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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

    Originally posted by damoo_a View Post
    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
    Damoo,
    Thanks for the appreciation. However unless there are folks like them, I wont have the topic to discuss! Their mistakes provide a forum for education to others.
    Cheers.

    Comment


    • Re : Mathematics on Pricing of Land

      Very convenient ommission!!!

      Originally posted by Natarajg007 View Post
      Damoo,
      Thanks for the appreciation. However unless there are folks like them, I wont have the topic to discuss! Their mistakes provide a forum for education to others.
      Cheers.

      Nats,

      That was a very convenient passing over of my post and going over to Damoo's post with all that sweet, syruppy thank you notes.

      What about the price of that Rs.625 land back in 2004. What was it? Or are you ignorant of it?

      Awaiting the number so I can recalculate and establish some facts.

      cheers

      Comment


      • Re : Mathematics on Pricing of Land

        Originally posted by wiseman View Post
        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
        Very long mail from Wiseman. Will just provide the required numbers.
        Price in 1988 .. 27k per ground
        Price in 2004 .. 3L per ground
        Current price ... 625 psft
        Between 1988 and 2004 price escalation on the average is 1.16%.
        Price escalation between 2004 and 2009 is 1.37%.
        One should remember that we need to calculate average escalation over long periods of time. Also this location Tirunindravur has developed only in the last 3 years. There was no tar road if I remember even in 2004, but only around 2007.
        I had given the example of another property in my earlier post which gave similar returns. Now RE is for long term not for trading. That is why I contradict Wiseman asking people to sell and reenter. It is honestly impossible to trade in RE in 6 months gaps! You dont get buyers easily neither do you get to sell easily. If I finalize a deal today it will take atleast 3 months to realise the money in RE and that was true even 2 years ago when RE was supposedly hot stuff as per our friendly bears.
        Also Wiseman and Bigbear have conveniently forgotten the most important part of my message earlier. I was highlighting the tax implications and based on the same the return in RE is much higher by many factors than in FDs. Simply because the IT is not paid every year and only at time of sale. So the IT is also recirculated into the investment and you get returns on the IT portion also. That alone is sufficient reason to invest in RE even if RE and FD give same interest. In FD YOU HAVE TO PAY I.Tax EVERY YEAR ON NOTIONAL VALUE OF INTEREST.
        I hope sense prevails with the bears!

        Comment


        • Re : Mathematics on Pricing of Land

          Wiseman
          You seem to be waiting to grab me! You are stalking me! LOL!
          Answer to your query is also posted above.

          Comment


          • Re : Mathematics on Pricing of Land

            Nope, Nats. I am not stalking you! Thats bad manners

            Originally posted by Natarajg007 View Post
            Very long mail from Wiseman. Will just provide the required numbers.
            Price in 1988 .. 27k per ground
            Price in 2004 .. 3L per ground
            Current price ... 625 psft
            Between 1988 and 2004 price escalation on the average is 1.16%.
            Price escalation between 2004 and 2009 is 1.37%.
            One should remember that we need to calculate average escalation over long periods of time. Also this location Tirunindravur has developed only in the last 3 years. There was no tar road if I remember even in 2004, but only around 2007.
            I had given the example of another property in my earlier post which gave similar returns. Now RE is for long term not for trading. That is why I contradict Wiseman asking people to sell and reenter. It is honestly impossible to trade in RE in 6 months gaps! You dont get buyers easily neither do you get to sell easily. If I finalize a deal today it will take atleast 3 months to realise the money in RE and that was true even 2 years ago when RE was supposedly hot stuff as per our friendly bears.
            Also Wiseman and Bigbear have conveniently forgotten the most important part of my message earlier. I was highlighting the tax implications and based on the same the return in RE is much higher by many factors than in FDs. Simply because the IT is not paid every year and only at time of sale. So the IT is also recirculated into the investment and you get returns on the IT portion also. That alone is sufficient reason to invest in RE even if RE and FD give same interest. In FD YOU HAVE TO PAY I.Tax EVERY YEAR ON NOTIONAL VALUE OF INTEREST.
            I hope sense prevails with the bears!

            Nats,

            I take no pleasure in stalking or embarassing you.

            Getting back to the discussion, 3L per ground is Rs.125 per SFt.

            Okay, so in the period 1988 - 2004, 16 years long, the rise in value from Rs.11.50 to Rs.125 gives a CAGR of 16.25%.

            As you may recall, we must redraw the boundaries about what our respective stances is.

            I have not at any time taken the stance of RE is a bad buy!!! Please read that again!

            I am only stating that, after such a dream run of well-above-average returns from 2004-08 (wholly created due to the artificial credit-fueled boom) the next few years will see a contraction of all that excess credit and therefore people will not be able to throw money after RE and keep the high growth rates going.

            So, when you overeat and get indigesion, you will lay off excess eating for some time till the system gets back to normal - and this "get back to normal" is called "reversal to the mean".

            I am with you when you say RE is a good long term investment with a rider that, it is always important as to when you buy it (at what price) so that you do not see sub-optimal returns on the RE you buy at high prices!

            cheers

            Comment


            • Re : Mathematics on Pricing of Land

              Stabilisation

              Nats agree with u to treat RE as a long term investment.

              This FACT has been lost to people expecting quick bucks like stock market. Met one seller, who had four flats bought in these four years. Now this person wants to sell off these flats. This particular flat i saw, he was sitting on a neat profit even in these recessionary times. The seller was in two minds to wait or sell off. Now he is blind to the fact that the flat prices have decreased continuosly for the last one year.He has just got possession, and expects higher prices. He has decreased prices by few lkhs, but being behind the curve he is unable to sell it off, even though he requires the money. He is ill advised and losing money in the bargain. Even if he sells off, the wait period of three yrs is not over, so he will also be losing on Tax + excess stamp duty.

              Nats has mentioned stabilisation period in another thread. So aren't we in a decrease followed by Stab period right now.

              Nats, U have conveniently left out Tax implications on appreciation on sell off + property taxes & charges + municipal shares of lease & leave agreement etc. The cost benefit have been beautifully illustrated in one of the posts by Real acres.

              Comment


              • Re : Mathematics on Pricing of Land

                Here it is

                Here just read the post.

                ]http://www.indianrealestateforum.com/pune/t-builders-re-bulls-theory-proved-wrong-5139/page6.html[/URL]

                C post 59.

                Comment


                • Re : Mathematics on Pricing of Land

                  Another one

                  Here is another one beside the topic


                  ]http://www.indianrealestateforum.com/rental-trends/t-to-buy-a-home-on-loan-or-rent-2705.html[/URL]

                  Cheers

                  Comment


                  • Re : Mathematics on Pricing of Land

                    Originally posted by Sansei View Post
                    Nats agree with u to treat RE as a long term investment.

                    This FACT has been lost to people expecting quick bucks like stock market. Met one seller, who had four flats bought in these four years. Now this person wants to sell off these flats. This particular flat i saw, he was sitting on a neat profit even in these recessionary times. The seller was in two minds to wait or sell off. Now he is blind to the fact that the flat prices have decreased continuosly for the last one year.He has just got possession, and expects higher prices. He has decreased prices by few lkhs, but being behind the curve he is unable to sell it off, even though he requires the money. He is ill advised and losing money in the bargain. Even if he sells off, the wait period of three yrs is not over, so he will also be losing on Tax + excess stamp duty.

                    Nats has mentioned stabilisation period in another thread. So aren't we in a decrease followed by Stab period right now.

                    Nats, U have conveniently left out Tax implications on appreciation on sell off + property taxes & charges + municipal shares of lease & leave agreement etc. The cost benefit have been beautifully illustrated in one of the posts by Real acres.
                    Sansei,
                    Regarding flats as investments. That is for pig heads. I always have said, buy land for investment, buy flat for living. In Chennai since the ratio of land in flat is high, when someone is scared to buy land he uses flat as investment. That is not bad in Chennai though I will yet consider one considering it as stock market as pig head. Go and check Wiseman. He too believes that RE is to be treated as Stock and should be traded. So you need to be clear about your views, as you are another Wisey gang!
                    As for what I have left out. Sorry you aint reading fine. I have calculated Capital gains losses in long term sale of RE (Land) in my examples. I have left local property taxes as they are peanuts in most cases for land! So please learn to read before you answer.
                    Take good care of your friend and also be sure that you aint right about RE falling.

                    Comment


                    • Re : Mathematics on Pricing of Land

                      Originally posted by wiseman View Post
                      Nats,

                      I take no pleasure in stalking or embarassing you.

                      Getting back to the discussion, 3L per ground is Rs.125 per SFt.

                      Okay, so in the period 1988 - 2004, 16 years long, the rise in value from Rs.11.50 to Rs.125 gives a CAGR of 16.25%.

                      As you may recall, we must redraw the boundaries about what our respective stances is.

                      I have not at any time taken the stance of RE is a bad buy!!! Please read that again!

                      I am only stating that, after such a dream run of well-above-average returns from 2004-08 (wholly created due to the artificial credit-fueled boom) the next few years will see a contraction of all that excess credit and therefore people will not be able to throw money after RE and keep the high growth rates going.

                      So, when you overeat and get indigesion, you will lay off excess eating for some time till the system gets back to normal - and this "get back to normal" is called "reversal to the mean".

                      I am with you when you say RE is a good long term investment with a rider that, it is always important as to when you buy it (at what price) so that you do not see sub-optimal returns on the RE you buy at high prices!

                      cheers
                      Incidentally our friends Wisey and Bear swear by Buffet! Can they take a look at what their Buffet says now. S&P to shoot to 1050. While darling Wisey is talking about falling S&P falling Nifty and what not.
                      Looks like our bears are clearly proving what I always said of them. They are just losers who missed the bus and are crying like babies.

                      Comment

                      Tags: mathematics
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