CONVENTIONAL economics says a crash is bad. In reality, however, it’s a boon. A real estate crash is an economic blessing for billions of people and the country.
Two years back, no one would have imagined that real estate prices could crash by 50 per cent. Today, it’s a fact. Compared to peak prices of 2008, you can expect a correction by 70 per cent in the coming years. Despite that a lot of properties will be lying vacant as there is a huge oversupply – in India and all over the world.
Many builders and brokers will probably send me hate mails for saying this but the fact remains that a 70 per cent crash is a good time for them to create much more wealth and to tap a large market. This crash is excellent for home buyers, businesses, and the entire economy.
Reason: A lot more cash is available for more productive activities in the economy such as building roads, electricity, etc.
How is that?
Let us say earlier a property you wanted to buy was being quoted at Rs 1 crore. To get money to buy this, you might have to scour your entire life savings and take additional loans. You and your family might have to slave for at least 20 years to pay off the EMIs to banks. A lot of your savings gets sucked into unproductive assets like real estate.
Today cost of construction per square foot is only around Rs 600. Based on this a 1000 sq. ft apartment should cost not more than Rs 6 lakhs to construct. Just imagine a flat that cost barely 6 lakh to construct is being sold for Rs 1 crore. A few might argue – that we need to consider land costs.
Land cost is artificially inflated across the country – India has an abundance of land all across. Just move out of the major cities and you will see thousands of acres of vacant land.
Now imagine if that same property is available for Rs 20 lakh, which is the fare value for such a property. Now there is an additional Rs 80 lakh available in the economy for more productive uses.
What happens to this surplus of Rs 80 lakh?
Previously, only a small minority of builders enjoyed this surplus of Rs 80 lakh but now it can be invested to boost consumption.
Roads, factories and new service industries can boom if each family uses this Rs 80 lakh more productively. Electricity, roads, water, health care and education will get a huge boost from this money. No amount of interest reduction or artificial stimulus package can have the same effect as this.
When property prices go down, automatically the ‘black cash’ element would disappear. People would not see the need to find the back alleys to pay Rs 20 lakh.
The question, you should ask!
Today, a place like Dubai, which has sunk billions of dollars into unproductive real estate, is on the verge of collapse. Had they utilised this money for better use, the economy would have been much better today.
A lot more to a crash that is excellent for the economy. The real estate crash has not yet happened in India and is still to come and will probably surprise a lot of people.
India has a bright future ahead and millions of new jobs are going to be created. A lot of new capital also is going to be used productively thanks to this global economic crash. I’ll once again stress that this is one of the best opportunities in history to create immense wealth for all those who are armed with knowledge and have a little bit of patience.
Source
Showing posts with label Real estate. Show all posts
Showing posts with label Real estate. Show all posts
Wednesday, March 25, 2009
Friday, December 12, 2008
7 Common Mistakes To Avoid
In bad times, informed investors, too, end up making mistakes in the real estate market. Here's how to avoid the pitfalls.
The wheels of fortune for the real estate, especially the residential property market, have turned since the stockmarket crash in January this year. The sector, which was already battling with high interest rates and high cost of property that were, to an extent, keeping homebuyers away from the market, received a death blow in terms of the negative sentiment. The global economic turmoil in the later months only increased the intensity. While homebuyers are deferring purchases to catch the bottom, real estate speculators, who invested in property purely for gain, are finding it hard to pull out at their desired price points.
Whether you’re a home-buyer or an investor, the present scenario is the perfect setting for inducing wrong calls. We list the commonest ones—and ways to avoid them.
Money Mistake 1
With prices likely to cool off in the short-term, there is no point in holding on. I should pull out of the investment.
This is the first thing most of us do when we get bad news about any asset class. When it comes to real estate, the worry is aggravated if there’s a home loan involved. With home loan interest rates climbing steadily since 2004, your tenure is now longer (or EMIs heftier). Capital values, too, are down, especially since January this year. As a result, you are paying more (in terms of interest payout) for an asset whose value is decreasing. Experts believe that the prices of residential units will go down by another 15-20 per cent in the short term.
But is that reason enough to pull out? No. If you can hold on to your investment, do so. The reason is simple: In the long run, returns from real estate are second only to that from equities. Further, with the large gap between demand and supply for residential units in the country, long-term prospects still look good.
Pull out of your investment only if you find it difficult to hold on. But be ready for three major hurdles—finding a buyer when most of them are trying to catch the bottom; clearing paperwork if there’s a mortgage; minimising the tax impact on sale proceeds.
Money Mistake 2
While selling the property, I should stick to the price at which the neighbouring flat was sold six months ago.
While real estate as an asset delivers good returns in the long run, exits are not easy, compared to some other asset classes. In the present scenario, your problems will be further compounded because, even if you find a buyer, he will know fully well that you are making a distress sale and, hence, will drive a hard bargain. To get an idea of the price you may realistically expect, investigate the sale of similar properties in the area over the past month or so. Property portals will also give a fair idea of the going rates.
Money Mistake 3
I have surplus funds. I should go ahead and increase the EMI on my existing home loan.
The home loan is the cost of acquiring the house while the interest on it is an expense you incur to get the asset. An ideal situation would be to get the loan at the cheapest cost. However, rising interest rates increase your cost of acquisition. If you have surplus funds, instead of increasing the EMI you should part-prepay the principal. This way your principal outstanding will go down, which will, in turn, reduce your tenure. In other words, your interest outgo will reduce.
Also, most lending institutions do not levy any pre-payment penalties if the part-prepayment is made through one’s own resources. For those who don’t have extra funds, use this time to arrange for it.
Money Mistake 4
Real estate developers are promising returns on investments in their advertisements. I think I should invest in them.
Most developers have been looking at individual investors to bail them out of the cash crunch. Advertisements portraying real estate as an investment with assured returns of around 11-12 per cent were a common sight till very recently. Don’t fall for such gimmicks: these are merely evidence of their efforts to get cheap funds for ongoing projects. When private equity funds invest with real estate developers, they typically expect rates of return above 20 per cent. So, if you have funds, park them in safer instruments like bank fixed deposits—which are anyway giving returns of around 10 per cent.
Money Mistake 5
The developer is giving a car free with the every booking. Good idea to book with them.
This is again an attempt by developers to maintain their cash flow. With banks reducing their exposure to real estate, negative sentiment at the bourses and private equity coming at a high cost, giving freebies is a way to boost sales, which will, in turn, keep the cash registers ringing.
Earlier, developers promised waivers of stamp duty or parking charges to woo customers. But, with most homebuyers not getting lured by such offers, developers have become more desperate. Rather than reducing their basic sale price, they are introducing ever more attractive freebies, such as a car free with a home booking, or even buy-one-get-one-free deals.
If you are seriously tempted, be very clear about what’s on offer. For example, if it’s a buy-one-get-one-free deal, find out who will pay the stamp duty, parking, maintenance and other related charges of the second house.
Apart from high costs (both of real estate and home loan), genuine homebuyers are discouraged by the prevailing negative sentiment. So, if volumes do not increase in the short term, developers will have no option but to reduce rates.
Money Mistake 6
Prices are expected to cool further. I should wait to enter the market when prices hit a new low.
A slump in the fortunes of any asset class provides an opportunity for rich pickings. However, don’t try to time the market. Remember that the real estate arena is not homogeneous and price falls/corrections will vary across markets and properties. So, if you find a good property that suits you by way of location, amenities, construction and other factors within your budget, go ahead and invest. However, under the present circumstances, buy only in ready-to-move-in properties. If you plan for the long-term, you’ll never go wrong with real estate investments based on informed decisions.
Money Mistake 7
Since my EMIs have moved up, I should increase the rent to set off my EMI burden. Also, there is no point in getting any work done on the house as prices are falling.
Most investors see situations like the present one opportune to increase rentals. Your property broker will be happy to know that you expect higher rentals as it will increase his commission. However, it is best to be reasonable while increasing the rent; it shouldn’t be so high that it scares away a good tenant. It makes more sense to have a good tenant at slightly lower rent than a bad one at a higher rent.
So far as home improvements go, basic additional work like kitchen woodwork, a coat of paint and checking of electricity connections will increase your rental income by more than
Whether you’re a home-buyer or an investor, the present scenario is the perfect setting for inducing wrong calls. We list the commonest ones—and ways to avoid them.
Money Mistake 1
With prices likely to cool off in the short-term, there is no point in holding on. I should pull out of the investment.
This is the first thing most of us do when we get bad news about any asset class. When it comes to real estate, the worry is aggravated if there’s a home loan involved. With home loan interest rates climbing steadily since 2004, your tenure is now longer (or EMIs heftier). Capital values, too, are down, especially since January this year. As a result, you are paying more (in terms of interest payout) for an asset whose value is decreasing. Experts believe that the prices of residential units will go down by another 15-20 per cent in the short term.
But is that reason enough to pull out? No. If you can hold on to your investment, do so. The reason is simple: In the long run, returns from real estate are second only to that from equities. Further, with the large gap between demand and supply for residential units in the country, long-term prospects still look good.
Pull out of your investment only if you find it difficult to hold on. But be ready for three major hurdles—finding a buyer when most of them are trying to catch the bottom; clearing paperwork if there’s a mortgage; minimising the tax impact on sale proceeds.
Money Mistake 2
While selling the property, I should stick to the price at which the neighbouring flat was sold six months ago.
While real estate as an asset delivers good returns in the long run, exits are not easy, compared to some other asset classes. In the present scenario, your problems will be further compounded because, even if you find a buyer, he will know fully well that you are making a distress sale and, hence, will drive a hard bargain. To get an idea of the price you may realistically expect, investigate the sale of similar properties in the area over the past month or so. Property portals will also give a fair idea of the going rates.
Money Mistake 3
I have surplus funds. I should go ahead and increase the EMI on my existing home loan.
The home loan is the cost of acquiring the house while the interest on it is an expense you incur to get the asset. An ideal situation would be to get the loan at the cheapest cost. However, rising interest rates increase your cost of acquisition. If you have surplus funds, instead of increasing the EMI you should part-prepay the principal. This way your principal outstanding will go down, which will, in turn, reduce your tenure. In other words, your interest outgo will reduce.
Also, most lending institutions do not levy any pre-payment penalties if the part-prepayment is made through one’s own resources. For those who don’t have extra funds, use this time to arrange for it.
Money Mistake 4
Real estate developers are promising returns on investments in their advertisements. I think I should invest in them.
Most developers have been looking at individual investors to bail them out of the cash crunch. Advertisements portraying real estate as an investment with assured returns of around 11-12 per cent were a common sight till very recently. Don’t fall for such gimmicks: these are merely evidence of their efforts to get cheap funds for ongoing projects. When private equity funds invest with real estate developers, they typically expect rates of return above 20 per cent. So, if you have funds, park them in safer instruments like bank fixed deposits—which are anyway giving returns of around 10 per cent.
Money Mistake 5
The developer is giving a car free with the every booking. Good idea to book with them.
This is again an attempt by developers to maintain their cash flow. With banks reducing their exposure to real estate, negative sentiment at the bourses and private equity coming at a high cost, giving freebies is a way to boost sales, which will, in turn, keep the cash registers ringing.
Earlier, developers promised waivers of stamp duty or parking charges to woo customers. But, with most homebuyers not getting lured by such offers, developers have become more desperate. Rather than reducing their basic sale price, they are introducing ever more attractive freebies, such as a car free with a home booking, or even buy-one-get-one-free deals.
If you are seriously tempted, be very clear about what’s on offer. For example, if it’s a buy-one-get-one-free deal, find out who will pay the stamp duty, parking, maintenance and other related charges of the second house.
Apart from high costs (both of real estate and home loan), genuine homebuyers are discouraged by the prevailing negative sentiment. So, if volumes do not increase in the short term, developers will have no option but to reduce rates.
Money Mistake 6
Prices are expected to cool further. I should wait to enter the market when prices hit a new low.
A slump in the fortunes of any asset class provides an opportunity for rich pickings. However, don’t try to time the market. Remember that the real estate arena is not homogeneous and price falls/corrections will vary across markets and properties. So, if you find a good property that suits you by way of location, amenities, construction and other factors within your budget, go ahead and invest. However, under the present circumstances, buy only in ready-to-move-in properties. If you plan for the long-term, you’ll never go wrong with real estate investments based on informed decisions.
Money Mistake 7
Since my EMIs have moved up, I should increase the rent to set off my EMI burden. Also, there is no point in getting any work done on the house as prices are falling.
Most investors see situations like the present one opportune to increase rentals. Your property broker will be happy to know that you expect higher rentals as it will increase his commission. However, it is best to be reasonable while increasing the rent; it shouldn’t be so high that it scares away a good tenant. It makes more sense to have a good tenant at slightly lower rent than a bad one at a higher rent.
So far as home improvements go, basic additional work like kitchen woodwork, a coat of paint and checking of electricity connections will increase your rental income by more than
10 per cent.
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