Smart Man Sells his Apartment 30% Cheaper

Praveen Malhotra is a smart man. And this is the kind of person we are looking for to trigger a collapse in the overheated Mumbai real estate market.

Malhotra lives in an eastern suburb of Bhandup in Mumbai, and had invested in a 2-BHK apartment overlooking the lush forests of Sanjay Gandhi National Park, where greedy builders had usurped forest land and built multi-storied structures flouting the Maharastra Private Forests Act.

Malhotra sold his apartment for Rs 27 lakh, almost 30% cheaper than what he purchased it for investment purposes. Malhotra has sensed that most buildings that have come up during the last real estate mania were based on the premise of unmitigated cash from foreign investors and a unbridled rise in real estate prices.

We are used to stock market manias and busts -- do not forget that tulip bulbs in 1600's Netherlands were sold for equivalent of today's $30,000 -- but the Indian real estate bust, which has started in 2008, is going to hurt people more than the 1929 stock market collapse hurt US investors. We are talking EMI defaults at the individual level and not at corporation levels.

Back to Malhotra, he feels that it is best to get out of the market before the rates go for a toss. He has even found a nice way to protect the interest of the buyer. He has signed a power of attorney agreement wherein the new buyer is a "custodian" of the flat until the Supreme Court gives the final verdict. The buyer of course is taking a huge risk, because obviously he is sinking Rs 27 lakh of his own money, since banks have stopped funding these properties.

Of course, when any bubble bursts, the first emotion is denial. And we are hearing exactly the same things. Builders in these forest lands are buying back flats at a discount of 15%, obviously trying to cash in on the panic. But remember that fools come in all shapes and sizes.

All registrations on forest lands are banned by the High Court, and hence those who are buying these apartments may in fact be catching what is known in stockmarket parlance as a "falling knife". The end result is only bleeding losses. Wait for some more time and these apartments could be selling for even less than 20% of current prices.

About so far 10 cases of Malhotra have been cited, but this is just the beginning. Give it a few weeks, and a 100 more will come to light.

Do not expect any resurgence in the stock markets to support this. A CRR hike is in the offing, no matter how much the RBI tries to stave this off. George Soros, legendary trader, as well as Warren Buffet, legendary investor, says the US dollar is going to sink. Where do you think new money is going to come in from?

Read the TOI story here