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How prices will climb down - the calculation!


How prices will climb down - the calculation!

Last updated: November 9 2008
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  • How prices will climb down - the calculation!


    Here is an interesting way I think Home prices will climb down. Of course there may be other ways and the real way may not be known at all. But give it a thought ...

    Economic Times (print edition, so don't ask me for a link ) has reported today (31 Oct 08) that Banks have now raised down payments to as high as 40% of the price of the property. Upto 30 lakhs down payment is 20%, upto 1 crores, its 25% and over that it is 40%.

    So, lets say that a house in Koramangala (Mantri Classic) was bought in 2002/03 for about 40 lakhs. In 2007, it was quoted (don't know if there was a sale at that price) at 1.30 crores!

    So, lets say that for 1.30 crores one had to put up a down payment of 10% or 13 lakhs (lets round it off to 15 lakhs).

    Now, the bank says, friend, surre we will not say no to loans as you are a Sr. VP in a top IT company (which is going bust in the US! ). But as per our rules we will now only give 60% for property over 1 crore.

    Buyer says, but I have only 15 lakhs - and buyers have nearly vanished, so the seller, who is in some distress HAS to sell and sees no one else coming with an offer.

    So, buyer says, my 15 lakhs as 40% of the price leads to the total sale price of the property at only 37.5 lakhs - almost the same price as it was when built in 2003!!! Of course, if you, the seller can sell it below 1 crore, my 15 lakhs can be 25% of the value so I can afford 60 lakhs as the final price. As you can see, lack of demand and tight market conditions can instantly cut down price by nearly 55%!!! . If seller waits, his situation only gets worse, so he has to sell in distress.

    If you count the interest paid to banks in the interim 5 years, the distress seller must make a big loss! And as time goes by story only gets worse.

    Folks, this is just an imaginary story. But, when jobs are lost wholesale and people find it hard even to find money that they can gather up today, the buyer who could put up 15 lakhs today, may not even be able to do that much. So, expect prices to crash much more than the experts tell you!!!

  • #2


    Re : How prices will climb down - the calculation!

    nice synopsis... i hope this is true.. the prices are still crazy... btw. what do you think about mumbai .. everyone says that other states would be more affected versus mumbai .. since the demand is really high and the supply is low.


    • #3


      Re : How prices will climb down - the calculation!

      World news getting steadily worse ...

      Dear Varun,

      I was hoping that, with Obama coming in there will be radical change in the US and new policies may shorten the duration of the global deflation and contraction that is gradually squeezing the life out of us all like a Giant Anaconda. But based on his first Press Conference he is falling prey to the usual Democratic (Socialistic) line.

      He is just re-arranging the policies to reverse the Republican bailing out the rich and shifting it to benefiting the poor and middle-class. Laudable efforts. But it is like the proverbial "shifting the deck chairs on the Titanic". Will have no effect on the final outcome, which might be long-term global depression.

      Bombay RE prices may be impacted by the following trends:

      1. Being the Financial hub of India, it might see a hit as financial sector worldwide is being hit. So jobs will be lost, salaries cut and this will bring home as well as commercial prices down significantly

      2. Though not like NCR, Bangalore, etc, Bombay still has quite a bit of IT/ITES companies. This too will help prices come down significantly

      3. The most worrying thing, though is the impact of regionalism and divisive politics on Bombay's reputation as a cosmopolitan city. With the Internet and communication revolution, if people find that they cannot live peacefully, they will simply shift base and take their business elsewhere (like Tatas in Singur). Once people realise that they can setup wherever convenient to them, it will be very hard for Bombay to reverse the tide after a certain critical mass of outflow has been achieved. People will simply realise that life can go on without Bombay too!

      To answer your question, Bombay prices are likely to fall in line with the rest of the country - and excuses like shortage of supply will be met with answers like shortage of buyers as well. More the recent rise, greater the fall.



      Have any questions or thoughts about this?