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India's property market to go the Dubai way?

Dec 18, 2009

In this issue:
» The best times to be buying Indian stocks
» World's largest bond fund going into cash
» Jim Rogers scorns the US Fed's actions
» The kind of innovation you should keep away from
» ...and more!!

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India isn't another Dubai, and thus our property market will escape the kind of collapse that has impacted the Gulf nation. This is what Mr. Keki Mistry believes. Coming straight from the chief of HDFC, India's largest housing finance company, these words carry a lot of weight.

As Mr. Mistry says, "Dubai was very different from India. In India, the property market is largely end-user based; in Dubai, the property market is largely investor based." While we are in agreement with Mr. Mistry about his views on the nature of the Indian realty market, we believe certain pockets in the country like Mumbai and Pune do give a sense of a building bubble. And they seem like strong contenders for being the 'next Dubai'!

We believe homes are still out of reach of average buyers in these cities. And if greedy real estate companies, instead of getting punished for their misdemeanors, continue to get rescued by banks, they will not change their stripes in a hurry and will continue to bid up home prices.

So, while the Indian realty market might not crash like the one in Dubai, realty buyers' dreams of owning their own homes will continue to crash if property prices continue to surge.

 Chart of the day
FII activity in the Indian stock market is a much tracked affair. When FIIs are busy loading up on stocks, it is quite normal for investors to intuitively feel like they too should be buying. But today's chart of the day seeks to dispel that very myth. For the best times for investors to be buying stocks have been those when FIIs have been least enthusiastic about Indian equities.

Source: Statistical Outline of India 2008-09

The word 'innovation' usually has only positive connotations. But add to that the word 'financial' and it brings to mind unpleasant images of the credit crisis. The offsprings of this financial innovation have played havoc with the world during the last two years. They are widely considered to be the genesis of the credit crisis.

Paul Volcker, former chairman of the US Federal Reserve, came out rather strongly at these financial instruments in a recent conference. In his view, there is not a shred of evidence that this particular innovation provided any kind of benefit. In fact, the credit default swaps and collateralized debt obligations (CDOs) took the US right to the brink of disaster.

Reminiscing the time when he held office, he said that the US economy was doing just fine in the 1980s without credit-default swaps, securitization and CDOs. Important lessons for India too! As India moves towards more developed financial markets, there will always be a tendency towards more and more complex products that will be hawked to unsuspecting investors. It would be wise to take a leaf out of this bad experience of the developed countries - if you can't understand something (an investment option), it's probably not for you.

At standard pressure, water boils at 100 degrees Celsius. This is an irrefutable law of nature. It does not matter to the boiling point if different people are conducting the experiment. It will still exhibit the same characteristic. But what about an experiment where the result is dependent on the how the participants think? Let us take the example of the most recent credit crisis. Here, the politicians, the most influential participants thought that financial markets should be completely de-regulated and left to themselves. And what is the result of the experiment that we got? Risk taking increased at a phenomenal rate and the global economy came to the brink of a collapse.

Thus, if an experiment leads to disastrous consequences, it only makes sense to abandon it and use some new rules. And this is exactly what Nobel Laureate Paul Krugman also seems to be thinking. In an article in The New York Times, Krugman has argued that the reason the US economy got into the current mess was because politicians got under the influence of free market ideology and gave bankers whatever they wanted.

Holding former US President Ronald Reagan responsible for the situation the US economy currently is in, he hoped that better sense would prevail and a major overhaul of the financial system takes place. As he so rightly said, "If politicians refuse to learn from the history of the recent financial crisis, they will condemn all of us to repeat it."

What do you do when you find markets to be expensive? You don't put in new money. And you start selling the existing investments. As a result, your cash holding goes up. That's exactly what the manager at the world's largest bond fund is doing.

As per Bloomberg, Bill Gross of Pacific Investment Management Co. (PIMCO) has boosted cash to the highest level since Lehman Brothers collapsed in September 2008. It may be noted that as a bond fund manager, one of Mr. Gross's main concerns is interest rates. 'Expected' interest rates to be more precise.

Higher interest rates imply investors will demand higher yields. That in turn means bond prices must fall. With the US economy expected to post some growth in 2010, its central bank is expected to increase interest rates from close to zero. That would make bonds less attractive. We'd like to add that a higher interest rate not only affect bonds but also stocks. In fact, it is like gravity that exerts a pull on the entire financial universe. To take a cue from PIMCO, it is perhaps time for equity investors to also moderate their expectations for 2010.

In a recent interview, Jim Rogers expressed concerned regarding the US economy. He felt the solution that is being given by the Federal Reserve for getting out of the recession is absurd. He pointed out that spending more money to get out of this crisis may not be the right thing to do specially since too much debt and too much consumption is what has led to it in the first place.

On a humorous note, it is like asking Tiger Woods to get 5 more girlfriends to solve his marital problems. Moreover, the government has tripled its balance sheet size with debt. The very same people who are expected to spend more are also expected to pay more taxes to bring down the deficit. He also believes that the government has stretched itself to thin in this crisis. In case of another slowdown the government may not have enough resource left to tackle it. In a lighter vein he added that there may soon not even be enough trees left to print money with.

Meanwhile The Indian markets traded in a narrow range today and the BSE Sensex was trading lower by 40 points at the time of writing. While stocks from healthcare, auto and consumer durable managed to garner investors' interest, stocks from realty, oil & gas and FMCG traded weak. As for global markets, Asia was trading in the red, while Europe began the day on a positive note.

 Today's investing mantra
"We try to price, rather than time, purchases. In our view, it is folly to forego buying shares in an outstanding business whose long-term future is predictable, because of short-term worries about an economy or a stock market that we know to be unpredictable." - Warren Buffett

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6 Responses to "India's property market to go the Dubai way?"


Jan 12, 2010

The increase in the price of property all over India has been really abnormal due to the greed of speculators and builders whereas the purchasing power and the increase in salary with certain exceptions like the IT industry were not commensurate with unrealistic increase in prices. So when the IT industry had a downtrend several projects which came up only to satiate the needs of this industry were stuck midway causing lot of heart burn . Even several of the finished projects did not have many takers as most of these were located in far off places with close proximity to the IT corridor. The infrastructure has also not shown any improvement in most of the major cities and commuting to main business district is also very difficult owing to the chaotic traffic conditions. The government has to intervene and bring down the prices to affordable levels so that the middle class who are the worst hit will find some solace.


Deepak Parekh

Dec 21, 2009

Dubai property prices (in some of the best areas) after the crash are still cheaper than Mumbai suburb property prices where there is hardly good infrastucture forget to mention the quality of construction. Mumbai is more expensive than Florida in USA. Does this mean that we have progressed and economy is booming?

Mumbai property prices are driven by gullible NRIs / local speculators and greedy bankers and not sustainable income of people living in the city. A person can purchase a car costing say INR 2 lacs for INR 4 lacs (either thru his savings or borrowing) but how can u expect people to buy a house costing INR 10 lacs for INR 50 lacs by forcing them to take a huge bank debt and spending the rest of the life in paying that debt.Till few years back "Debt meant death" in India and common people avoided taking huge loans. It is just in last 6-7 years (when the mortgage rates crashed to as low as 5-6%)and salary levels jumped to four five times that property prices more than doubled.

How opaque is our property market is best understood by looking at the some of the portals like For the same area you could find many property at INR 5000 per square feet to INR 19000 per square feet on property portals like

One can look at the concerns of realtor companies by large number of property shows these companies are conducting during recent months in Dubai. Just to trap few more gullible NRIs who have been stung by Dubai property crisis.

What Keki Mistry has mentioned needs to be read along with the great Mr. Deepak Parekh who believes that Mumbai properties are not affordable by most of the middle class and realtors are fooling people based on "affordable housing".

Eveyone knew that Dubai property market is going to crash one day and those who thought that it will only go one way were the biggest fools on this earth. The same goes for Mumbai where the infrastucture is worst and half the population leaves in slum. In my view Mumbai real estate bubble will crash worst than Dubai since on a quality level Dubai properties even after the crash are still cheaper compared to Mumbai.

btw india is the only place where one can hear concepts like super built-up and carpet. imaginative ideas floated by property companies to fleece people. now please do not give stories that mumbai has a very limited area and that is why prices are / banker and politician (read gundas) is a lethal mix and till they work in sync u will always find this opaquness in property market



Dec 20, 2009

Yes. The property prices in Pune are unaffordable for genuine middle income home buyer. A 800 sq. ft. flat (usable area of 650 sq. ft. only) costs upward of Rs.25 lacs. The EMI for a loan of Rs.20 lacs would work out to Rs.25,000. With the current high cost of living it is certailnly impossible to pay high EMIs with uncertain future. Builders sell their flats to brokers who then hike the prices for making a killing. The Government fixes the price for stamp duty according broker rates or higher in some cases. This adds to the spiral. The end user who is just stepping into life is left helpless. I feel there must be a strong consumer movement against such unscrupulous activity. Genuine home buyer needs help.



Dec 19, 2009

I think the conclusion drawn by Sumit is because of your not providing the figure for 2010.If you give the upto the date figures for f y 2010 the conclusion would be different


Sunil Kumar Singh

Dec 18, 2009

Is it fair to compare Dubai with India? Which characteristics are common between Dubai and India? India is a full fledged versatile country with different types of economies coexisting within mega cities at same time whereas Dubai is just a city. On the other hand, Dubai’s economy depends more on tourists, foreign inflows, expats or other GCC countries. Though, to the best of my understanding there is no comparable city in India, one can compare Dubai with Mumbai or other mega cities of India. Having said that, I would rather like to compare Indian real estate with US real estate. I can very safely say, at this point of time when world economy is dominated by emerging markets such as BRIC nations, India can be termed as developing United States. To reach to a stage where USA is now (not in terms of financial crisis), it will take several years for India. However, India is steadily inching towards that stage. This is the point where India has an edge. There can be temporary glitches, but medium to long term growth trajectory for Indian economy is certainly very robust. Chances of bubbles seem to be very remote. However, as rightly mentioned in today’s “5 minute wrap up”, there should not be unethical innovations by Indian finance profession to create bubble in real estate.



Dec 18, 2009

The graph about FII Investment do not underscore the point that is being made. Between 2001-03, market did not move anywhere when their investment was flat. Between 2003-07, markets moved up as the markets moved higher. In 2008, they invested and benefited from the rise in 2009 and 2009 seems to be an exit year probably indicating a fall next year. What do you say?

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