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Mathematics on Pricing of Land

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Mathematics on Pricing of Land

Last updated: August 5 2009
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  • Re : Mathematics on Pricing of Land

    Some more mathematics!

    I bought a CMDA (la MMDA approved) land in Thirunindravur on the Avadi-Tiruvallur section. Today there is a tar road in front of the property and a scenic lifestyle with independant houses. In 1988 I paid 27K per ground or Rs11.25psft. Today quite a bit beyond this area CMDA plots are being sold by some Aysha Real estate for Rs 625psft. I know my plot will get me close to 1K psft but let me take Aysha rate of 625. So in 21 years my plot has appreciated by 625/11.25=55.55 times.That means 21% return cumulative per annum or to use the Finance guys words a CAGR of 21%.
    I am curious why the price of this land will ever fall. Second why I wont continue to get this return in the next 10 years. That means price in 2019 will be 1.21^10x625=4200psft. Now today a Lovebird will state 4200psft is too big in Tirunindravur. He is right, but 10 years from now it will happen unless ofcourse our interest rates shrink to 2%like in US. With growing interest rates, it is likely that growth of this plot will shoot up more than 21%.
    In simple, invest in RE and I mean land, if documentation and approval are clean as it is the SAFEST and BEST returns provider.
    Goodnight!

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    • Re : Mathematics on Pricing of Land

      Originally posted by Natarajg007 View Post
      I bought a CMDA (la MMDA approved) land in Thirunindravur on the Avadi-Tiruvallur section. Today there is a tar road in front of the property and a scenic lifestyle with independant houses. In 1988 I paid 27K per ground or Rs11.25psft. Today quite a bit beyond this area CMDA plots are being sold by some Aysha Real estate for Rs 625psft. I know my plot will get me close to 1K psft but let me take Aysha rate of 625. So in 21 years my plot has appreciated by 625/11.25=55.55 times.That means 21% return cumulative per annum or to use the Finance guys words a CAGR of 21%.
      I am curious why the price of this land will ever fall. Second why I wont continue to get this return in the next 10 years. That means price in 2019 will be 1.21^10x625=4200psft. Now today a Lovebird will state 4200psft is too big in Tirunindravur. He is right, but 10 years from now it will happen unless ofcourse our interest rates shrink to 2%like in US. With growing interest rates, it is likely that growth of this plot will shoot up more than 21%.
      In simple, invest in RE and I mean land, if documentation and approval are clean as it is the SAFEST and BEST returns provider.
      Goodnight!
      If past history was all there was to the game, the richest people would be librarians.
      The investor of today does not profit from yesterday's growth.
      - Warren Buffet

      Comment


      • Re : Mathematics on Pricing of Land

        Originally posted by Natarajg007 View Post
        In the 1990s in India the interest rate kept going up to the point that in 1994-96 I could get 18% clean safe interest in Company FDs and not one of these deposits disappeared. I am not talking about RBC or another famous name that disappeared. Simple, interest is 15% and you get 3% upfront commission in decent finance companies.
        Now our friends argue that interest hardening will result in RE contraction. How foolish they are, only time will tell. Go back to the 90s. The interest rate raised and RE prices started soaring up. Atleast until late 96. Then they stabilised while interest rates reduced. Now using basic incomplete knowledge of Economics will not let these bears understand why. I will leave with what history has shown in the 90s. Anyone who bought in the 1992-94 went rich by 96 and never had to worry till today. We in 2009 are somewhere trudging towards 92 period. You know what a boom we are waiting for. Incidentally some of my investments were in 1988 and I know how much they have grown. So if you continue to believe the bear talkers who never give you one reason beyond talking about the greatest depression in the world and so on, then you are going to feel bad.
        One newspaper today is talking about Chinese aggression, good story! In the 90s people talked that the world will end in the late 90s. Did that happen? Same way all those talking that RE will fall in Chennai are going to just make you get nervous. On this board atleast one Natpudan came and mentioned the RE he bought and the price he bought it for. I am yet to see one seller talk here. In other words, there are almost no sellers! Those who want to miss the bus again as they did in 2004 can sell or miss buying. For the rest it is a one way ticket to the moon.
        In 1990's how many people overleveraged 4-5 times to buy RE.Average age of buyers were around 40 and most of them bought with their own money as banks were not giving loans like today.Lets assume that a buyer had bought property worth 10 lakhs in 1990's with help of bank loan like today.
        Since you are getting 18% interest in FD's, banks should be lending you at 22-25%.So whatever the CAGR of 25% you got from land as quoted in other post will have been neutralised by the interest paid to bank and your investment would have grown 2-4% after 10 years and if you add inflation you will be sitting on loss of 8-10% per annum.Thats why people in 1990's didnt overleverage to buy land.But today everyone knows how much leverage buyers in their early 30's have taken without taking all these factors in to consideration and how much they are suffering now.Why spent your life long earnings for a broker to become rich!!

        Comment


        • Re : Mathematics on Pricing of Land

          Originally posted by BigBear View Post
          If past history was all there was to the game, the richest people would be librarians.
          The investor of today does not profit from yesterday's growth.
          - Warren Buffet
          Buffet says many things, 50% are right like for most!

          Comment


          • Re : Mathematics on Pricing of Land

            Originally posted by BigBear View Post
            In 1990's how many people overleveraged 4-5 times to buy RE.Average age of buyers were around 40 and most of them bought with their own money as banks were not giving loans like today.Lets assume that a buyer had bought property worth 10 lakhs in 1990's with help of bank loan like today.
            Since you are getting 18% interest in FD's, banks should be lending you at 22-25%.So whatever the CAGR of 25% you got from land as quoted in other post will have been neutralised by the interest paid to bank and your investment would have grown 2-4% after 10 years and if you add inflation you will be sitting on loss of 8-10% per annum.Thats why people in 1990's didnt overleverage to buy land.But today everyone knows how much leverage buyers in their early 30's have taken without taking all these factors in to consideration and how much they are suffering now.Why spent your life long earnings for a broker to become rich!!
            Incidentally banks were lending at 15 to 18% in the 1990s. Yet the RE gave a return more than bank deposits! Now let me argue a bit differently. Between 1988 and 1996 I could have got using the safest of Company FDs with all careful analysis about 17% returns on the average. From 96 to 2002 the return was about 12%. From 2002 till now it will be about 8%.
            1.17^8x1.12^6x1.08^7=11.8 times
            That fades in comparison to 55.55 times. Incidentally the example I gave was not the best of 1988 investments of mine. Another gives me close to 120 times conservatively!
            Now take into account the tax you will pay throughout the period. So if you got 17% you might actually take only 70% in hand. So it will be .17*70=11.9%
            Using that it will be
            (1+.17*.7)^8x(1+.12*.7)^6x(1+.08*.7)^7= 5.84times
            Now if I sold my land and got 55.55 times and paid 30% tax I will yet get 38.85 times. That is 6.6times.
            Infact the reason the rich and mighty sink their money into real estate is to avoid tax as RE investment is non taxable for IT and Capital gains is only at time of sale.
            Big Bear you need to understand the above mathematics and then comment. Ur views are appreciated!

            Comment


            • Re : Mathematics on Pricing of Land

              Recalculate

              Hi Nats

              Can u give a proper perspective upto a time line say 2003-4, when the boom started, using prices quoted at those levels.

              I suspect that, u will get much lesser return, since u got a booster dose of liquidity which everything else has got, after Govt policies.

              The next sector for this dose will also show this trend.

              Comment


              • Re : Mathematics on Pricing of Land

                Originally posted by Natarajg007 View Post
                Incidentally banks were lending at 15 to 18% in the 1990s. Yet the RE gave a return more than bank deposits! Now let me argue a bit differently. Between 1988 and 1996 I could have got using the safest of Company FDs with all careful analysis about 17% returns on the average. From 96 to 2002 the return was about 12%. From 2002 till now it will be about 8%.
                1.17^8x1.12^6x1.08^7=11.8 times
                That fades in comparison to 55.55 times. Incidentally the example I gave was not the best of 1988 investments of mine. Another gives me close to 120 times conservatively!
                Now take into account the tax you will pay throughout the period. So if you got 17% you might actually take only 70% in hand. So it will be .17*70=11.9%
                Using that it will be
                (1+.17*.7)^8x(1+.12*.7)^6x(1+.08*.7)^7= 5.84times
                Now if I sold my land and got 55.55 times and paid 30% tax I will yet get 38.85 times. That is 6.6times.
                Infact the reason the rich and mighty sink their money into real estate is to avoid tax as RE investment is non taxable for IT and Capital gains is only at time of sale.
                Big Bear you need to understand the above mathematics and then comment. Ur views are appreciated!
                Comparing FD's and RE is like comparing app le and orange.In FD's you get 100% safety whereas in RE you dont know what happens tommorow either someone will occupy your land or sell with forged documents or government might takeover or seller could cheat you with forged documents.Thats why there is a risk premium for RE as compared to FD's.
                I was talking about people in their 20's who borrow huge amount of money to buy RE thinking it as wise decision.Anyway who has full money to buy RE in city at this hyped price.Investing in RE is good if you buy low and sell high and not buy high and sell low.

                Comment


                • Re : Mathematics on Pricing of Land

                  BigB,
                  The data I gave is based on FDs in Companies which are not as safe as you might imagine. If I used Bank FDs that too of SBI then the value I gave will dip to pittance and that is where you can talk of safety. So by continously arguing you can wear me out but not be correct!
                  As for Sansei, I will give a quick answer. Price in 1966 was 5K and in 2003 was 35L. So the growth rate will be 19.36%. Almost the same. Remember RE peaks up in bursts and not in a straight line. So average return over 10 year periods or more will make sense.
                  Finally if the argument is dont borrow and invest, I am not going to argue much. The argument that because of borrowings prices went up is what I think is an extrapolation and not fact. The reason RE prices went up is higher salaries, infact a quantum jump in salaries. So if the salaries correct to Pre2004 levels then you can argue something. Also I dont want to bother about job losses. They make individuals sick but not society. The rich will continue to grow richer and the poor poorer and bubble paradox will continue irrespective of whether you like it or not.
                  God save those who dont learn from history. And forget Warren Buffett. He has no reason to tell what you like, he can tell whatever he wants but does not mean he learnt anything about markets other than from the past, which means from history!

                  Comment


                  • Re : Mathematics on Pricing of Land

                    I was tempted to take up this line, but no use!

                    Originally posted by Sansei View Post
                    Hi Nats

                    Can u give a proper perspective upto a time line say 2003-4, when the boom started, using prices quoted at those levels.

                    I suspect that, u will get much lesser return, since u got a booster dose of liquidity which everything else has got, after Govt policies.

                    The next sector for this dose will also show this trend.

                    Sansei, you are correct. I would like to know from Nats the price in 2004. In my opinion it should have been around Rs.105 or lower, assuming the average of 6-8 times rise in prices in the intervening period that Nats himself has mentioned in the other post to BigBear so conveniently for us.

                    I have highlighted the numbers to indicate that they are exactly the figures given by Nats.

                    Here are the figures if the jump from 2004 to 2009 was 6 or 8 times:

                    6 times jump. Price in 2004 Rs.104, CAGR from 1988 = 14.75%

                    7 times jump. Price in 2004 Rs.89, CAGR from 1988 = 13.65%

                    8 times jump. Price in 2004 Rs.78, CAGR from 1988 = 12.7%

                    As you can see the long term return on RE prices (even land) over 16 years, is in the range of 12% - 15% (even in the best of cases when you were lucky enough to buy just before the start of the greatest boom your generation has seen and sold just after the boom ended in one of the prime cities of the country).

                    And if you go back to ALL the posts on this topic from me, this is exactly the range I have always maintained!!!

                    Here is the proof. And it can be finalised if only Nats could provide us the price of his land in 2004!!! Others can also chip in so that everyone can see the truth about long term ROI on Land in the best of places in the best of times in India.

                    And we are now entering the worst of times. So where do you think ROI and consequently, prices will head?

                    Let us use the tried and tested Reversion to the mean!!!

                    If you follow this argument, to get back to the mean price growth, let is see how far away will be the time when prices go down and them recover ...

                    Assuming the Long Term growth rate are as given below, here is when the prices will reach up back again by ...

                    At 12.70% the 1988 price will reach Rs.595 in the year 2021!

                    At 13.65% the 1988 price will reach Rs.605 in the year 2019!

                    At 14.75% the 1988 price will reach Rs.605 in the year 2017!

                    So the prices should correct and recover to these prices given, so as to fit the model of reversion to the mean!

                    Get the picture?

                    cheers
                    Last edited July 16 2009, 06:47 PM.

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                    • Re : Mathematics on Pricing of Land

                      I have to appreciate about ur knowledge on real estate

                      That is well said Nataraj...those guys who are talking about RE fall and writing some non sense just cannot understand what U are talking about...how it will benefit them

                      Comment

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