Monday, April 07, 2008

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

1 Comment:

Crazy Business Ideas said...

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.


I agree to it completely. Just watch the Sobhas and Purvankaras - they will prostrate in front of you and plead you to buy apartments!

Well , the higher you go , harder you fall .

KM

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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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