Will real estate prices go any lower?

Mar 25, 2010

In this issue:
» India, China report higher growth in Q4 2009
» Geithner's view on the Chinese Yuan
» Crude oil consumption's impact on fiscal deficit
» Debt managers are wooing sovereign wealth funds
» ...and more!!

So where do you think real estate prices will be headed going forward? Will prices fall down or will they rise further? And will the demand supply dynamics be the key determining factor of the price that you will shell out for your dream home? Not really. Ajit Dayal, in the recently held Equitymaster Investment Summit 2010, has quipped that the direction of real estate prices will in large part depend upon the close connection between politicians and real estate companies. Unless and until that gets broken, the chances of prices heading significantly lower appear remote.

This is not to say that simple economics have no role whatsoever in determining prices. But here again politicians have made their stronghold felt. In India, the demand for real estate is palpable as many people do not still have their first home. But the problem is also on the supply side. While there has been no shortage of land per se, only limited land is being sold because of zoning rules.

Ajit further went on to add how banks are also in some part responsible for real estate prices not being lower for a period longer than they should have been. Infact, not just real estate, Ajit also gave interesting insights into the Indian economy and stockmarkets as well. For those who missed out on his wonderful presentation, now is the time to take advantage of this opportunity.

 Chart of the day
The Q4 2009 GDP numbers have a familiar story to tell. As today's chart of the day shows, China and India seem to have left the global crisis far behind what with their economies growing strongly. In India's case, strong growth in manufacturing and services more than made up for the poor growth in agriculture. China's growth was driven by various stimulus measures injected by the Chinese government and considerable rise in lending by banks. But now fears of a bubble bursting in China have begun to emanate. Although growth in the US was flat, it was nevertheless better than its European peers. The latter especially reported a decline in GDP during the quarter with some European nations in danger of committing sovereign defaults.

Data Source: The Economist

One more voice has joined forces against the money printing exercise of central bankers. It is of John Hussman, a leading economist and fund manager. He believes that the expansion in governments' deficits worldwide is sowing the seeds for high inflation in the future. He says, "The long-term implications of bailouts, tax shortfalls and lack of budget discipline is likely to be significant inflation pressure beginning about four years or so out, and continuing for the remainder of the decade." Scary prediction, indeed!

If only the Indian meteorological department could predict the rainfall to precision. If only economists and policymakers could have a control over global economic growth and domestic output. It would then herald not just India but several growing economies on to a superlative growth trajectory. But unfortunately that is not the case.

Poor agricultural output and recessionary trends in developed economies have made a joke out of projections of India crossing 9% GDP growth target this fiscal. The Central Statistical Organization pegs the GDP growth in FY10 much lower at 7.2%. This is despite a healthy improvement in industrial output. Inflation and food inflation in particular, have been the cause of the pullback, besides the impact of lower agricultural output. While growth in the last quarter of this fiscal is expected to come in higher at 8.5%, India will have to pray hard to the rain gods to touch the double digit growth rates in the next few fiscals.

Did the year 2007 mark the end of globalization as we know it? Is protectionism about to raise its ugly head sooner than later? The growing trade friction between the US and China does certainly point towards such a scenario. We have seen Nobel Laureate Paul Krugman take a strict stance towards China a few days back. Now, Treasury Secretary Tim Geithner has thrown his hat in the ring. Geithner has argued in a recent interview that China may move up Yuan's value over time. He believes that such a step would be in China's own self interest. Clearly, the pressure on China is mounting. We think we have some idea where people like Geithner and Krugman are coming from.

A major problem in the US right now is unemployment. And China is seen as the biggest reason behind such a development. Over the years, the dragon nation has replaced most of the US manufacturing with cheaper, imported goods of its own. That's not all. China has let its currency appreciate very slowly. This has ensured that its exporters continue having a cost advantage. But not anymore. A crippling slowdown has hit the US and it wants China to behave itself on the currency front. Can the US take a similar action against Indian IT exports? Looks unlikely but policymakers have shown to do stupid things when pushed into a corner. We just hope good sense prevails.

Most observers have appreciated the government's commitment in the Union Budget 2010 to reduce its funding gap (fiscal deficit). But as an article in Mint points out, one of the key factors influencing the fiscal deficit is India's crude oil consumption. The government forces oil marketing companies to sell processed petroleum products below their input cost. This loss is partially subsidized by the government. Fiscal deficit targets will go for a toss if crude oil prices spike. The target also wishes away the subsidy doled out by the government. Prudent economics dictates that petroleum products should be market priced and the government should stop paying the subsidy. Something we have advocated as well. But the problem is, it is a political minefield, especially after some parties have withdrawn support to the government. Hence, it is unlikely that oil subsidies will go away in a hurry, and nor will the fiscal deficit situation.

The head of Germany's government debt management agency, Carl Heinz Daube, is busy sharpening his sales skills these days. Skills that have become rusty due to lack of use, but are now becoming needed more than ever before. As per a Financial Times report, debt managers are now vying for meetings with some big investors like those managing sovereign wealth funds. The agenda? To talk them into buying government bonds. It should be noted that western countries have long prided themselves on having the highest possible debt ratings and relatively low yields. Thus they have historically felt little need to court investors to buy them. But now, times indeed have changed. With the supply of government paper showing no signs of slowing, and investors' appetite for the same on the decline, these countries are getting down to doing many things that they would never imagined even as little as five years ago.

Indian stockmarkets languished in the red throughout the trading session today as persistent selling across index heavyweights took toll. At the time of writing, the BSE-Sensex was trading lower by about 37 points (0.2%). While the Asian indices were trading mixed, the European indices had also opened on a mixed note. Banking and energy stocks were weighing heavy on the indices. However, buying interest was being seen in healthcare and FMCG stocks.

 Today's investing mantra
"Risk comes from not knowing what you're doing." - Warren Buffett

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4 Responses to "Will real estate prices go any lower?"


Mar 27, 2010

It's really unfortunate to see the politions-developers nexus which is the only reason why real estate prices are not coming down.

Does it make sense to buy a house in mumbai ? I feel at the current prices it does not logical. If i take example of a 1-BHK flat in Kandivali... the rent this house can fetch on an average would be appox 15k and EMI for a 20year loan would be appox 40k... till the time the gap between EMI & rent gets narrowed it's not a good idea to buy a house... one should rather live in a rented accomodation... difference between EMI & rent should not be more than 25%, else it does not make economic sense to buy.



Mar 26, 2010

real estate prices will never go down,except for a lull intermediate periods as the land is constant and the usage for residential, industrial and agricltural usage is growing for ever.
Taxation on fuel is inevitable for developmental activities, but the non-rationale style is the problem. On cooking fuel people can afford upto 500 per cylinder, public will learn how to save gas fuel


Subhash Malhotra

Mar 26, 2010

Too much money chasing too few goods, applies to real estate as well. Urbanization at breakneck speed will continue and hence for many years the prices in industry will consolidate. However, hiccups will be there in between.


Ashok Roy

Mar 25, 2010

Real estate prices depends on the input cost of land, material used and services rendered.cost of land will not come down as the land is with haves only who can wait for 10 years or more.prices of material and services will not come down as we are always supply short. Government measures are city centric as well as opportunistic. under such circumstances prices will not go any lower.

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