Real estate prices are rarely rational! It is just that there is not enough information available in a well organized manner, and people are resistant to change.

Take a city like Mumbai. It is impossible to set up a barber shop, an inexpensive eatery (I mean selling dosa at Rs. 50), a general practice or even a specialized practice for a doctor…

However the older businesses continue – simply because the owner believes that he is earning well. The old owner is right, and a little wrong.

If you are sitting in a house with a market value of Rs. 4 crores, an office with a market value of Rs. 3 crores, a factory that will fetch Rs. 4 crores, and you are earning a GROSS income of Rs. 40 lakhs (pre tax)…YOU ARE FOOLING yourself?

Just sell off all your assets and move out of Mumbai. You would have got cash of Rs. 11 crores. Use 2 crores to buy a nice decent house and put Rs. 9 crores in a bank. You will earn Rs. 90 lakhs, GROSS.

Thus if all the real estate people in the expensive cities were to arbitrage the opportunities, the people remaining will find it very, very difficult to live! WHY?

Simply because all the low cost service providers will be forced to go out. A guy who buys a house for Rs. 4 crores will want to give it on rent of Rs. 15 lakhs a year…not Rs. 7 lakhs as the current owner is doing. There will be a lot of pressure on all fronts. Lower end jobs will not be created in Mumbai – no business house can pay astronomical costs to cater to Mumbai and Delhi’s prices. So the businesses will shift to less expensive areas, people will refuse to take transfers to these cities, …

Will all this actually happen?

NO. Not in the immediate future. What happens to the balance sheets of home finance companies? What happens to bank balance sheets? (SBI alone has a Rs. 100,000 crore housing loan portfolio). How can the politician allow a builder-mafia nexus to go away? Big ‘reputed’ builders who have usurped ‘school’ reserved land and ‘play ground’ ground reserved land could not have done it without political patronage, right?

So you will hear ridiculously funny stories like a school auctioning parking space in Mumbai and the whole parking lot getting sold out (at Rs. 4.5 lakhs per parking) in 10 (TEN) MINUTES, ……sure something is stinking…but cannot put a finger on the solution!!

 

Related Articles:

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

  1. A great message.People with such real estate assets continue to hold as they feel prices will continue to rise ….and then they will be ready.So Greed is IN CHARGE !

  2. You brought in a wonderful point. The development of airports are also an other example. If everyone feels that paying crores for 1 acre of land for acquisition is justifiable, it is affecting the airline industry, operators, employees and the travellers. No one is spared and all are sinking except the one who sold the land.

    As it happened in the west, everyone should realise that higher prices are no good to anyone. The high wages forced the west to outsource the jobs and locals in West were affected badly. If every resident of Metro feels that they are sitting on gold mine of real estate, the heat would be felt eventually.

  3. If you apply this logic, then 95% farmers in India will be better off selling the farm land and live off the interest income.

    However, people don’t do that for two reasons. One is in a growing economy, asset prices keep rising. In your 11 crore example, if the price appreciation is more than bank FD rate, why should he sell? By holding real estate, he is not capping the upside.

    Second – people need some occupation to keep them busy. It is not only about money. They want to create something on their own even if it doesn’t look profitable to start with.

  4. Mrhdk : Agreeing to your 2nd point about having an occupation.
    Many people in Pune have small shops on Laxmi road or MG road. They may not make much money out of the business- but the old owners do have an occupation and when time comes will fetch them (or their kids) millions.

    Milind N : Unless someone has a real “Need” to sell such a property, he may not sell it. Also, uprooting and moving somewhere else even if very profitable, may not be everyone’s cup of tea (especially not of the senior citizens). So, it’s not necessarily out of greed.

  5. ‘Real estate prices are rarely rational’
    sir, one more example from your previous post narrating the new property costs at Rs.14000/- p.s.f. v/s. old at Rs.8000/- p.s.f. on the same road in Chennai. the maximum construction could not be more than Rs. 3000/- p.s.f. in metros , what could be rational?
    for not selling the properties and moving other place could be for two other reasons; 1.basically man is stagnant , i.e. not like to shift 2. the most deals, rather most part of deals are in cash, which is difficult to manage afterwards .

  6. @krish the point about higher wages makes no sense. wages are high because of a good reason.the avg productivity of an american worker is simply far higher than an indian worker -for many reasons -none of which have to do with the capability of the worker. the capital goods he has in place -a road can be laid with high quality and few workers thanks to wonderful machines ten times faster and better than an indian contractor.thats why the guy who operates machines there earns more.the other invisible productivity improvers like better law and order/court systems/infrastructure provided by the state also increase productivity.

    you seem to imply that outsourcing is net negative for the americans.that can be established only by sloppy reasoning.
    higher wages are not the cause or sign of inflation in 99% of the cases.except on wall st.

  7. “inexpensive eatery (I mean selling dosa at Rs. 50)”
    i’m afraid to ask what is the charge at an ‘expensive eatery’…

    anyway, i think we are in general unwilling to pay the ‘fair’ cost of anything & thus illegal shopping establishments & working class living in illegal slums is something we can just not do away with.
    if you want to run a simple tea-shop in a legal manner & earn a decent profit, it is impossible to price it at a rate that would sell to masses. so, while we look down on slums & encroachments with contempt, we also don’t want to get rid of it, as that is what keeps prices down for us.

  8. @ Pravin. I am not talking about the general business model. Let me give you an example. Recently when Infosys said it is not considering the annual pay hike for the employees this year, social networking portals/blogs are full of messages from shocked employees asking the rationale, forecasting bleak outlook, cursing the management for unethical practices and so on.

    What many of these employees do not realise that higher cost have started to affect the client orders and profit margings. General Indian Market is watching the employee pay rise and in no time RE prices, Rental market, Weekend liesure and even fuel price from government are catching up with immediate effect. The net effect could be negative for the average IT employees. I myself had seen when the IT was going through recession during 2007-08, the prices came down for housing, products and services.
    A common man or employee should rather fight for inflation control. The huge profits of a company going as bonus to senior management is of no use to employee or public.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes:

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>