There are numerous articles and news on price reduction in market or likely market crash. Without doubt, in the current scenario, several builders are offering discounts. Should one buy at these discounted prices or should one wait for the prices to crash further is a big question!!!

Given the fact that a project that is being sold at a discounted price or is likely to be a sold at discounted price, will the project reach satisfactory completion? Do you see that price reduction will directly impact the construction quality - comprise by use of lower cost material?

Will it be safer to invest in a high value (no price reduction/least price reduction) properties than in one that is discounted (and may never see completion or will be of inferior construction quality)? Ram, WiseMan, John, Rex, Diwakar, Rashim and all of you, what do you say?

Regards,

Manoj
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  • Thoughs?

    Wiseman and boys...please comments!
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  • Construction guy's thought

    I think end of next year would be the right time to invest.

    I do not see any compromise in the quality of construction due to correction in price. However, most of the apartment construction compromises quality in construction up to 30% (regardless of builder).
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  • Latest trends point to 2011 all the way to 2013 ...

    Originally Posted by Manoj Misra
    Wiseman and boys...please comments!



    Manoj,

    You do not predict far into the horizon as there are so many unknowns.

    The Subprime crisis started the slide in the US in August 2005. Real bad slide started in late-2007 and 2008. The impact on India has seen a lag of around 9 months and impact only started seriously in Oct 2008 - that too because the US situation precipitated it.

    GDP growth in China is expected to crash to 0-3 % and India 2-4 %. World's GDP is expected to be flat to slightly negative.

    This is a knock-down, drag-out kind of bear market. The knock down will take till late 2009, early 2010.

    The drag out effect will take at least till 2012 in the US (some expect it to go on for a decade!!!)

    Assuming the same kind of lag in India, we might see our bottom in housing in 2012 or early 2013. Stock market will start early as it is always a lead indicator by 6 - 9 months.

    There is another possibility that we may recover a little earlier and see bottom in 2011 itself.

    Finally, I will know we are around the bottom only when we are in that vicinity in terms of time. I will get the "feel" of the bottom and will wait for time to confirm it. Too early to tell now. You just have to keep biting your nails and wait. :D

    cheers
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  • Your have a point wiseman

    Wiseman -

    You have a point there!!

    Thanks, Manoj
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  • If we are still talking about growth,whether it is 0.5 or 5% it is growth.
    It is only the stocks which discount the p/e to around 22+ times.
    i.e the stocks are priced assuming a 22 times profit.

    RE is not so the prices are fixed on an actual transactions which happen in real time not estimates.CORRECTION will be there no doubt but not at the levels being forecast here.
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  • It is not just about growth ...

    Originally Posted by abk
    If we are still talking about growth,whether it is 0.5 or 5% it is growth.
    It is only the stocks which discount the p/e to around 22+ times.
    i.e the stocks are priced assuming a 22 times profit.

    RE is not so the prices are fixed on an actual transactions which happen in real time not estimates.CORRECTION will be there no doubt but not at the levels being forecast here.



    Dear abk,

    Good to know you deal with Real Estate. May have to contact you one of these days if you are a Chennai person :).

    Coming to the topic, it is not just about growth alone. It is also about absolute economic output and most importantly, employment levels. Let us have an example:

    Say India's Industrial Output (IO) is $550 billion and employment level is (theoretically) 95%. Assume growth rate is 10%. So it is quite obvious that last year IO was 500 billion and next year it will be around $605 billion. So far so good.

    Of this, assume current exports is $200 billion.

    Now let us assume that exports falls 25% (in some export segments this is already true; example mining where drop is 50%!). Further, let us assume that multiplier effect of export losses is 1:1, meaning for every rupee lost in exports there will be another rupee lost in domestic output (actually it will be more). Thus, total economic output will drop by, say, $100 billion.

    From a 10% growth, the situation will become 20% decline in IO and a 10% drop in overall GDP (This 10% drop may look small (whats only 10%, you might say?). But when you measure it in lost jobs and unemployment, it will mean many millions of jobs lost and almost all remaining jobs taking significant wage cuts.


    Coming to Stock P/E and the Real part of Real Estate

    Company stock have real profits and income. Thus there is a standard way of measuring the price of a stock. The P/E ratio is a simplification of the process of measuring the current cummulative value of a stock based on its current profits, profitability as well as the growth prospects of the company among other factors.

    Coming to Real Estate. There is nothing REAL about it. The term "Real" was born out of the term Royal when the king owned everything in his kingdom. But there is a way RE is also measured. Its called "Rent" or the profit part of owning property in urban areas (in rural, measures are different). As others in this forum will vouch, the normal ratio of Rent/Value is in the range of 3% to 7% or so. So, when ratio goes below 3%, people think its over-valued and over 7% its the other way round.

    Therefore there IS a P/E ratio for Real Estate. Price is the Price you pay for the property (like Stock). Earnings is the "Rent Income" assumed for that property. The P/E ratio for property under normal, equilibrium state is around 20 times! Go ask the old timers and the professionals.

    Sometimes, like today, you have extreme situations when this equilibrium gets upset by some whacky politician / finance minister decides to throw money at 20-somethings who end up with more money than knowledge who then fall for all this marketing blitz and go buy properties at totally crazy prices - hoping there will be a greater fool who will buy at a higher price down the road!!! Lets consider this example:

    Flats whose price is Rs 1 crore should have a rent of at least Rs 25000 to justify the extreme end of the range (3% Rent/Value). Actually, taking in property tax, repairs and maintenance, etc, the rent should be in the range of 30k to 35k or even more. Are your 1 crore properties fetching such rents? I think not!!!

    So, as per this time-worn rule these properties are over-valued long term and will either retract in price or stagnate for a lon time till rents climb and reach that level to justify the price. Of course people will give all kinds of reasons why prices are so high, but eventually sound economics always punishes people who push its limits.

    Now, lets assume rents in these areas are Rs 15000 pm (Rs 1.80 lakhs pa). At a rato of 3% - 4% Rent/Value price should correct to 60 lakhs to 45 lakhs (a drop of at least 40% from here).

    Lets assume ratio climbs to 5% (which is long-term average) and people can afford only 10,000 rent (jobs and salaries are down). This gives annual rent of 1.20 lakhs pa and at 5% a price of only 24 lakhs!!! Is that a 76% drop from current?

    So, just like Sobha stock came down from Rs 1250 with P/E of 42 times to current price of Rs 100 and a P/E of 3.33 on last year's earnings, property too can come down from a current P/R of 55.55 times (1 crore on rent of 15k pm) to a P/R of 22.22 times (when price falls to 40 lakhs!!!). Or even 24 lakhs at 13.33 times P/R.

    Did you say Real Estate prices are real? Really?!!! It is not that real. It is also based hugely on subjective things like hopes of people who buy it. How many people actually bought property based on the P/E ratio for Real Estate - called Value to Rent ratio or P/R.

    As you can see, there is something unreal about Real Estate today and simple economic theory (that has seen hundreds of years of applicability and has severely punished people who broke its rules) will make prices come back quite dramatically. Of course it will take time, maybe next 2-3 years to decline in fits and starts. So, don't fret if it does not come down tomorrow (that kind of thing happens only in movies).

    Count on it.
    cheers
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  • And how is the stimulus plan helping?

    Like in the US of A, stimulus plans do not work! Why? Because you cannot solve problems of too-much-cheap-money with even-more-cheap-money.

    The FM can flood the economy with liquidity through fiscal and monetary means. Make things cheaper and so on. Can he force you to go to market and buy more?

    Well, he is betting on it. I believe that this will only prolong the crisis since the only way to solve the crisis is to bring down excessive liquidity in the market - which will have a significant side-effect of wealth destruction, unfortunately!

    And IF this stimulus plan does not work, what then will the Govt do to pump up the economy? One more stimulus? How will this bring back normal buying in the RE markets which many people are now hoping will come back in 3-6 months?


    So, lets take a poll and see. How many of you have directly, or have a friend who, has changed mind to buy property or car or whatever due to this fiscal crisis?

    cheers
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  • No one can force anyone but easy money and the loans available for almost everything from homes to holidays,it is but human to fall to our 'must have' feelings, may be all are not wise as you. I know people who pledge their ornaments in banks just to buy(upgrade) plasma TV's .and the reason is just that his neighbour just got one.see it was neither need nor his fancy. such cases exist in millions and easy loans will only hasten up his idiosyncracy to buy the plasma.So all buying(homes to holiday packages) do not fully obey the diktats of the mrkt or the wisdom of the wise.
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  • 'Must have' feelings & blissfull ignorance may prevent price crash(not correction)

    Originally Posted by wiseman
    Like in the US of A, stimulus plans do not work! Why? Because you cannot solve problems of too-much-cheap-money with even-more-cheap-money.

    The FM can flood the economy with liquidity through fiscal and monetary means. Make things cheaper and so on. Can he force you to go to market and buy more?


    Nobody can force anyone.But with easy money(loans) on everything from homes to holidays it is but human to succumb to our 'must have' feelings.

    The advent of the EMI in india has changed the 'affordabilty' of white goods and RE.
    I know a person with a modest salary who pledged his jewels at the bank to purchase(upgrade) a plasma TV. this was because his neighbour bougth one and not because of need,fancy or excess money. such people exist in millions.these idiosyncrasies will be fuelled by easy availibility of loans and people will buy holidays and homes not just because they need it.
    Buying of homes& holidays do not look for or obey the diktats of the mrkt forces or the wisdom of the wise.
    Moreever the forecasts are so unimaginable, which has not happened in many a lifetime may be rubbished by many as paranoia.
    The point is that there are many factors which influence 'buying' and only a small portion of indians understand or believe the forecasts! Why? Because you cannot solve problems of too-much-cheap-money with even-more-cheap-money.

    The FM can flood the economy with liquidity through fiscal and monetary means. Make things cheaper and so on. Can he force you to go to market and buy more?


    Nobody can force anyone.But with easy money(loans) on everything from homes to holidays it is but human to succumb to our 'must have' feelings.

    The advent of the EMI in india has changed the 'affordabilty' of white goods and RE.
    I know a person with a modest salary who pledged his jewels at the bank to purchase(upgrade) a plasma TV. this was because his neighbour bougth one and not because of need,fancy or excess money. such people exist in millions.these idiosyncrasies will be fuelled by easy availibility of loans and people will buy holidays and homes not just because they need it.
    Buying of homes& holidays do not look for or obey the diktats of the mrkt forces or the wisdom of the wise.
    Moreever the forecasts are so unimaginable, which has not happened in many a lifetime may be rubbished by many as paranoia.
    The point is that there are many factors which influence 'buying' and only a small portion of indians understand or believe the forecasts
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  • Originally Posted by abk
    I know people who pledge their ornaments in banks just to buy(upgrade) plasma TV's .and the reason is just that his neighbour just got one.see it was neither need nor his fancy. such cases exist in millions and easy loans will only hasten up his idiosyncracy to buy the plasma.So all buying(homes to holiday packages) do not fully obey the diktats of the mrkt or the wisdom of the wise.


    Ha Ha !!! This is typical Indian Women Attitude. If you neighbor buy a Swift you wanna buy Swift Desire car... Cat Race. This will lead an end of the earth.
    Today I have see one small news in TV. This is economics down turn season.
    In Punjab there are farmer who is not able to have one day full meal. But in other side farmers are buying BMW/MERC... And believe it or not they the sales has jumped to 100% for luxury car. What a irony :)
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  • Interesting discussion brewing up

    So if there is a rise in Luxary cars sales.. do we expect a rubb off here? Anyways, I would like to close this discuss soon.. but there are several senior folks in this forum who can also help by commenting on - should we really wait..
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  • As per me we can wait for few more months !!! Until and unless real estate price are not coming to a realistic one. 2009 will be more worst than now.
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  • Have said it enough :)

    We may need to wait for another 1-2 years in my opinion. Anticipate real bottom in the 2010 - 2012 region.

    Real pain still to begin.

    cheers
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  • Real pain still to begin?

    Wiseman: I think we need a bit more debate on this.. I have not seen anyone really coming up with facts to prove your point incorrect. At least I am yet to see a forceful point countering your views. Will still wait for some more time before we put this discussion thread to end!!!

    Cheers,
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  • Read my post under "uninhibited exuberance"

    Originally Posted by Manoj Misra
    Wiseman: I think we need a bit more debate on this.. I have not seen anyone really coming up with facts to prove your point incorrect. At least I am yet to see a forceful point countering your views. Will still wait for some more time before we put this discussion thread to end!!!

    Cheers,



    Manoj,

    I did some calculations relating to the future to scare the readers on this post under "uninhibited exuberance".

    To sum up, if you buy at 2.4 crores per ground and hope for a 25% CAGR over next 20 years (some geniuses do believe it and espouse it on this forum to palm off their property to the unwary!), you need to find a buyer at 104 crores for 1200 Sft and this amount at 35% pa shoots up to 485 crores.

    Take your pick.

    1. Either you find a sucker to buy your property at such astronomical amounts (meaning that the rupee will become like the Zimbabwe $ by then)

    2. Or the returns need to be very, very poor over the next decade and more, so that people's salaries catch up with these prices (we discuss the unviability of this case a little later down the post)

    For case 2, further one of 2 things can happen:

    a. Prices can crash and then go up slowly to provide pedestrian returns

    b. Prices can stagnate for a long time and achieve the same result

    So, what it means is, if someone bought now, it is like locking the door to the dungeon and throwing away the key for a long time. Because, in the next decade or two, selling will not be much of an option as price appreciation will be very slow, if at all. nd much of this time you will actually be making a loss since, net of interest your profit will actually be negative. Has anyone on this post thought about the future 20 year out and calculated the pain?

    Besides, you know how IT salaries are already making India uncompetitive. Do you think salaries will rise by 15% - 20% every year for next 20 years? Dream on!!!

    Besides, with our population rising so fast, there will be scarcity for most essential commodities, greater competition for jobs and this will put continuous pressure on salaries keeping them low, while keeping expenses always rising faster than salary.

    So, with rising prices, your not-so-fast-rising salaries will put pressure from above and you huge monthly outflow (1.5 lakhs pm) will keep the pressure on from below, squeezing the ba**s out of you! ;). That is, if you can actually earn 2 lakhs or more per month continuously for next 240 months.

    No way out of this and prices will, at best, stagnate for a long period of time and at worst, crash and come back after a decade or two.

    Now you know where that statement came from! :D

    cheers
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