hike in cost of raw materials, labour costs etc....

    Raw material has moved around 100%. Labour cost actually came down - because Maruti had expensive labour - new companies came with cheap labour. Inflation was low, it permitted low wage inflation. Main thing = cost of capital was low throughout 2000-2009, because of low interest rates.

    Now with cost of capital going up and cost of labour also going to shoot up because of inflation and cost of living rise = look forward to doubling of car prices. If our currency depreciates as well, it will be double whammy = metal costs both steel and aluminium will shoot through the roof.

    i can provide some more examples ..like consumer durables etc....

    clearly india is facing a crisis of oversupply rather than undersupply .

    India has been in a sweet spot decade when inflation was low, currency was high and rates were low. That sweet spot is going to become sour soon. Much of it was thanks to the right wing economic policies of BJP.

    It sustained through 5 years of Congress misrule. Now the true economic price for Congress rule is at hand.

    same thing has devloped in RE sector ,contrary to your perception, had it not been overinvestment in RE sector ,one would not have seen flats and plots in areas like kundli ,panipat ,sonipat ,YEA and to justify this oversupply we think of fancy news like HIGHWAY,SEZ etc...whereas actually these areas will not be livable even after 10 years.
    and current prices have already captured that 10 year price appreciation.


    So despite this hike in inflation for the time being ,the biggest enemy is deflation which is a byproduct of overinvestment and overcapacity.


    :bab (6):


    RE will fall in price when 5 things are done by govt:

    1. Remove farming vs. municipal land laws, which make it impossible to construct on farmland

    2. Make more roads (like YEA)

    3. Remove corruption and the incentive for black money by lowering capital gains tax

    4. Remove urban land ceiling act

    5. Allow corporate farming and corporate townships on large scale on farmland

    6. Remove stamp duty and improve land record services.

    7. Allow corporate tenancy residentials

    8. Allow REIT without attracting state taxes or stamp duty

    9. Make RE an industry

    10. Have a real estate regulator

    If govt does all this, RE prices will collapse and you will get a much bigger bang for your buck

    Until then, you have to tolerate the existing pathetic RE situation. I for one KNOW FOR SURE that govt will do nothing. Congress govt will do worse than nothing - Robert Vadhera will run BPTP, Pranab Mukherjee will run TDI, Pawar will run Mumbai and Pune and the status quo or worse will prevail.

    Re; Cost of capital, with higher rates trending up like this, next time a auto or commodity company goes to the bank for working capital loan, suddenly from 10%, it will go up to say 14%.

    A sudden 4% rise in cost of capital cannot be sustained unless it is passed on to consumer. So it is not the minuscule 0.5% rise in auto loan rate which causes problem - instead, price of car increases and at the same time cost of financing the car purchase increases.

    Same with house - working capital needs of builders suddenly rises by 5 to even 10% (depending on the company risk profile and mortgageable land available and its value which suddenly falls). Builder cannot sustain a 10% rise in his business cost = he has to pass it on. So paradoxical effect = rise in flat prices.

    Builder will camouflage this by reducing the area of the flat and reducing the super built up area = foyer, club house and other amenities and also the specifications.

    Even as it looks as if prices have gone down, actually you are getting a much inferior product at lower price
    CommentQuote
  • Real Estate Sector Worried Over Hike in Home Loan Rates by RBI

    Pressure is building on Builders, to collect finances.
    CommentQuote
  • 2 important points missed completely ..

    Originally Posted by Venkytalks
    RE will fall in price when 5 things are done by govt:

    1. Remove farming vs. municipal land laws, which make it impossible to construct on farmland

    2. Make more roads (like YEA)

    3. Remove corruption and the incentive for black money by lowering capital gains tax

    4. Remove urban land ceiling act

    5. Allow corporate farming and corporate townships on large scale on farmland

    6. Remove stamp duty and improve land record services.

    7. Allow corporate tenancy residentials

    8. Allow REIT without attracting state taxes or stamp duty

    9. Make RE an industry

    10. Have a real estate regulator

    If govt does all this, RE prices will collapse and you will get a much bigger bang for your buck

    Until then, you have to tolerate the existing pathetic RE situation. I for one KNOW FOR SURE that govt will do nothing. Congress govt will do worse than nothing - Robert Vadhera will run BPTP, Pranab Mukherjee will run TDI, Pawar will run Mumbai and Pune and the status quo or worse will prevail.

    Re; Cost of capital, with higher rates trending up like this, next time a auto or commodity company goes to the bank for working capital loan, suddenly from 10%, it will go up to say 14%.

    A sudden 4% rise in cost of capital cannot be sustained unless it is passed on to consumer. So it is not the minuscule 0.5% rise in auto loan rate which causes problem - instead, price of car increases and at the same time cost of financing the car purchase increases.

    Same with house - working capital needs of builders suddenly rises by 5 to even 10% (depending on the company risk profile and mortgageable land available and its value which suddenly falls). Builder cannot sustain a 10% rise in his business cost = he has to pass it on. So paradoxical effect = rise in flat prices.

    Builder will camouflage this by reducing the area of the flat and reducing the super built up area = foyer, club house and other amenities and also the specifications.

    Even as it looks as if prices have gone down, actually you are getting a much inferior product at lower price


    Vatsal and Venky,

    Vatsal talked about deflation and how this happens when there is oversupply. But there is one more criterion thats required for deflation.

    Venky talked about various points relating to when RE would come down. But they are all related to regulatory and structural issues. But there is one more criterion thats required for deflation.

    While both have brought out very important points as the basis for crash and deflation, why then has it not happened yet!?

    The one condition that is still preventing deflation and crash is - sufficient or high employment levels.

    People with jobs and getting even notional increments have the confidence to plunge into heavily leveraged, long term investment into homes, confident that this very employment level will continue to drive people to continue plunging into buying more home even at these high prices - thus maintaining price levels as well as liquidity (just in case).

    Banks use the same criterion (enough people with jobs) to keep building higher and riskier positions in builder as well as buyer loans banking on repayment capacity at high employment levels.

    Builders keep overbuilding based on both the above.

    When the West crashes, with a time lag, there will be a decline/crash in the employment scenario. Exporters will crash straightaway and domestic suppliers down the chain will crash as a result. Like in 2008 (but probably worse this time) companies will suffer significantly lower sales, crashing margins and this will force a broad retrenchment of workforce. Already I notice that most companies are touting growth in absolute profits as a sign of strength. Be very wary of this. In my analysis I pay more attention to margin sustenance or growth. Back in the 1990s IT companies routinely had 40% - 50% EBIDTA margins. Today its crumbled to anywhere from 15% - 20% even for the very best. If we apply taxation to them, they will become worse than even our domestic manufacturing companies. So much for the s/w exporters and the high P/E they still enjoy. Danger!

    When jobs are starting to get lost ...

    Suddenly the banks will see far higher NPAs, builders will see soaring dead stock and buyers will vanish. Existing loaners (also called owners) may see defaults, adding to the problem.

    This is the primary reason for the deflation and crash to happen. The sudden vanishing of apparent buyer strength during high unemployment scenarios.

    cheers
    CommentQuote
  • Originally Posted by wiseman
    Vatsal and Venky,

    Vatsal talked about deflation and how this happens when there is oversupply. But there is one more criterion thats required for deflation.

    Venky talked about various points relating to when RE would come down. But they are all related to regulatory and structural issues. But there is one more criterion thats required for deflation.

    While both have brought out very important points as the basis for crash and deflation, why then has it not happened yet!?

    The one condition that is still preventing deflation and crash is - sufficient or high employment levels.

    People with jobs and getting even notional increments have the confidence to plunge into heavily leveraged, long term investment into homes, confident that this very employment level will continue to drive people to continue plunging into buying more home even at these high prices - thus maintaining price levels as well as liquidity (just in case).

    Banks use the same criterion (enough people with jobs) to keep building higher and riskier positions in builder as well as buyer loans banking on repayment capacity at high employment levels.

    Builders keep overbuilding based on both the above.

    When the West crashes, with a time lag, there will be a decline/crash in the employment scenario. Exporters will crash straightaway and domestic suppliers down the chain will crash as a result. Like in 2008 (but probably worse this time) companies will suffer significantly lower sales, crashing margins and this will force a broad retrenchment of workforce. Already I notice that most companies are touting growth in absolute profits as a sign of strength. Be very wary of this. In my analysis I pay more attention to margin sustenance or growth. Back in the 1990s IT companies routinely had 40% - 50% EBIDTA margins. Today its crumbled to anywhere from 15% - 20% even for the very best. If we apply taxation to them, they will become worse than even our domestic manufacturing companies. So much for the s/w exporters and the high P/E they still enjoy. Danger!

    When jobs are starting to get lost ...

    Suddenly the banks will see far higher NPAs, builders will see soaring dead stock and buyers will vanish. Existing loaners (also called owners) may see defaults, adding to the problem.

    This is the primary reason for the deflation and crash to happen. The sudden vanishing of apparent buyer strength during high unemployment scenarios.

    cheers



    yes wiseman you are right.
    apparently both me and venky forgot to put up this very important point.
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  • Originally Posted by vatsalbajpai

    Actually this will be a good time for people who are in FD ,as they can lock in higher interest rates for 8-10 years .


    I always think the other way around. The interest rates are going to go down when the base effect of inflation kick in. So if we can buy assets at lower price when interest rates are high with affordable leverage, when the interest rate go down the asset price goes up and we can always refinance at the lower interest rate of course with a little penalty. Please let me know if there is anything fundamental I am missing in my assumption
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  • Originally Posted by Venkytalks




    PS: Are we in a normal cycle?

    Every cycle is normal and every claim that "this time its different" is typical crowd behavour.




    This is the latest view of another common man (for Example ..... several could be put in here)

    John P. Hussman, Ph.D.
    Hussman Econometrics Advisors Equity Holdings Total $6B



    "On nearly every economic and financial measure, the cycle from 2007 to the present has undoubtedly been a striking outlier from the standpoint of history. Likewise, it has been an outlier for us - particularly in Strategic Growth."
    .................
    .................

    "As the crisis unfolded, it became clear that conditions were "out of sample" from a post-war perspective, and we needed to contemplate Depression-era data in estimating the likely return/risk profile for stocks. But even recognizing the need to integrate this data into our modeling, there was no straightforward way to do it effectively in a single model (something I repeatedly referred to as the "two data sets problem"). "


    This is just 1 example I want to put of a Common man


    and the best part is .....

    S&P is behaving almost similar today in whats written in the article .....

    And the article was published 2 days back ...:bab (35): :D
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  • Don't expect big crash in real estate

    Hi All,

    I'm also one of the person who is willing to buy flat in pune. I do agree with view of correction in real estate market. The people like me are waiting at fence to jump in the market in right time.
    However the biggest question here is when that right time will come. How do we know this is the point for which we were waiting for so many months.

    I don't think there would be big crash like what has happend in US RE market. The reason behind it is first RBI who is closely monitoring and taking appropriate steps to secure banking sector in india which in turn don't encourage people investing in risky asset class.

    Moreover particularly in pune RE prices are driven by IT sector where currently people has capacity to buy at market price as well but waiting for correction since infra and developments doesn't justify current prices. These people may jump after 20%(just guestimate) of reduction in prices. Once these people are in the prices against slowly move towards peak and stabilize there due to further lack of demand.

    The world economy is slowly recovering from recession and hence IT companies are seeing growth which means IT people will not fear about job loss. If these people continue their spending the other sectors will also able to survive through correction. The job loss and rising interest rate was imp factor in US for RE to crash which doesnt seems to be the case with indian market.


    I would request respected members of this forum to please share their thoughts on how much big correction they are seeing in current situation. Now probably everyone knows there will be correction but what extent it will go down depends on how soon people come out of negative mood and start spending and investing.
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