»5 Minute Wrap Up by Equitymaster

On This Day - 17 OCTOBER 2012
Will property prices ever fall in Mumbai?

In this issue:
» Cronyism rampant in Asia
» Denmark pays one of the highest taxes
» What does Vikram Pandit's sudden exit mean?
» Rally to continue opines Mobius
» ...and more!

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Property prices in metros like Mumbai have been a favourite topic for dinner table conversations. But despite varied opinions on price movements, buying an affordable house in the city remains a distant dream for the average Mumbaikar. This is despite the fact that demand is palpable and millions are waiting to buy their first home in the city.

The obvious solution would be to increase the supply of affordable homes. But therein lies the problem. Delays in regulatory approvals is a given which only adds on to the cost. Builders cite the economic slowdown and debt burden as issues which have compelled them to focus on other projects. But that is not all. Because these homes typically generate low returns, builders have hardly shown much interest in them. Moreover, many a time affordable housing hardly forms a part of the core business of developers. Especially at a time when there is enough demand for luxury homes in the city. Then there is the question whether these homes are bought by genuine buyers who are looking for their first home or investors.

The biggest hurdle of all is the cost of land. This on an average is so high so as to make the whole project of affordable homes unviable. Firstpost states that land prices have risen by 200-300% in just the past four years. Affordable housing requires support from the government, given the high land cost. Without a proper policy or a regulator in place, the role of state agencies in facilitating affordable housing is limited by the sheer pressure from the politician-builder nexus. Indeed, what is affordable to 70% of people living in Mumbai may not be enough to cover even the construction cost for developers. Not just that, typically builders who are in need of cash will have no option but to sell their stock of homes at affordable prices. But because they have ready loans available from banks and hence the much needed 'cash flow', many of them do not display this urgency.

This is where the government can make a difference and undertake the project of affordable housing as seriously as the building of infrastructure. But does it have the will to do so? If the example of the Land Acquisition bill is anything to go by, the results are not very encouraging. This remains pending in Parliament. Thus, unless the connection between politicians and builders is broken, affordable housing will continue to remain a dream.

Do you think breaking the link between builders and politicians will make property prices affordable in Mumbai? Let us know your comments or post them on our Facebook page / Google+ page

 Chart of the day
Rate of income tax has become a touchy topic in the developed nations in an environment where most of them are mired in recession. Indeed, this topic has certainly assumed importance in the current ongoing Presidential elections in the US. Today's chart of the day shows that citizens of Denmark pay one of the highest tax rates when compared to other countries. Further, it is interesting to note that tax rates in India too appear to be on the higher side when compared to China and the US. Although it goes without saying that those earning gross income of US$ 100,000 form a smaller part of the population pie.

Data Source: The Economist

It is perhaps in the nature of capitalism that its benefits do not flow proportionately. In other words, a small minority becomes rich while the rest just manage to scrape through. But what gets our goat is that the vast majority in countries like India and China are finding it extremely hard to even scrape through. In other words, there has been a drastic rise in income inequality in these countries in the past few decades. Thus, there seems to be something sinister that is at work here. Something that is not letting the poor to rise above their hand-to-mouth subsistence.

The Economist has tried to find an answer to this question and it has laid the blame squarely on what is known as cronyism. It argues that the Government insiders and politicians have excelled in the art of looting state resources for their own personal benefits. Besides, poor infrastructure in countries like India acts as a big deterrent for people to move beyond farms and into huge factories. This then restricts the growth in income that industrialization would have otherwise brought.

Thus, while emerging economies are growing at a fast clip, the above mentioned factors are not letting everyone to benefit from it. And the manner in which this problem will be addressed will in fact decide the fate of these nations in the coming decades.

Vikram Pandit has had a checkered track record during his stint as chief of Citigroup. The ex-CEO of the global bank was named in the list of worst ever American CEOs way back in 2009 itself. This was a little after he took over the reins of the subprime loss hit bank in 2007. He did steer the bank through the rough weather in 2008. However, the results were not to satisfaction. But his exit from the bank yesterday was as unceremonious as his predecessor Charles Prince's. The latter announced his exit in 2007 taking complete responsibility for US$ 14 bn of subprime losses. However, Pandit's sudden exit has been rife with speculations about under performance and bonus issues. Citi's failure to pass the recent stress test by US Fed has been one of the key issues. It may be noted that for much of his tenure, Pandit took a notional US$ 1 salary in line with the bank's austerity motive. But he did so after reaping more than US$ 160 m from the sale of his Old Lane hedge fund to Citi. It is therefore not surprising that the shareholders' of the bank were not willing to dole out big bonus for an average performance. Having said that, the woes of Citi are far from over.

The recent rally in global equity markets, especially the emerging ones, is seen with an eye of suspicion. Advocates of liquidity deem it as a relief rally fuelled by cheap money flowing into the emerging economies. However, emerging market guru Mark Mobius is of the opinion that this rally has legs to carry on further. Loose monetary policies in emerging markets are likely to fuel growth. That's because it brings down the borrowing cost and accelerates industrial spending. He also feels that since monetary tightening is not on the cards, emerging markets are in a structural bull run.

Also, Federal Reserve's quantitative easing program is making conditions ripe for a bull cycle. That's because near zero interest rates in US make investors search for higher yields in other markets. Valuation is another factor. Right now, valuations in some emerging nations are cheaper than in US. This presents excellent buying opportunity. Overall, he feels that the entire emerging markets pack will outperform US. May be we are just at the cusp of another bull cycle.

The coming 19th October would mark the third anniversary of the Eurozone crisis. The first question that comes to mind is: How far the Eurozone has come in dealing with the crisis? There is no clear answer. There is still extreme uncertainty about the future prospects of the region. The Eurozone bourses have been witnessing low trading volumes. Merger and acquisition has come to a grinding halt. And so have initial public offerings. This just shows investors have no clue where things are headed.

So what's really going on? An article in Financial Times has an apt answer. It says that Europe's 'muddle along' plan is going to prove dangerous. By now, the actions and reactions of Eurozone policymakers follow a characteristic pattern. At every turn of the crisis, there have been market sell-offs, policy reactions and short term relief. The article points out that this is then followed up by complacency, backtracking until the crisis re-intensifies again. The problem with this is that there is no definite direction. Investors are now seeking clarity. A positive outcome would be that the monetary union moves towards a stronger fiscal union. On the other extreme, there is a possibility of a broad debt restructuring or the breaking up of the Eurozone. Some believe that the euro break-up would not be catastrophic, but beneficial. It will allow for a fresh start. It remains to be seen if the logic appeals to the EU policymakers. Most likely, they will prefer 'muddling along' till the crisis reaches its peak.

In the meanwhile, the Indian equity markets opened on a strong note and traded positively throughout today. At the time of writing, BSE Sensex was up by 20 points (0.1%). Consumer durable and healthcare stocks gained maximum. Asian stock markets displayed positive investor sentiments except Taiwan and Indonesia.

 Today's Investing Mantra
"Markets can remain irrational longer than you can remain solvent." - John Meynard Keynes

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