Real estate continued….from yesterday

As some of us have been saying, we’re witnessing the unwinding of one of the greatest financial bubbles of all time. Not just in India – much more so in the USA.
Yet home prices will not simply go to zero like some shares did.(Remember Mazda, Silverline, Shaan, Indiana Dairy?) However DLF shares fell from Rs. 1200 to Rs. 150. In the real estate market it is going to be a prolonged, gradual deflation. Real estate can test your patience.
Let me start with my standard disclaimer:

Yes, all real estate is local. Yes, some areas of the country (Marine Drive, Carter Road, Defence Colony?) will hold up better than others. Yes, very well constructed and maintained properties in great locations will hold up best of all. (Hoechst House, Nariman Point)

With that out of the way, let’s also note that virtually no market IN THE WORLD is experiencing appreciation right now. Even offices in Bandra Kurla Complex (Mumbai) and homes in the Bandra/ Andheri area – have hit lows.
This is not just a result of a weak economy. Ok, let us look at a weak economy first. Cut to the US – enough data is available to say the following things:

Prices at the market peak were ridiculous. Ask yourself why home values TRIPLED in many areas from 1996 -2007. Was it population growth? No. Was it inflation? No. Was it the cost of building? No. Was it sky-high rental income? No. Was it a huge leap in discretionary income? No.

It was three things: rock bottom interest rates, Easy credit, and an unshakeable conviction that real estate “always goes up.”

Cut to India: Let us ask the same questions:

Prices at the market peak were ridiculous. Ask yourself why home values TRIPLED in many areas from 1997-2007. Was it population growth? No, not really. Was it inflation? No. Was it the cost of construction? No. Was it sky-high rental income? No. At 3% rental income that cannot be the reason. Was it a huge leap in discretionary income? Partially perhaps yes. Were people selling their ‘other inflating assets’ to buy this ‘inflating asset’ – the answer is yes.

It was perhaps the same three things: rock bottom interest rates, Easy credit, a very strong housing finance lobby and an unshakeable conviction that real estate “always goes up.”
It doesn’t. And now everybody knows it.

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3 Responses to “Real estate continued….from yesterday”

  1. kavita bothra on June 1st, 2009 at 3:46 pm

    Good reading…. but if you notice most of the aam janta will buy in real estate than equity as they are willing to bet on real estate as long term but they see equity as satta… and hence are not able to understand!! Probably if you give examples they may understand but not agree as equity is paper and real estate is solid and can be felt!!

  2. Good topic, well written. I’d like to add my 2 bit – the myth about property needs to be demolished with clinical analysis. Just look at the numbers –

    Asset price – 100
    Rentals – 3 to 4% p.a. of the asset price
    Add. maintenance, property tax, muncipal tax on rentals. Does it look attractive anymore?

    So the game is all about appreciation.

    So lets talk about how to value the asset?

    a. Is it driven by market (yes, if for rentals)?
    b. Is it driven by factors personal to me (yes, if for self-occupation)?

    If you reflect, most of the time we try to justify the price we pay based on what others are willing to pay….this logic would have been fine if we were investing in property.

    You’ll realize this kind of price determination for buying is akin to speculation.

    What can put a pin to this bubble? A housing regulator! Haven’t we all benefitted from the role played by SEBI and TRAI?

  3. A regulator would be good, but remember for every SEBI, there is also an IRDA…

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