India's Real Estate Bubble will burst by end of 2014 , lets bet on odds !

I had written about Real Estate prices hype in 2008 and was predicting the slow down and the slow down had happened then....Though short-lived.....
The real estate slow down I can foresee now is going to be worst in last TWO decades.....May surpass fall greater than that in 1997-2000, ask anyone who had seen that fall.....

Following are the reasons why I feel Real Estate Bubble will Burst by end of 2014 or early 2015:

• Current hype in market prices is because of Greedy Investors trying to double their money every 6 months to one year cycle, as soon as returns start falling down all cheque books will be locked in drawers and the returns now have fallen drastically. Read some reference below for detailed analysis on falling returns

• 

  Growth Rate has slowed down in all Major Cities as indicated by graph, hence investors will move out !

• Black money of politicians was slowly being withdrawn from cash havens like Swiss Accounts, Mauritius etc and being brought into economy, only best industry where maximum black money can be absorbed is Real Estate......Majority of this money has caused hike in prices and during election all these money will be sucked out of system.....Minimum amount that will be sucked out by elections would be INR 5000 per vote X 250000000 (25 crore voters who vote only when they get money) = 1250000000000 (Hundred & Twenty Five Thousand Crores)....Imagine what will happen to already cash starved industry when this amount is pulled out ?
• Builders are already under cash pressure and have exhausted bank borrowing limits and have started borrowing funds from common citizens luring them with attractive returns of 1.5 % to 2 % interest per month.....and here I am not talking of small unknown builder, I am talking of reputed builders and very close friends of mine have been approached for this.....Few days back there was program on CNBC where this issue of cash crunch and falling demand was discussed 
• Rate of growth is slower than Home Loan interest rates....Currently property prices are growing slower than 10% per year and lot of prospective buyers are thinking of waiting and staying in rental houses
• Rental income is far lower than bank returns and this is shooing away investors, for example property worth 60 Lacs as per today's prices may fetch rental of less than 15 Thousand per month, this amounts to less than one third of interest per month which is Fifty Thousand per month @ 10% per year interest rate, and here I am assuming down-payment that you make also fetches same interest rate, in many cases it may fetch higher if you invest judiciously. Now if your investment has to be viable your property rate should increase 35 thousand per month or approximately 4.2 Lacs per year , which is at-least 7 % per year consistently at-least for first five years, which is rare chance in current conditions

Why Government is not doing anything ?

• Real Estate has become speculative market and in such situations there are lot of buying and selling every 1-2 years for same property till the time real home dweller buys it to stay and continues to stay for longer period without selling it.....Since same property gets traded many times government earns handsome amount in taxes and duties, as much as 10% on every transaction and even if one property does 4 transactions in life time government earns 40 % which is highest among-st Builders, Investors, Brokers etc....Its greed of Government in wake of promise to give prosperous India , doesn't allow them to pull triggers....Imagine if Government starts pulling trigger it not only loses Handsome revenue , but also loses entire vote back which will be because of real-estate crash....it will be in the best interest of government to keep this monkey show running....Financially it makes sense and politically it suits their agenda....
• Government cannot charge heavy taxes directly , cannot cut down subsidies because of fear of losing vote banks, when the crash happens government would have already indirectly recovered all money in form of hyped up rates and  taxes and loser will be common man.....I have started seeing exit of politicians from real estate...my close relative bought one flat from politician (even after my insistence against it !), why politician is liquidating asset ? Of course he has insider news , and they have started pulling out cash for coming elections.....
• If crash happens just after elections, government can easily blame on Bankers, Investors, Builders etc and promise stricter controls etc, I am sure they will not refund the registration fee & taxes and duties they collected happily when in boom......And I am sure they will not admit Government was greedy

National Impact of Continuing the way it is ?

• Most of people have stopped focusing on their core work and have got involved into speculation and have started putting their money into real estate....This is due to greed or jealousy or sheer lack of knowledge and understanding of complete picture....
• Money is not flowing into other industries which might likely  to help us grow industries and compete better in world market, on contrary higher real estate prices is discouraging genuine entrepreneurs and banks also have pumped their money into real estate and have limited liquidity to support other industries which has potential to generate foreign revenues, people may argue that we are getting foreign investment in real estate, but please understand difference between getting investment vs. getting revenues....I am talking of foreign revenues here.....
• By making it most lucrative investment option , people are pumping money into real estate and selling it at profit to other Indian who also is pumping in his money.....situation is that we are not earning any foreign exchange , we are not developing any competitive skills, on contrary we are making ourselves non competitive as entrepreneurs are vary of getting in due to lack of Government support.....Salaried professionals are expecting more salaries, other countries are struggling with  financial crisis and do not  want to buy at higher prices so prices are falling......How will India survive ? and what if other low cost nations don't fall trap into real estate mess ? They will have lower Housing and Real Estate costs....That's why easy to setup business.....Lower salary expectations as cost of housing is affordable.....Able to sell services at competitive prices internationally which is very price sensitive market ! Indians will lose on this count too !
• Agriculture land getting converted into Non Agriculture land...going rate 20 Lacs per acre for conversion.....By converting Agri land to NA are we doing good to nation or bad ? But who cares as far as greedy stakeholders involved get short term gains, who cares of Mother India whom we are selling and feeling that we are prospering !

By the way I have started betting that slowdown will htt by end of 2014..........Are you ready to bet on odds  ?

If you think what I am saying makes sense please forward this to people who think matter to you, in narrow viewpoints I don't want to appeal you to think of National Interests here.... At-least stop your friends and relatives from making investments till early 2015 !

Some More References which you may consider unbiased:

http://www.firstpost.com/real-estate/why-bullishness-on-indian-real-estate-is-misplaced-544459.html  http://indiahousingbubble.blogspot.in/ http://en.wikipedia.org/wiki/Indian_property_bubble http://www.indianexpress.com/news/housing-bubble-can-burst-govt/1024681 http://www.tflguide.com/2012/11/indian-real-estate-bubble-will-it-ever-burst.html http://businesstoday.intoday.in/story/real-estate-property-prices-rising-interest-rate-home-loan/1/24244.html

Loan Waiver for Farmers

Beneficiaries of Farm Loan Waiver

Recently Government announced a waiver of more than 60000 Crores for farmers holding land of two hectares (Five Acres) or less. The loan which will be waived off will be only for those who have taken this loan from Government recognized banks. Government has promised to complete the implementation by 30 June 2008.
The declaration seems to be more of impromptu exercise as preparation for Lok Sabha elections, which are likely to get schedules earlier than actual term.
Look at various beneficiaries and anomalies of this waiver:
Different Amount Waiver for Different People
People who have better clout in banks can avail more loans on the same land compared to who don’t have clout. Thus people holding five acres of land or less is useless parameter to decide the waiver.
Prosperous farmers are benefiting more
There is huge disparity in the rates of farmlands across country. People holding ten acres of land in non – irrigated belt will be poorer than person holding just one acre in irrigated area. Also loans that you can get on the farmland are not based on size of land but on the rate of land. So it is very likely that people with just two acres of land in prosperous area will get more loan than person holding ten acres in non – prosperous area

Real needy farmers are left out
If you look at the farmers who have been committing suicides are people belonging to region which falls under non – irrigated region. The holding of land in these region is generally higher compared to in irrigated areas.

In Vidarbha region farmer holding ten acres of land is still not as prosperous as farmer holding just five acres in Western Maharashtra.

Suicides will not stop with this action
Most farmers who have committed suicides haven’t committed it because of burden of bank loans, as farmers in this bracket anyway don’t get loans from banks and they are forced to take it from money lenders who may not be registered with Government.

I think unless the root cause is analyzed we may not be able to put brakes on suicide happening

Don’t give them fish , teach them fishing
These loan waivers may take care of easing out pressure on some farmers but what about remaining ones?

1. Why government doesn’t keep reservation for family members of farmers for education?
2. Why government doesn’t allow them to look for alternative means of earning and enable them to search and use it?
3. Why government doesn’t provide good rates for the farm produce?
4. Why government doesn’t invest in irrigation projects in non- irrigated lands?
   
   More of such points can be raised. Most important point is whom will this waiver really help ?
   

• This loan waiver will really help some ministers whose regions might have been benefited to maximum extent with this scheme.
• It might benefit the existing government as they have at least positive inclination towards the farmers.
  
  But remember one thing, farmers who are not getting benefited are much more than ones who are getting benefited, so beware!!

Pune Real Estate Prices

India has seen great boom in stock market as well as real estate. Pune's real estate prices have gone up significantly in past one year. Rates in some areas are quoted more than double of what it was one year back.

Property which was being sold at INR 1000 psf ( per square feet) eighteen months back is now being quoted at INR 3000 psf.

In my opinion all this rate hike is not natural. Builders have really made their hay on shining sun of Couples Working in IT (herinafter referred to as CWIT). For saving taxes CWIT have really gone behind property booking at the price demanded by builders.

This gave clue to investors who have spotted this trend and started investing heavily. Builders started promising assured returns on investment if investors booked their properties. Many people started booking and as a result all the builders got the required funds so that they could arrogantly refus lower offers.

CWIT who already had home decided to invest in second home assuming that this arrogance means there is great demand and prices will definetely shoot further....

How long can this story continue....

1. Till the time investors keep getting good returns
2. Till the time all CWITs have booked their second home
3. Till the time builders have holding power
4. Till the time people are OVER OPTIMISTIC about the economic growth

All CWITs felt that they can easily rent their second home and manage their monthly commitemnts and in a way it is very true if we consider Home loan to be short term investment, but repaying EMI for more than 10 years and that too for two homes seems to be too big a risk.

Now look at the returns people are getting by investing today.....

Property costs at Wakad and nearby areas are around INR 3000 psf and rate of interest per month on this is around one percent. So interest on psf of property is INR 30.

Now the going rate for rent in this area is around INR 6- 8 psf and you are never assured of 12 months occupancy. We will have to assume 5 % time the property remains vacant. But we can ignore it at this moment.

Now the investor or CWIT ends up paying INR 22-24 psf for his property in terms of interest. This comes to around 9 % per annum.

For the investment to reamain profitable the property prices should keep growing at steady rate of 9 % per annum to keep the investments financially viable.

Besides the economy also should be booming at the same rate so that people can afford paying the rents at this rate.

Recently I saw people finding it difficult to rent the property at INR 8 psf. With more property coming out in market the rates will be dropping to level of INR 5 psf.

As soon as we hit this level all the investors will start exiting of the market creating negative demand pulling the property prices down.....

Also people who already have first home and are salaried should weigh down all the risks before going for second home. When the propety market starts melting down, actually capitalists are ones who can easily sell their property as they are full time investors, they can spend time sensing the pulse of market and exit at right time.

Now imagine what happens to the property which has depreciated rather than appreciating and you are paying more interest than the rent you are earning !!

And please do not argue that property prices never dip...as in past we have seen such meltdown... people should know that in 1995 Mumbai property market collapsed by 50 % and at Pune , Aundh area , property prices fell down more than 40 % after Y2K and DOT com burst.

Also people should not forget the subprime market collapse at US. Arguing that Indian economy fundamentals are very strong is alright, but three years back did any one have question marks on US economy ?

Also not to forget the recent front page article in many business newspaper about 10 - 15 % drop in the property prices at Bangalore, Hyderabad & Gurgaon.....if this can happen in booming economy of India , imagine what will happen if there is economic slow down......

I am not being pessimistic about economic growth of India , but I am just apprising people of risks involved. I would be glad if all goes very well......