Wednesday, February 27, 2008

Are We Months Away from a Realty Bust?

Toll Brothers, one of leading US homebuilders, announced it has taken a 23% dip in revenue and writedowns of $150 million in Q1 2008. However, what glares though its numbers are the signs of a flagging realty market.

Toll Brothers however, like any business trying to save face, has blamed it on ceaseless talk of recession, which it cites as the reason customers are not purchasing new homes.

According to Toll, the average price for home sales, fell to $634,000 from $730,000 last year -- a drop of 13%. This drop, it says, is mainly due to a change in the mix of houses sold as well as the value of incentives being offered.

What Toll Brothers' is saying is that US buyers are not keen on last year's splurge on plush interiors and high-end finishes, and are instead cutting back.

In so far, realty companies in the US have been maintaining the list price on documents, but are giving out freebies, discounts and other giveaways, to make up for a sizeable discount in purchase price. This is similar to a mutual fund or insurance agent giving cash from its own commissions. Builders are not keen on selling an apartment at a price today and then having to push a similar one down the road at a price 15% less next month. However, it is a trick they may not be able to hold on to for very long.

Similar gimmicks have started doing the rounds in cities like Bangalore, Hyderabad, Kochi and others, where builders are giving back incentives like cars, mobile phones, insurance, or writing off maintenance charges for the first few years or throwing in free holidays for home buyers.

All of this reeks of a simmering US-like situation in the Indian realty markets. Sure, cities like Mumbai -- for sheer lack of available space and cartelization by politician-builder nexuses, may be able to hold on for a few more months.

Yet, this is an election year, and hardly any support can be forthcoming from the government. Further, it is a matter of time before the last straw breaks the camel's back. A rush by publicly listed realty companies to meet revenue targets by March 2008, may just force them to let loose an oversupply homes in India.

Posted by Eclectic Investor at 11:33 PM  

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IN PASSING

Consider how the crisis has unfolded over the past eighteen months. The proximate cause is to be found in the housing bubble or more exactly in the excesses of the subprime mortgage market. The longer a double-digit rise in house prices lasted, the more lax the lending practices became. In the end, people could borrow 100 percent of inflated house prices with no money down. Insiders referred to subprime loans as ninja loans—no income, no job, no questions asked. - George Soros in latest book


“When everything’s going up, there’s a feelgood factor and people tell each other how much their houses are going up at dinner parties,” says Professor Mark Stephens of York University’s Centre for Housing Policy. “Then the music stops, as it always does.”

“Last year, Japan was a more attractive market to put money in. If you look at the US, we can now get an internal rate of return of 25% there, so why would anyone want to come to India?” - a senior executive at an international financial services group, who did not wish to be named.

"Most people told us house prices never go down on a national level, and that there had never been a default of an investment-grade-rated mortgage bond, "Mortgage experts were too caught up." - John Paulson, trader, who bet against subprime market and made $15 billion.

The most puzzling are the real-estate projects of Parsvnath. Just have a look at the Pride Asia project near Chandigarh. They are asking almost US $300K-$350 K dollars for 2 bed room apartments. They have Villas in this project that costs more than US $1.5 million dollars. It is true that some people in India have that kind of money in India. However most of their wealth is black money and that can not be used to buy these properties. Obviously, these projects have been launched keeping NRIs in mind. - Sanjeev, comment from another site

Prachi Desai, aka Bani, the star of Balalji Telefilms's soap, Kasam Se, has been house hunting for over a year. She had almost closed a 2-BHK deal last year for Rs 1.5 crore in a Oberoi Constructions' building located at Andheri, Mumbai, but when she went back to confirm it, she was asked to cough up Rs 2.61 crore. Since then, she is still house hunting. - Mumbai Mirror

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