November 25, 2015
Time: 12 Noon.
Real Estate Woes in India:
Today is a holiday for stock market and hence I choose to write something different from stock market.
In fact two weeks before I have written about Real Estate. I feel that there is more to write. Hence this article.
About 400 years back, in Holland, Tulip flower prices were kept on increasing from few cents to a whopping 35000 US dollars for one flower. Then the prices crashed and a number of people have lost everything in their life in that crash. That was the first "bubble burst" recorded in the History.
Fist let us come to the basics.
Middle class people spend lot of money. But for which item people spend more than a lakh?
Let us exclude medical treatments as it is not spent willingly and in most cases insurance take the responsibility.
Let us exclude marriage and related things like buying Jewelry as that is a compulsory thing.
Then comes only two things, one House and the other one is Car.
Out of these two, the Car is purchased for enjoyment and convenience and we are fully aware that it is a depreciating asset.
So finally we invest in a house, which is the largest expenditure in our life, with the aim of convenience as well as expecting capital appreciation in future.
Since this is the largest investment of our life time, we have to be very careful.
Myth 1: Real estate prices will keep appreciating and will never go down.
Truth: Real estate prices have crashed in japan in 1989 and it has never recovered so far. US experienced Great Depression in 1929 after nearly a century, in 2008, US faced once in Century disaster of Great Recession. This recession was mainly due to Real Estate price crash. When something can happen to Japan and US, why it can not happen to India. So it is not true that price of real estate will never come down.
Even if prices do not come down, if it stagnates, people in US or Japan, lose only 1% to 4% as that is the rate of interest they pay, But here we pay 10% so we lose 10% when property prices stagnate.
Myth 2: Real Estate is the best investment for Hedge against inflation
Truth: Though this is true in the past and this may be true in the long run on an average, people who invest at the peak of the cycle tend to loose a lot. Apartment prices in OMR, Chennai has not appreciated in the last 6 or 7 years but in this period Inflation was up by more than 100%. An egg was sold for Rs1 in 2008, now selling for Rs 4, most retail products are up between 200% to 400%. But prices in OMR did not appreciate that much.
At the same time, in Boat Club area, property prices appreciated by more than 500%. So the location and many other factors will decide the appreciation and appreciation will not be uniform in all places.
Myth 3: Hold the property for long term and you will make only profits.
Truth: Though you will be able to sell at a higher price than your buying price, you may not make any profit if you take the interest into account. Assuming that you are paying 10% interest, your property approximately should double in 7 to 8 years in order to break even. If you invest in decent rent yield area, it will be better. Otherwise even breaking even is also difficult.
Myth 4: I invested in a booming area of OMR which is IT corridor. So prices should only appreciate.
Truth: There is a famous saying " Think locally and act globally". Between 2005 and 2008, IT people salary were way higher than other people salary. But IT salary stagnated since 2008. Now a peon in Govt. is getting more salary than and IT person. Two of my relatives, one very poor academic background getting more than a lakh salary and the other one a top student in Tamil Nadu getting a salary of only rs 25000. The only difference is that the first one entered IT before 2008 and the second one entered IT after 2008. So between 2005 and 2008, everyone assumed that IT people salary will keep going up. People just forget that something can not keep going up all the way.
Myth 5: I have bought an apartment in a gated community with Swimming Pool, Club Hose, etc. So the chances are more I can get better rental and better selling price.
Truth: Buying an apartment with all facilities is good for your own consumption. But if you want to rent it out, it will be difficult. People who are looking to rent, will look for lower rentals than paying high maintenance charges for facilities. This is the exact reason why thousands of apartments are vacant in OMR waiting for tenants. While buying, you pay extra for all facilities but while selling, the buyer will only look for per sq.ft. price.
People who invest in properties are altogether living in a different world. A builder in OMR quoting a price of rs 3500 sq.ft and the same one quoted at Rs 6000 and 7000 by resale people.
Purvankara builder is very famous for asking high price. They will keep on spending more and more money for advertisements but will never bring down the prices. Now they are putting up the properties through online auction. The best bid so far is only below Rs 3000 sq,ft. while they have been selling at Rs 4200. The auction is open until December 7, let us see where it ends.
Even the current bid of less than Rs 3000 is also questionable, we do not know whether it is genuine one or not.
There are lot of sales gimmicks. Recently, a plot was launched at Rs 10 Lakhs, next week it was quoted at Rs 10.5 lakhs. So what the seller achieve, he makes people who bought for Rs 10 lakhs happy as they think they made right decision, also attract the fence sitters to buy the plot. As a special offer the plots will be sold only to you at the same old price of rs 10 lakhs, so you are also happy to buy at Rs 50000 cheaper. So just by one advertisement, he makes everybody happy and do more business also.
If all in well for Real estate then why DLF, India's largest real estate company, share price is trading around Rs 100 while the same was Rs 1200 in 2008. DLF is one of the largest wealth destroyer both for its share holders and property buyers in India in the last 7 years.
People are born to be slaves. Some are slaves to Drinking and some are slaves to various things, most prominent being Real estate in the last many years.
Time: 12 Noon.
Real Estate Woes in India:
Today is a holiday for stock market and hence I choose to write something different from stock market.
In fact two weeks before I have written about Real Estate. I feel that there is more to write. Hence this article.
About 400 years back, in Holland, Tulip flower prices were kept on increasing from few cents to a whopping 35000 US dollars for one flower. Then the prices crashed and a number of people have lost everything in their life in that crash. That was the first "bubble burst" recorded in the History.
Fist let us come to the basics.
Middle class people spend lot of money. But for which item people spend more than a lakh?
Let us exclude medical treatments as it is not spent willingly and in most cases insurance take the responsibility.
Let us exclude marriage and related things like buying Jewelry as that is a compulsory thing.
Then comes only two things, one House and the other one is Car.
Out of these two, the Car is purchased for enjoyment and convenience and we are fully aware that it is a depreciating asset.
So finally we invest in a house, which is the largest expenditure in our life, with the aim of convenience as well as expecting capital appreciation in future.
Since this is the largest investment of our life time, we have to be very careful.
Myth 1: Real estate prices will keep appreciating and will never go down.
Truth: Real estate prices have crashed in japan in 1989 and it has never recovered so far. US experienced Great Depression in 1929 after nearly a century, in 2008, US faced once in Century disaster of Great Recession. This recession was mainly due to Real Estate price crash. When something can happen to Japan and US, why it can not happen to India. So it is not true that price of real estate will never come down.
Even if prices do not come down, if it stagnates, people in US or Japan, lose only 1% to 4% as that is the rate of interest they pay, But here we pay 10% so we lose 10% when property prices stagnate.
Myth 2: Real Estate is the best investment for Hedge against inflation
Truth: Though this is true in the past and this may be true in the long run on an average, people who invest at the peak of the cycle tend to loose a lot. Apartment prices in OMR, Chennai has not appreciated in the last 6 or 7 years but in this period Inflation was up by more than 100%. An egg was sold for Rs1 in 2008, now selling for Rs 4, most retail products are up between 200% to 400%. But prices in OMR did not appreciate that much.
At the same time, in Boat Club area, property prices appreciated by more than 500%. So the location and many other factors will decide the appreciation and appreciation will not be uniform in all places.
Myth 3: Hold the property for long term and you will make only profits.
Truth: Though you will be able to sell at a higher price than your buying price, you may not make any profit if you take the interest into account. Assuming that you are paying 10% interest, your property approximately should double in 7 to 8 years in order to break even. If you invest in decent rent yield area, it will be better. Otherwise even breaking even is also difficult.
Myth 4: I invested in a booming area of OMR which is IT corridor. So prices should only appreciate.
Truth: There is a famous saying " Think locally and act globally". Between 2005 and 2008, IT people salary were way higher than other people salary. But IT salary stagnated since 2008. Now a peon in Govt. is getting more salary than and IT person. Two of my relatives, one very poor academic background getting more than a lakh salary and the other one a top student in Tamil Nadu getting a salary of only rs 25000. The only difference is that the first one entered IT before 2008 and the second one entered IT after 2008. So between 2005 and 2008, everyone assumed that IT people salary will keep going up. People just forget that something can not keep going up all the way.
Myth 5: I have bought an apartment in a gated community with Swimming Pool, Club Hose, etc. So the chances are more I can get better rental and better selling price.
Truth: Buying an apartment with all facilities is good for your own consumption. But if you want to rent it out, it will be difficult. People who are looking to rent, will look for lower rentals than paying high maintenance charges for facilities. This is the exact reason why thousands of apartments are vacant in OMR waiting for tenants. While buying, you pay extra for all facilities but while selling, the buyer will only look for per sq.ft. price.
People who invest in properties are altogether living in a different world. A builder in OMR quoting a price of rs 3500 sq.ft and the same one quoted at Rs 6000 and 7000 by resale people.
Purvankara builder is very famous for asking high price. They will keep on spending more and more money for advertisements but will never bring down the prices. Now they are putting up the properties through online auction. The best bid so far is only below Rs 3000 sq,ft. while they have been selling at Rs 4200. The auction is open until December 7, let us see where it ends.
Even the current bid of less than Rs 3000 is also questionable, we do not know whether it is genuine one or not.
There are lot of sales gimmicks. Recently, a plot was launched at Rs 10 Lakhs, next week it was quoted at Rs 10.5 lakhs. So what the seller achieve, he makes people who bought for Rs 10 lakhs happy as they think they made right decision, also attract the fence sitters to buy the plot. As a special offer the plots will be sold only to you at the same old price of rs 10 lakhs, so you are also happy to buy at Rs 50000 cheaper. So just by one advertisement, he makes everybody happy and do more business also.
If all in well for Real estate then why DLF, India's largest real estate company, share price is trading around Rs 100 while the same was Rs 1200 in 2008. DLF is one of the largest wealth destroyer both for its share holders and property buyers in India in the last 7 years.
People are born to be slaves. Some are slaves to Drinking and some are slaves to various things, most prominent being Real estate in the last many years.
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