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!!

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"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

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

T Mogul

Feb 6, 2010

As every tangible asset in India, housing too is over priced. I cannot believe it costs THAT much to build a house/flat even allowing a decent return on for the builders efforts. Worse still is the belief that once you own a property you are rich and worth, for example, a crore. Actually your property is worthless, in so far as you are in occupation thereof, and is therefore not a disposable asset. In fact financially it is a loss!! When you consider the maintainence charges/civic taxes etc.! No one ever highlights these factors.


mahesh gaur

Feb 5, 2010

So long there is parallel economy in India real estate bubble will not burst because a large no of earning class serviceman, businessmen, brokers in all field, professionals including doctors, engineers,advocates, CA, etc etc are making unaccounted money.There is a big gap between their actual earnings and reported earnings. which they can only invest in gold (Upto certain limit)or benami properties.The unaccounted liquidity in real estate sector will not allow the prices to fall.



Feb 5, 2010

Response number 96. I apologise for a typing error.
The salary of a professional in London is 1 crore and not 10 crores as stated in my earlier post. Sorry.


Vivek Bohra

Feb 5, 2010

Mr.Parekh is absolutely right. It has become impossible to buy a 2BHK flat even in distant suburbs in Mumbai district boundaries for a middle class family. Banks can give loan upto 4 times of yearly income, but that does not reach to even 50% of the cost of the flat. I am sure a middle class man will not have so much of the cash to pay for remaining 50%.



Feb 4, 2010

Yes, Mr. Deepak Parekh I totally agree with you.



Feb 4, 2010

A three bedroom flat in a reasonble location in Panjim costs about 70 lacs. A better constructed flat 1 crore.
A house can cost you anything from 1 1/2 crore to 3 crores in Dona Paula,2 kilometres from the centre.
The average price of a house in England is 1 1/2 crores and a good house in London will cost you about 2 1/2 to 3 crores.
The salary of a professional person at the top of his profession in Goa is about 7 to 8 lacs per year.
The salary of a similar professional in London is about 10 crores per annum.
How on earth can even a successful Indian expect to live in a reasonable house given these facts.
This is to say nothing about the lower middleclasses and the poor. Hello wholesale corruption!!
I hope the bubble bursts, and takes out all the corrupt realty dealers and politicians in its wake.


mohan r gopal

Feb 4, 2010

I feel the Biggest Bubble in the World is in Indian Real Estate Market especially the Urban Area.

An apartment or Residential Site in a dirtiest place without any proper infrastructure costs many many times more than what costs in a very posh locality (with all the infra and amenities in place) in any of the developed countries. The reason behind such high price is the prevalent of TOO MUCH OF Black Money - real estate investments are the best way to dump the tons of Black money our politicians and Govt Officers, doctors and Buisnessman have made - these guys do't pay the tax but they don't mind paying more than the true value for the property they buy. Only way to check this Real estate market as a dumbing ground for Black Money is to convert all transcations to Online akin to Our Share market. There should not be any physical holding of Propery Documents, but should be in Demat Form connected to the respective bank accounts. Purchaser should pay online and Registration charges, brokering charges should be deducted Online and should be credited to the respective Registar Office and Brokers Bank account.


Dinesh Shah

Feb 3, 2010

The prices anywhere in India are nothing but EXHORBITANT. In a book 'The golden rules for making the most of your money' they say ' Don't buy a house that costs more than 2.1/2 times your annual income. How many people can buy house in this criteria?



Feb 3, 2010




Feb 3, 2010

Yes, Mr. Deepak Parekh I totally agree with you.

Prices are going up like anything. A Common man cannot buy a 1 BHK Flat unless he takes a loan and pays through
out his life time. The legacy of paying the loan will be
given to his generations to come. A Sad state of affairs and the government, irrespective of which is in power is to be blamed.

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