[Nilesh5417]

Here is an interesting article that i read on Firstpost today. Quoting the first few key paragraphs.

In this column on Monday, this writer argued that falling car sales is a reflection of the overall economy slowing down. People expect the bad times to either continue or get even worse in the months to come. And this makes them hold on to the money they would have otherwise used to buy high cost items like a car. It also means that they do not want to commit to an EMI right now. Given these reasons car sales have slowed down.

The question that begs asking is this: why does not the same logic apply to real estate? What immediately cropped up was that if car sales are falling, using the same logic real estate sales should also be falling and should lead to a fall in prices. If cars are a big ticket purchase, then buying a house is the biggest expenditure that most people incur during their lifetimes. Also the prices of cars over the last few years haven’t risen much, whereas the prices of homes have gone through the roof, making them terribly expensive, if not simply unaffordable.

The economist George Akerlof wrote a research paper titled The Market for Lemons in 1970. For this paper, Akerlof ultimately received the Nobel Prize. In this paper he discusses the market for second hand cars (or used cars) and the problem people have in selling them.

Akerlof divided the second hand car market into two types of cars – peaches and lemons. Peaches were cars which were in a good shape whereas lemons were cars which were in a bad shape. The individual selling the car obviously knows whether his car is a peach or a lemon but the individual buying the car doesn’t. So seller has what economists refer to as ‘insider information’ which the buyer doesn’t have.

The point is that in this transaction one side has much more information than the other side. So there is an asymmetry of information. As Nate Silver writes in The Signal and the Noise – The Art and the Science of Prediction, “In a market plagued by asymmetries of information, the quality of goods will decrease and the market will be dominated by crooked sellers and gullible and desperate buyers.”

The real estate market in India is a tad like that – full of crooked sellers and desperate buyers. The sellers have all the information in the world and buyers have very little of it, almost next to nothing. And this manifests itself in situations which do not benefit the buyers at all.

http://www.firstpost.com/economy/why...e=MC_TOP_WIDGE

Mods : Not sure what section this goes into so please move where it belongs.

[sa_kiran]

Most of the builders have deep pockets, can sustain bad times for long times. This is because most of them are financed by black money of corrupt netas. They don't want price correction, because it will affect those few people who have invested or bought property.

I've heard that builders recover their investment if they sell 30-40% of what they build, because the selling price is extremely high.

[arvind71181]

A house is seen as an asset, a quickly appreciating one at that. Cars on the other hand are depreciating products. Probably the reason why realty prices keep on increasing.

That said, there has to be a breaking point. Dont know when will be the last straw which will break the camel's back.

[ACM]

1) Builders financed by Black Money and supported by many buyer who further buy using a fair bit of back money in return.
2) Larger Builders can ride the downturn for about 3 years and not drop prices inspite of low real sales.
3) Higher end property still has buyers in a downturn just like luxury cars do not see a drop in sales in bad times.
4) In the last year of so approvals of new projects in places like Mumbai, Thane etc were at a standstill - new projects did come up but these were / are those that wear approved earlier or are still pending full approval - hence delay in giving pocession. In this situation there was no pressing need for a price correction as the stock on hand was just about average.

[Warwithwheels]

What role does black money have to play in this discussion, I wonder!

People with black money who buy houses can buy cars aswell with the same money.

And moreover the thread title requires a correction I guess.

[noopster]

Originally Posted by Warwithwheels

What role does black money have to play in this discussion, I wonder!

A big one. In most large cities, no real estate deal is done as per the paper value. Sellers demand cash which is not accounted for, to save on taxes and other statutory dues. Buyers who earn black money are happy to go along and dump their ill-gotten gains into the realty market. This results in an odd situation where the book value and the market value of a property widely differs.

Even without the cash element, prices of property in some pockets (e.g. Mumbai) are so inflated that nobody except the super rich can imagine buying. Real estate has been proclaimed by many expert as a bubble that will eventually burst, but except from one or periods where the rate of growth slowed down, the prices have steadily been on an upward spiral. It doesn't help that builders themselves restrict the supply of homes to the market and hoard them for speculative gains. Thanks to IT and other industries, a significant proportion of buyers is able to bring in money earned overseas into the market (real estate is usually everyone's first priority) which puts local earners at a disadvantage.

The situation these days is so ridiculous that a double income family in a smaller city like Pune is hard pressed to be able to afford a decent 2 BHK flat, something that was within reach maybe 3-4 years ago. In larger cities it is well nigh impossible.

Reality must bite at some point, but the question is...when?

[srishiva]

Originally Posted by Warwithwheels

What role does black money have to play in this discussion, I wonder!

People with black money who buy houses can buy cars aswell with the same money.

And moreover the thread title requires a correction I guess.

Just to answer, you can buy houses with black money because lot of sellers accept it (or want it) and it remains in the black. Car sales are not like that.

[pganapathy]

There are various reasons why the realty prices will not fall as much as car prices in a bad economy. The most important is that there are no alternatives to a house. Sure, in a sense you can say what replaces a car, but at least people in the metros can survive without a car by a mixture of public transport and taxis. What do you do if you don't have a house to stay in. Either you are wealthy enough to afford a hotel stay permanently or you are homeless and on the street. This effectively means realty prices are almost though not quite, recession proof. Thus people will pay whatever it takes to buy a house. Sad but true.

[tsk1979]

Originally Posted by pganapathy

There are various reasons why the realty prices will not fall as much as car prices in a bad economy. The most important is that there are no alternatives to a house. Sure, in a sense you can say what replaces a car, but at least people in the metros can survive without a car by a mixture of public transport and taxis. What do you do if you don't have a house to stay in. Either you are wealthy enough to afford a hotel stay permanently or you are homeless and on the street. This effectively means realty prices are almost though not quite, recession proof. Thus people will pay whatever it takes to buy a house. Sad but true.

Many of the buildings constructed and functional in big cities are "SOLD OUT".
However, if you drive by in the evening, only 10% of flats have lights on. This shows that the market is ruled by speculators.
This is what is called a bubble. A bubble can last a finite time. Now if the amount of black and illegal money is very very big the bubble can last for decades.

Here in NCR region this is how this works.
Lets say you are a broker with 5L rupees.
At the launch of a 1 crore flat, you pay 5% and book this flat. you cannot afford a 1 crore flat but you buy it anyway.
With every month passing, and every floor getting constructed, you owe the builder 5%.
But you do not pay.
So builder starts adding interest and soon you have 5-10L interest accumulated within 2 years.
Now comes in a real buyer.
The price after 10 floor construction is now 1.5 crores
The broker sells this flat to you for 1.4 crores(undercutting current builder price) and also gives you a better located flat.
So within 2 years he earns another 10L on his investment of 5L. Or even 20L depending upon how many real buyers are there.

As the bubble grows, you have "richer" investors coming in with black.
But with time, there are lots of flats on offer which are sold out but nobody lives there. And then the builder will get only 5L on his 5L after 2-3 years.

As long as this cycle continues everyone makes hay. But then in NCR, esp noida, its being overdone. Their are so many flats coming up (scheduled completition 2014), that they will outnumber existing flats 2:1
Now has the 50L affording population of Noida grown more than twice the size in Noida? I do not think so.
One day this bubble will burst. Already Jan 2013 possession projects are delayed?
Reason, all flats are sold out, and only 10% are paying the due installments. So the builds have run out of money.
Sure, brokers owe them crores, but you cannot buy cement with promise? Can you?
In the USA banks gave money based on "promise" of returns in the future. Look what happened. Indian banks are more wary.
But still lot of money is pouring in. In this budget, the ministry decided to help out the brokers by encouraging more black money into flats dearer than a crore.

Maybe next time they will try to encourage people to use black for even 20L flats, and the bubble bursting will be delayed.

[sourabhzen]

First the reality prices:

A real estate developer buys a property on area based on the max FAR possible for a particular region. This FAR translates into the 'sale able area' for a developer. Now if we see sale price of project land in a city and divide it per square feet cost of the building that can be built, we will know the cost per square feet of units that are to be sold. In larger cities this cost is so high that the additional construction cost and cost of 'amenities' provided is negligible. Thus the cost of units are more or less fixed the moment a builder acquires the land.

Most of the land for projects are auctioned and thus the they are always more than the last auctioned piece of land. Since the builder invests so much of money in land cost, it becomes imperative for him to price the units higher.

The units are then sold to 'bulk buyers' who charge a premium and sell it to small investors. All the investors in this chain block their money to get higher returns and there is a very small percentage of end-users. This inflates the bubble and it will burst only when the investors run out of black money to invest any more. Till the time majority of investor start selling the units at a 'loss', the prices remain sticky and will not come down. The enormous capacity(black money) of the investors allow them to hold on till the prices escalates, which happens when economy shows sign of progress.

The big cities seems to have demands for the real estate as the middle class person book or buy one property as soon as he thinks he is eligible to get loan from the banks. Ultimately, he borrows money from a bank and pays upto 90% of the cost to developer for 40-45% of work completed (structure only). Now the developer need to complete 50-55% of work for which he will get only the balance 10% of money. From this point of time the end user keeps waiting for his dream house paying the EMIs while the developer invest the money on other land for another project. So, in totality the end user keps paying and all others - builders, agents, investors and banks keep earning. This keeps the prices stable.

Recent trends in Dwarka, Delhi shows that some investors are not finding the end users and hence they are selling the properties at prices that are below the market rates. I hope to have more such trends if the economy remains as it is for some time.

Now the car prices:

Nothing of sort of investment takes place when we go to buy a car so there is no greed involved. Whatever we do the cost of our car will start depreciating from the moment we take it out of the showrooms.

[JoshMachine]

Originally Posted by srishiva

Just to answer, you can buy houses with black money because lot of sellers accept it (or want it) and it remains in the black. Car sales are not like that.

Agree srishiva...Just to expand on this, the instituition of buying and selling a house can be controlled by a single entity - the builder. Whereas for car selling/buying there are a host of entities you have to go through.
This translates to the builder being able to control and hold onto the price differential for a substantially longer time.

But as per a recent ToI article, the real estate prices in Tier-2 cities (comprising the max action) is quickly spiralling to a point where it will not be sustainable and most likely to crash.

[sj_koova]

I think it is simple. Asset vs liability.
Property does appreciate over time and car depreciates over time.
I can't think of anything that depreciates faster than car!

[GTO]

A property is an investment. A car is an expense.

Even a reasonable property appreciates with time. However good the car, it will only depreciate.

If Maruti sat on an inventory of 100,000 cars for 2 years, it'll have nothing but rust buckets at the end of it. Unlike the property owner who holds on to his land for 2 years.

While we can see some similarities in trends between the two sectors, it would be silly to question why the prices of one aren't going down when sales of the other are.

[dhawcash]

Originally Posted by GTO

A property is an investment. A car is an expense.

Even a reasonable property appreciates with time. However good the car, it will only depreciate.

If Maruti sat on an inventory of 100,000 cars for 2 years, it'll have nothing but rust buckets at the end of it. Unlike the property owner who holds on to his land for 2 years.

While we can see some similarities in trends between the two sectors, it would be silly to question why the prices of one aren't going down when sales of the other are.

What about Apartments? they may detiorate with age, and the owner just owns a piece of air space. If, god forbid, major damage is done to the building, by natural occuring, or poor build quality, everything is gone. what justifies their appreciation?

Ive noticed here in jaipur, prices of apartments in old buildings (10-12 year old) are way below prices of newly built apartments, even in the same locality, and same builtup areas and configuration.

Also, its a case of demand and supply- too many apartments, and still increasing prices. A point will come when it would not make sense for anyone to put in the market price. Builders/ flat owners will have to sell them at prices lower than market prices, and prices will follow the trend and will indeed fall- am i right?

Are apartments really a smart investment?

[HellwratH]

Originally Posted by Warwithwheels

What role does black money have to play in this discussion, I wonder!

This should help (was written way back in 2008) :
http://timesofindia.indiatimes.com/h...w/2910592.cms?

Swaminathan Aiyar is one of the few economists I follow very closely and he's usually right on money. He explains how the mentality associated with black money plays out. Interesting read for sure.