Finally, property prices are beginning to fall

Sep 3, 2013

In this issue:
» PIMCO losing interest in bonds?
» What the balance sheets of PSU banks show
» Factory output in India contracts
» A lesson India can learn from Malaysia
» ...and more!

00:00
 
For property buyers who have been on the sidelines for quite some time now, recent developments are sure to pique their interest. Indeed, an article on Firstpost has highlighted how some correction in property prices has finally become a reality in various cities across the country. The correction has been more pronounced in markets which have been speculation driven.

The trend is hardly surprising. Property prices over the past several years had risen way above fundamentals. The unholy nexus between politicians and builders as well as the overall murkiness in the sector on account of poor disclosures and corruption meant that prices were always kept artificially high. They never reflected the ground reality. This disconnect became all the more pronounced in the recent economic slowdown. Demand for houses simply dried up although there has been ample supply. Debt on the books of real estate players ballooned. And bankers became wary of lending to the sector on concerns of default rates rising. Therefore, the only solution was for prices to finally come down to acceptable levels.

To cite some examples, the article points out that in highly speculative markets such as Noida and Ludhiana there has been a paucity of genuine buyers and investors are looking to exit various projects. Then there is the large inventory of unsold homes. For instance, Mumbai saw the maximum inventory of unsold homes. It had 48 months of unsold inventory during the first quarter of FY14. For NCR, the inventory has more than doubled to 31 months in the first quarter of FY14. An ideal scenario implies inventory should be in the range of eight to 10 months. This means that unless prices come down, it will be ages before these homes are finally sold.

So far the correction has been in the range of 10-20%. The question is: Is this enough? Or is there scope for more correction? We believe that since prices were so unsustainable in the first place, logic suggests that one should expect more of such correction to happen. It is just a matter of when.

Do you think that after the recent fall in property prices, there is scope for more correction in the real estate sector? Please share your comments or post them on our Facebook page / Google+ page

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01:26
 Chart of the day
 
The bad news for India on the economy front continues. As if the steadily falling rupee was not enough, GDP growth in the April-June 2013 quarter was rather tepid. Indeed, India's GDP during this period grew by 4.4% as a result of which there could be more downgrades on the anvil. One could say that the silver lining in the cloud is that this growth was still better than a lot of its peers in the developed and developing world barring China. But at a growth of 7.5%, even the Chinese dragon is slowing down. Not surprisingly, overall growth in the Eurozone contracted as the debt crisis continues to haunt the region.

Data Source: The Economist

02:01
 
Remember Bond king Bill Gross' commentary from a few months back where he talked about investors and epochs? Well, the crux was that no investor, not even Warren Buffett, can lay claim to investing greatness. Simply because they mostly operated in a period where there were huge macroeconomic tailwinds behind them. In fact, even Bill Gross' stellar track record was on account of a 30 year bull market in bonds.

Therefore, there's a huge question mark over whether the performance could continue in the future as well. Looks like Gross is not even trying. As per ritholz.com, Gross' flagship firm, PIMCO, looks all set to tone down its love affair with bonds and is instead planning to push alternative funds. This is a huge signal that the 30 year bond bull market could well be on its last legs as per the author. Given PIMCO's track record, it will be hard to argue against the author we believe. So, should the US economy brace itself for a higher interest rate in the future? Well, it had to happen sooner or later and PIMCO's move may just be another big indicator of the same.

02:36
 
While most news publications claim otherwise, we have been reiterating that the rupee is not the only demon. Politicians, regulators, investors and companies, all have their eyes focused on the currency. Even ex-RBI governor Subbarao was busy tackling the rupee in his last few days in office. However, it seems his successor will have to combat the other devils as well. That too without more delay.

Dr Raghuram Rajan has certainly taken his office as RBI chief in difficult times. So while the pressure of managing the currency and keeping watch on inflation have not subsided, he needs to do more. As per Economic Times, it is pertinent that Dr Rajan should turn his attention to balance sheets of PSU banks. As we have written earlier, the quality of assets in PSU banks has gone from bad to worse in the past year. And some have yet to see the worse. Without adequate measures, these entities would be in need of massive bailouts. So while the government may want to pass on the buck to RBI, Dr Rajan should take a firm stance. Like his predecessor, he should not lose sight of what holds good for the banking sector.

03:02
 
India seems to be making new lows every day. First, it was rupee. Then it was GDP which grew by just 4.4% in April-June quarter. This was the lowest ever figure reported in the last 4 years. And now we have the factory data that has had the lowest ever reading since March 2009. The HSBC purchasing managers index (PMI) sank to 48.5 in August from 50.1 in July. An index level below the 50 figure mark is a sign of worry since it indicates contraction. Declining production and exports due to waning demand led to a decline in the index. With all indicators showing blurry picture of the Indian economy, there is a general consensus that sub 5% growth is the new benchmark for India now.

However, apart from growth concerns, depreciating currency is another headache for the government. With none of the steps to curb the free fall in rupee materializing, India's current account situation has turned precarious. Also, depreciating currency will fuel inflation that may come via importing crude. This can further exacerbate the inflationary scenario in the country. However, the new governor, Raghuram Rajan, is expected to resume office soon. And it would be interesting to see how he deals with this situation.

03:31
 
India raised prices of petrol and diesel recently. It was the sixth hike for petrol in just 3 months. A reason for this is the combined impact of higher crude prices and depreciating rupee. The two have increased the under recoveries for the oil companies which prompted the move to increase prices. Another way to look at this would be to question why does India have under recoveries in the first place. The reason for this is the subsidy offered. This subsidy not just hurts the oil marketing companies but also forms a huge chunk of expense for the government. It hurts our fiscal deficit in a big way. And at the end, no one really benefits from this subsidy as the benefit for the poor gets stolen somewhere along the line. Therefore, one would wonder why doesn't the government simply cut back on the subsidies? The answer is obvious - it would hurt its populist image. But when a country is in a mess what should be the priority? Winning an election or saving the country?

Malaysia too was faced with the same choice. Interestingly it has chosen the latter. The country has decided to cut down on the subsidy being offered on fuel. This would help it control its fiscal deficit which has been a cause of concern for investors. While this could lead to higher inflation, the country's Prime Minister is working with the central bank to keep a check on the same.

The point is when the tide turns for the worse, critical decisions need to be made. The choice is always between taking the easy way out or to take the harsher steps that would bring about long term gains. This is essentially the choice that India is facing at the moment. Maybe it could take a page out of Malaysia's book and take the bold step of cutting down the fuel subsidies. That would help the country more than political debates on who is responsible for the mess we are in at the moment.

04:06
 
You will recall that a slew of iron ore mining scams in India came under the scanner in recent years. The Supreme Court had banned mining in Karnataka, Goa and Odisha. The mining ban severely crippled iron ore exports from India. Just take a look at the export figures over the last four years as reported by Business Standard. In FY2010, iron ore exports were 117.72 million tonnes (mt). In FY11, the exports stood at 97.6 mt. This declined to 61.74 mt in FY12. In FY13, iron ore exports registered a sharp fall of about 70% and stood at 18 mt. As per estimates, this amounted to a loss of about US$ 10 bn in iron ore exports. As you would know, iron ore is the main raw material in steel manufacturing. So the mining bans have had adverse impacts on the steel industry also. India's steel imports jumped 14.6% in FY13. On the other hand, growth in export of finished steel slowed down to 14.3%.

As a result of all this, the Ministry of Mines is soon expected to file an affidavit in the Supreme Court. It will explain to the apex court the need to lift the ban on mining in major iron ore producing states. If the mining ban is lifted after providing necessary checks and conditions, it will provide a much-needed boost to the ailing sector.

04:46
 
Persistent selling activity led the Indian equity markets to fall deeper into the red during the post noon trading session. At the time of writing, the BSE-Sensex was trading down by about 440 points or 2.3%. Weakness was seen in stocks across the board with those from the banking, oil & gas and consumer durables sectors leading the pack of losers. Midcaps and smallcaps were trading weak as well with the BSE Mid Cap and BSE Small Cap indices down by about 1% and 0.4% respectively. Stock markets in other parts of Asia were trading firm with Japan, China and Hong Kong up by 3%, 1.2% and 1% respectively.

04:55
 Today's investing mantra
"If the job has been correctly done when a common stock is purchased, the time to sell it is almost never."- Philip Fisher

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15 Responses to "Finally, property prices are beginning to fall"

jagan

Oct 24, 2015

If Prices are unrealistic and interest rates are high people should just refuse to Buy Flat or house or even plots....Built houses will have to be sold or maintained otherwise it will collapse one or the other day...So best thing is to refuse to buy..


Take the English Idiom "Fools Build Houses for the wise to Live in"

Like 

jagan

Oct 24, 2015

Also, it is Banks that need to be blamed..Giving loans to all TOM DICK and HARRY buyers,as well as Builders in the Hope of increasing their(banks)business.....When the bubble starts bursting they are the ones who are going to face the music...
Maybe people will start looting Banks and ATMs TO PAY THE EMIs ???

Like 

Raj

Sep 19, 2013

See the correction in property prices when Congress will be out of the power after next election. Learn from the past. and wait till election.

Like (3)

dinesh

Sep 6, 2013

In my opinion, land price will fall minimum 50% within 2 years from now. Where ever flats prices will fall for almost 25%. It would be a steep correction where all the profits of big guns would be erased

Like (3)

m k parmar

Sep 6, 2013

I expect property price correction upto 20% by dec 2013. State govts will have to Correct Ready Reckoner Prices for Stamp Duty payment by 20 %.

Like (2)

mahadev khanchandani

Sep 5, 2013

Yes I do think that property prices are going to see a reasonable correction downside

Like (2)

bawa

Sep 4, 2013

PROPERTY PRICES WERE KEPT JACKED UP BY SO CALLED INVESTORS WHO WERE SYNDICATES OF PROPERTY BROKERS BUT NOW THEY ARE TRAPPED AS THERE ARE VERY FEW GENUINE END USERS TO PASS ONTHE INFLATED PROPERTY .THE FALL COULD BE AS HIGH AS 50% OVER A PERIOD OF TIME, EXACTLY LIKE THE STOCK MARKET FALL

Like (4)

RAVISANKAR

Sep 4, 2013

The rise in property prize over the last several years were challenging the basic principles of economy. The greedy middle man, the dirty money and thoughtless buyers are mainly responsible for the bubble. The property price will again come down to a reasonable level. We will see more bloodshed in this market before it settle down to reasonable level

Like (4)

Satish

Sep 4, 2013

in Mumbai for last 3 - 4 years people are talking about unrealistic property rates, unsold inventory, high cost borrowing by the builders etc, which should have resulted in steep fall in property rates. But actually the rates of residential property are much higher than what it was 3-4 years back. It is more a matter of 'Wishful Thinking'. Because a common man wishes the rates to go down so he thinks accordingly. We should not forget that the rates in Mumbai are because the Politicians/ Bureaucrats money parked with Builders. They don't bother much about high returns in short time. It is more for keeping the money safe. Swiss Banks do not give any interest rather levy charges as I understand. Because of this money unsold flats are not causing panic for Builders. As such Economy of Mumbai is not growing as much, when compared with other cities which is evident from slump in commercial property but still rates are inflated.
Though I wish the rates to go down drastically but there may not be such steep fall.

Like (3)

Mohamma Abdul Ahad

Sep 3, 2013

Property prices are likely to fall further by about 10 to 15% follwoing factors;

Liquidity issues
Inflation
Possible Cost cutting at corporate companies
Unemployment






Like (2)
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