You'll be happy to see this bubble burst

Feb 1, 2010

In this issue:
» Property sales will freeze once again, cautions Deepak Parekh
» SEBI chief on how to go about investing in stocks
» Lessons from the past decade - Jeremy Grantham
» Azim Premji on economic crisis and IT's future
» ...and more!!

---------------------------- FREE Webinar ----------------------------
The Equitymaster WebSummit - 2010: Where are the stock markets headed?

A double dip depression in the US. A bubble economy in China. Yet, India is said to be one of the fastest growing economies of the world. Don't you want to learn more about investing opportunities in India? Know what 2010 holds in store for you as an investor? What are solid investment opportunities? How much should you invest in gold? In real estate?

Listen to Ajit Dayal, President & Director Quantum Asset Management Company, clear your doubts, answer your questions. The webinar airs on Monday, 8th February, 5.30 pm IST.

It's FREE for all Equitymaster subscribers. Click here to register.

"The nexus between the builders and the brokers, who pushed property prices to record highs in 2006 and 2007, is back in business." We wrote this in an August 2009 issue of the 5 Min. Now if one were to go by the words of Deepak Parekh of HDFC, residential property prices have again reached bubble levels. And he has warned that if prices rise further from here on, sales will freeze.

As per his recent interview with DNA Money, he does not see prices going higher in commercial, shopping or retail spaces. But he has warned about prices in the residential sector. He says, "...they are shooting up very fast and we have to look at the affordability aspect in India."

Mr. Parekh is no outsider to these grave pricing issues faced by property buyers in India. In fact, he has been very vocal in the past about the greedy nature of realty companies. Whether it is the issue of overpricing, or the misnomer of 'super-built up' area as against the simple concept of 'carpet area', he has been against it all.

But are the realty companies listening to Mr. Parekh's warning? Currently on a high after the government saved them from an acute liquidity crisis last year, these companies do not seem to be mending their ways. And the ultimate sufferer is the aam aadmi who continues to dream of that affordable house he can call his own! He, then, will be very happy to see the realty bubble burst.

What is you view on property prices in your area of residence. Share with us.

Now if another report in DNA is to be believed, a bubble is building up in the Mumbai realty market. As the report suggests, "Residential property prices which had dropped by almost 35% in some areas have risen sharply in the last nine months and are now close to their earlier peaks of 2007-08." Tough times indeed for property seekers in the megalopolis!

 Chart of the day
Today's chart of the day tracks the profit share of the five biggest sectors (by companies' net profits) that are part of the BSE-Sensex. The biggest sector as of now - Energy - has a 27% share in total Sensex profits. Importantly, the sector's share stood at a much higher 42% in January 2005. Also interestingly, the share of the second biggest sector as of now - Finance, 14% of total profits - had a much higher 24% share of profits ten years back. And then, another important sector of today - Software - did not have a presence in the Sensex in January 2000 (the first software stock was added only in April 2000, so we have excluded it from our calculations).This just goes to show the ever-changing nature of the Sensex. And this gives enough hint on why it is not fruitful to rely on this index to take one's investment decisions..

Data Source: CMIE Prowess

SEBI's run in with the powers that be in the capital markets industry in recent times has been quite well documented. What is more, the watchdog has emerged victorious more often than not and has effected quite a few landmark rulings. All this made us think that we are indeed in the right hands as far as capital markets regulation is concerned. This belief was reaffirmed when SEBI Chairman Bhave hit all the right notes on investing at a recently held meeting.

"The youth have time on their side, so they can take on a risk of 80% but a retired man cannot do that. So only that part of the savings, which is required over the long term, can be risked," Bhave is believed to have said. Indeed! Investing in equities is a long-term exercise. Thus, those who are risking the money that they need in the short term by investing in equities should do so at their own peril.

Mr. Bhave also showed an astute understanding of the short-term market trends when he quipped that the direction of the Sensex cannot be an indication of where the economy is headed in the short run, though over a period of 20 years, the direction of the stock market can be an indication of the economic progress of the country. Again, very well said indeed!

Looks like he has really done his homework quite well and has his heart in exactly the right place atleast as far as equities are concerned. Be prepared for some more investor friendly moves by the SEBI in the near future!

The last decade was a roller coaster ride for investors. It began with the melting of the tech bubble. Towards the end, it saw the global financial meltdown. There were several lessons to be learnt for investors. Jeremy Grantham, chairman of the US based asset management firm GMO points out to several such lessons. And here are some of them.

Central banks wield much more influence than we think. Low interest rates affect financial markets more than the economy. Policy makers can be out of touch with reality for long periods. Asset classes are more efficiently priced than individual stocks. And developed countries, including the US, are past their prime compared with developing countries.

We agree with much of what he has to say. As for the antidote for these observations - investors must think on their own and not get carried away by all the surrounding hype. Applying logic, knowing one's limitations and patiently avoiding the herd has worked since the founding fathers of value investing first wrote it down. It remains the individual investor's best defense.

Indian stock market had an interesting session of trade today. While the markets opened deep in the red after following cues from other Asian markets, they gradually made their way up into the positive. The BSE-Sensex was trading with gains of around 50 points (0.3%) at the time of writing. Healthcare and realty stocks were the best performers today. Among other Asian markets, while China closed in the red (down 1.6%), Japan closed marginally in the positive.

Noted economists the world over have been harping over the possibility of a double dip recession in the near future. However, the Chairman of Wipro, Azim Premji has a different point of view.

In his recent interview with CNBC-TV18, Premji said that there is a genuine sense of optimism floating among companies. Many of the business leaders have used the past 18 months to make their companies leaner and far more productive. Not just that, the focus has also been on building closer intimate partnership with customers. All this has contributed to the belief that the economic revival is for real. That does not mean that companies have once again gone on a capex binge. The idea has been to sweat assets and get more productivity out of them.

What needs to be noted according to Premji is that majority of businesses had downscaled in the last one and half year. So the capacity which they had built-up three years back is now enough to carry growth into this year. As a result, there is sufficient capacity that has removed the need to invest massively in capital assets for the time being. Premji is also optimistic on the Indian IT sector that he believes will now pick up. Overall, he seems to be more confident about the business environment. This certainly comes as a welcome relief after what various doomsayers have had to say in recent times.

 Today's investing mantra
"The whole concept of dividing it up into 'value' and 'growth' strikes me as twaddle. It's convenient for a bunch of pension fund consultants to get fees prattling about and a way for one advisor to distinguish himself from another. But, to me, all intelligent investing is value investing." - Charlie Munger

Today's Premium Edition.

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "You'll be happy to see this bubble burst". Click here!

111 Responses to "You'll be happy to see this bubble burst"

Prem Katragadda

Feb 7, 2011

It is always good to have more housing suppy in the market. Bubbles create more supply and the supply can be used to lower the rental properties. Housing is not a limited resource for everyone to scramble. My only concern is indian housing is not very durable good, it depreciate fast beacause of bad construction.


Mohan Sharma

Dec 14, 2010

For those who are fascinated by height and love to be out of bounds, it would be worth exploring the opportunity to own a house in the tallest building of North India.

Standing tall at over 250 meters with 60 floors, this tallest residential building offers unprecedented levels of luxury, comforts and services. With its business centre, studio apartments, luxury apartments, penthouses, club/dance floor and open air rooftop restaurants, it is a world of experience in itself. Stylish, sophisticated and reaching for the clouds there would not be a better place to reside!



Oct 5, 2010

These real estate brokers and builders make fun of aam admi and they will laugh at you if you try to negotiate the price they quote as if you are the only one who wears a dress in the naked world.
I would be more than happy to see the real estate bubble burst. Atleast lot of agricultural lands will be saved from the greedy brokers and builders. They have been misleading the poor farmers to sell of their lands and making them refugee in their own country.


mahesh verma

Jul 27, 2010

Yes, Mr. Deepak Parekh, I agree with you, you are right.



Jul 10, 2010

I guess the time is not very far away for the real estate bubble to burst. The prices of real estate in cities like Delhi and Mumbai are hiked by the brokers and builders, there is actually no real reason for such high costs.Mr. Parekh is correct in his assessment.


s c natarajan

Mar 24, 2010

The residential space has become so hot. The apartment business has been converted as share business. If the govt. restricts 2 houses to 1 for Income Tax savings purpose these flats rates will become flat. Encashing rental business those who have a piece of land construct 2 or 3 flats and give for rent. All state govts. should take over the flats especially in A-class cities and the govt. should give for rent to the public using technology platform, like prepaid taxi. So there will be a rent control. Those who do not have house in cities will suffer like anything. Whatever we earn maximum amount goes to rental. Govt must immediately interfere.



Feb 16, 2010

Let us resolve that we will not purchase any property for the next 6 - 12 months. and you will see that the bubble is burst. We should also advise everyone to do the same.



Feb 16, 2010

The prices are so high that are costliest in the world. Even if we compare from US, the Per Capita Income in India is about 750 USD where a two bedroom accommodation in costing about 200000 USD and in US itself where the Per Capita income is about 50 times higher than India the same residential unit is costing about US $ 400000. Under the current circumstances the residential property prices are somewhere 20 times higher than India. Currently the builders and brokers are trying to panick the prospective buyers and it is prodent if all home buyers keep them away from any purchase till the prices come to 40% level of current prices. By that time these Real Estate Companies would be finished. That is their ultimatedestination one day.

Pl help yourself to buy a house. Pl stay away from purchase of any property for 6 - 12 month's time.



Feb 12, 2010

I am also waiting for the realty sector bubble to burst. I read somewhere that when all the money goes into one particular investment and that will be the time when bubble will burst. In 2008 when everyone put their money into stockmarket and it burst and so many lost more than 50% - 60% of their money. So, in case of realty it will take may be another 1 or 2 yrs to burst.


Rajiv kalia

Feb 10, 2010

Hi , rcently RBI took a good decision not to allow 2nd restructuring of loans of Real estate companies. Hopefully, if the government remains resolved and not bow to the nexus of these builders with politicians, these companies could be forced to sell their products at REAL prices and not allowed to make exhorbitant profits, which of course they are not showing in their books.

Equitymaster requests your view! Post a comment on "You'll be happy to see this bubble burst". Click here!