Tuesday, May 20, 2008

Soros's Gloomy View has Lessons for India

Wake up Mr. RBI Governor and Mr. Finance Minister. It is you who hold the reins to prevent mishaps in the Indian economic story, before elections come about. If you sit aside and watch cheap PE funds sloshing around in to hideous real estate schemes, then I am certain you will not mind opening your ears a bit and listening to man who will not hesitate a bit from playing vulture to the carcasses of the stock markets.

The news web sites are full of George Soros and his gloomiest forecast of the US, UK and other world economies. But what catches my eye is his advice to the UK governor, which resonates like a message for our own YV Reddy.

Here are some of the Soros gems:

  • Central bankers are partly to blame for the credit crunch because of their past behavior in bailing out the financial sector whenever it got in to trouble for over-lending - the so-called moral hazard problem.
  • Central banks should explicitly target asset bubbles such as housing booms and try to stop them getting out of control, which is something they have resisted doing so far.
  • Tougher but smarter regulation would be needed in the future, in order to reduce the excess supply of credit in the economy. These could include measures to force banks to put aside more reserves in good times, to help cushion them in bad times.
YV Reddy if he is listening is certain to announce a larger than expected CRR hike soon, and ICICI's Kamath will not be able to keep home loan rates low any more.

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Karthik Kumar said...

Your articles about Real Estate are really good. And this article about Soros is spot on. But i'm somewhat weary of taking such a gloomy outlook on real estate. Granted that prices went to unreasonable levels in 2007,,but prices have corrected by as much as 20% in areas like Gurgaon already due to double whammy of high-interest rates and sky high property prices. So don't you feel that the bubble is self-rectifying in the medium term?? In any case,,most realty stocks are already well down from their peaks and only DLF/Unitech and Mumbai players are still quoting at a PE premium.

Humblybob said...

Hi Karthik,
Thanks for your message. I think prices far outstrip the demand. I am not sure about Delhi, but Mumbai, the shortage is a hoax. It is only the desperate or the egoistic who are buying. And of course, the believers that the same return is possible on real estate as the last 2 years. A drop in margins awaits real estate companies for sure, but this is more a back of hand pitch. Over the next 5 years, reasonable land prices will keep margins of companies in place. Days of astronomical prices is went!




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

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.”

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.

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.

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

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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