I would like to share book that I read recently. We can exactly know how these weapons were effectively used by RE companies & brokers so far.
This book is psychological research on factors that influenced us to say ‘yes’ or ‘no’ at various events /situations that normally occur in everyone’s life but we really would not see the outcome or results of our response when we committed. Robert B. Cialdini is professor of psychology at Arizona State University. This book is his life time research on people’s behaviors and he took various roles during his research as door to door salesman, marketing guy and PR agent etc.
Author talks about the ‘weapons of influence’ that normally enterprises and other people use for their gain over the society which means the normal public. Prof. Cialdini found six common traits of people that influence an individual to make any decision.
Reciprocation – Based on the widespread human culture and evolution, the rule requires that one has to try to repay what another person has provided by means of any service/gain. Not repaying is considered as rude or uncivilized in our society. Free food samples at malls and stores.
Commitment and Consistency – It is easier to resist at the beginning than at the end – Da Vinci. It is always our desire to move with the society, colleagues, friends or relatives on making decisions or on deciding lifestyle. We all like to get approvals from the above mentioned social set up. I know many people who signed on the dotted line for the word of a marketing guy ‘just sign we will take care of it, don’t worry’ for their investments, mortgages just because others did so; dared to ask questions.
Social Proof - This is about how a person likes the society to view his actions; this comes of out his skepticism about other people’s reaction. When he is not sure about the action he would tend to follow the predecessor. This is an easy experiment for us who live in India. Next time you come across a beggar at a temple, train or bus stop; people normally look for a predecessor. Try for once the role of predecessor and see the results.
Liking – People tend to say ‘yes’ to individual they know and like well. There are three main factors for this behavior. Physical Beauty – This halo effect makes people to yes. Similarity – We like people like us by appearance or behavior etc. Increased Familiarity – Repeated contact or information about a thing. (Advertisements, stock recos.) Why are we spending so much time and money on some of the bakwaas movies of Bachans, Khans and Rajinikanth though we know already? (No offense meant)
Authority – This is very simple to understand. We will do whatever our boss says with “I will take care of it, don’t worry’. Individual will not stand up and say ‘no’ even if he knows something is wrong. You might have read a lot in newspapers these days about 'Satyam'
Scarcity – Another simple one to quote an example under current scenario. You might be seeing lot of advertisements from real estate developers, car companies and banks with a limited time offer “Only for next three days” or “Pre Launch Discount – Very few flats”. Cool that’s it.
I read and watched Cialdini talking about this; I can go on writing about this book. I have listed only main 6 items and there many examples & other weapons detailed in the book. Get a copy if you want to overcome or positively use these 'weapons of influence'
Thanks Vik for giving the oppurtunity.
Thursday, 26 February 2009
Wednesday, 25 February 2009
Unscrupulous real estate brokers will cheat you
The Hindu reports
Some go strictly by an unwritten code. They can be called honest brokers
Middlemen, or brokers as they are called, are found in almost all major business deals today. They advertise the sale, educate the client and broker the deal by functioning as a go-between.
It is in the property business that they are thriving. However, many believe that honesty does not always pay in brokering. That is, perhaps, why some real-estate middlemen become rich overnight. Their wealth often makes the buyer and the seller grow suspicious. But their capabilities in brokering and striking deals find little parallel.
They usually come as glib talkers. Their payment is fixed, often as a percentage of the sale value. In most property deals, brokers get two to four per cent of the total value as commission. Some go strictly by this unwritten code. They can be called honest brokers.
But there are others who do not care for the commission. Their aim is to strike the deal at any cost. And, often, they play an unconscionable game in achieving that end.
Desperate sellers
Their victims are usually desperate sellers. If you want to sell your property somehow, better beware. You may not enjoy the complete benefit from the deal if you fully trust the broker. Better make sure that you interact with the buyer.
Unscrupulous brokers often create situations where the buyer and the seller never see face to face. Their modus operandi is simple. They may approach you, saying that your property is not worth the price you ask.
After waiting for some time, you may be prompted to reduce the price. Then, they may approach again and make a negotiation.
For example, if you expect to get Rs. 10 lakh for your property, the broker offers Rs. 8 lakh or so. You may be somehow prompted to accept the offer.
The broker will tell you that if this opportunity is not grabbed, you will never get a better price.
Differing rates
The broker at the same time approaches a potential buyer offering him your property for Rs. 10 lakh or above.
He may be ready for a bargain. Yet, the price of sale fixed for the buyer will be more than the price of sale set for the seller.
The difference may be lakhs of rupees. But neither the seller nor the buyer gets the benefit. Only the broker makes money.
Some go strictly by an unwritten code. They can be called honest brokers
Middlemen, or brokers as they are called, are found in almost all major business deals today. They advertise the sale, educate the client and broker the deal by functioning as a go-between.
It is in the property business that they are thriving. However, many believe that honesty does not always pay in brokering. That is, perhaps, why some real-estate middlemen become rich overnight. Their wealth often makes the buyer and the seller grow suspicious. But their capabilities in brokering and striking deals find little parallel.
They usually come as glib talkers. Their payment is fixed, often as a percentage of the sale value. In most property deals, brokers get two to four per cent of the total value as commission. Some go strictly by this unwritten code. They can be called honest brokers.
But there are others who do not care for the commission. Their aim is to strike the deal at any cost. And, often, they play an unconscionable game in achieving that end.
Desperate sellers
Their victims are usually desperate sellers. If you want to sell your property somehow, better beware. You may not enjoy the complete benefit from the deal if you fully trust the broker. Better make sure that you interact with the buyer.
Unscrupulous brokers often create situations where the buyer and the seller never see face to face. Their modus operandi is simple. They may approach you, saying that your property is not worth the price you ask.
After waiting for some time, you may be prompted to reduce the price. Then, they may approach again and make a negotiation.
For example, if you expect to get Rs. 10 lakh for your property, the broker offers Rs. 8 lakh or so. You may be somehow prompted to accept the offer.
The broker will tell you that if this opportunity is not grabbed, you will never get a better price.
Differing rates
The broker at the same time approaches a potential buyer offering him your property for Rs. 10 lakh or above.
He may be ready for a bargain. Yet, the price of sale fixed for the buyer will be more than the price of sale set for the seller.
The difference may be lakhs of rupees. But neither the seller nor the buyer gets the benefit. Only the broker makes money.
NRI realty investments drop by over 50%
NRI realty investments drop by over 50%
26 Feb 2009, 0044 hrs IST, Avinash Nair & Parag Dave, ET Bureau
The result: NRI investments in India-based properties dropped by over 50% this season, with the four metro cities and “NRI-heavy” mirco markets in states like Gujarat and Kerala being among the worst hit.
“Compared to last year, the drop in NRI interest in India-based properties has been almost 50% in all sectors. The metros showed a sharp drop in demand, largely owing to the steep prices”, says Sanjay Dutt, CEO - business, Jones Lang LaSalle Meghraj (JLLM), a global real-estate consultancy firm. “Very few luxury homes have been sold as compared to last year”, he adds.
At a time when the domestic demand in micro-markets in Tier-I, II and III cities began to slump in the third quarter of this financial year, the developers were hopeful that the demand from the NRIs will pep up the sentiments in the realty markets.
However, the global slowdown and the resulting slump froze the bullish sentiments among NRIs. “Though a far-from-spectacular number of transactions have indeed taken place this season, generalised job insecurity and a desire to conserve available cash among IT employees abroad has curbed investment demand for high-end properties, Mr Dutt said adding that the response was “significantly muted” from the NRI community this season.
The sharp corrections seen in some larger cities has also led to an “acute wait-and-watch attitude among NRIs who - just like everyone else - are now very price sensitive”, he explained.
26 Feb 2009, 0044 hrs IST, Avinash Nair & Parag Dave, ET Bureau
The result: NRI investments in India-based properties dropped by over 50% this season, with the four metro cities and “NRI-heavy” mirco markets in states like Gujarat and Kerala being among the worst hit.
“Compared to last year, the drop in NRI interest in India-based properties has been almost 50% in all sectors. The metros showed a sharp drop in demand, largely owing to the steep prices”, says Sanjay Dutt, CEO - business, Jones Lang LaSalle Meghraj (JLLM), a global real-estate consultancy firm. “Very few luxury homes have been sold as compared to last year”, he adds.
At a time when the domestic demand in micro-markets in Tier-I, II and III cities began to slump in the third quarter of this financial year, the developers were hopeful that the demand from the NRIs will pep up the sentiments in the realty markets.
However, the global slowdown and the resulting slump froze the bullish sentiments among NRIs. “Though a far-from-spectacular number of transactions have indeed taken place this season, generalised job insecurity and a desire to conserve available cash among IT employees abroad has curbed investment demand for high-end properties, Mr Dutt said adding that the response was “significantly muted” from the NRI community this season.
The sharp corrections seen in some larger cities has also led to an “acute wait-and-watch attitude among NRIs who - just like everyone else - are now very price sensitive”, he explained.
Monday, 23 February 2009
DLF slashes apartment prices on OMR
Times Of India reports
CHENNAI: Shaking up the city's realty market, DLF on Monday announced a hefty price cut, ranging from Rs 3.6 lakh to Rs 12.6 lakh, for its residential project Gardencity - on the Old Mahabalipuram Road (OMR).
It would benefit existing as well as new customers, said K K Raman, executive vice president, DLF Chennai. The builder has introduced four price slabs, three for old customers and one for new entrants. Those who booked apartments during the soft-launch of the project, at Rs 2,800 per sq ft, would get a discount of Rs 300 per sq ft. The new price for those who booked at Rs 3,000 per sq ft last year is Rs 2,550 per sq ft. The maximum discount of 18.75 per cent Rs 600 per sq ft has been given to those who booked at Rs 3,200 per sq ft between August 2008 and February 2009. The price for new customers is Rs 2,650 per sq ft; the price will hold till May 31, 2009.
While the minimum savings on the smallest apartment 1,200 sq ft at Rs 300 per sq ft works out to Rs 3.6 lakh, the maximum benefit for the largest apartment 2,100 sq ft at Rs 600 per sq ft is Rs 12.6 lakh. This is also the highest price cut announced for an ongoing project by any promoter in Chennai after the economic crisis set in. Significantly, the promoter has also decided not to collect any interest for delayed payment from existing customers.
Speaking about reasons for taking such a drastic step, Raman said: "With unprecedented events in the world economy affecting the real estate sector here, bringing changes in input cost and interest rates, DLF went back to the drawing board and created further efficiencies. These benefits are being passed on to consumers."
DLF entered Chennai's residential sector with a bang in January 2008 by announcing the biggest project of 3,493 apartments spread over 53.5 acres in Semmanchery, 2 km off OMR. Its soft-launch made headlines with close to 2,200 people booking flats in less than two weeks. All major empanelled realty consultants were in the race for clocking the maximum number of bookings for the project. Three months later, when the formal launch happened, several hundred customers opted out, perhaps anticipating the market downturn in the months to follow. The DLF sales team took several months to make up for those cancellations. Currently, the project has about 1,800 bookings in the first two phases.
Ramesh Nair, MD, Jones Lang LaSalle, an international realty consultant, said: "DLF's price revision could drive up demand for the project as it becomes more affordable for home buyers. It will also lead to most developers reducing their unit sizes and building specifications apart from reconsidering their pricing strategy."
At least half-a-dozen residential projects on OMR, in which private equity funds, mostly foreign, have been parked on a pre-agreed condition that sales will be effected at a minimum price of Rs 3,200 per sq ft, will be affected by the DLF move. Also, customers who had booked apartments in other ongoing projects on OMR at higher prices could apply pressure on their builders. In short, a price correction for properties on the much-hyped OMR is perhaps underway.
CHENNAI: Shaking up the city's realty market, DLF on Monday announced a hefty price cut, ranging from Rs 3.6 lakh to Rs 12.6 lakh, for its residential project Gardencity - on the Old Mahabalipuram Road (OMR).
It would benefit existing as well as new customers, said K K Raman, executive vice president, DLF Chennai. The builder has introduced four price slabs, three for old customers and one for new entrants. Those who booked apartments during the soft-launch of the project, at Rs 2,800 per sq ft, would get a discount of Rs 300 per sq ft. The new price for those who booked at Rs 3,000 per sq ft last year is Rs 2,550 per sq ft. The maximum discount of 18.75 per cent Rs 600 per sq ft has been given to those who booked at Rs 3,200 per sq ft between August 2008 and February 2009. The price for new customers is Rs 2,650 per sq ft; the price will hold till May 31, 2009.
While the minimum savings on the smallest apartment 1,200 sq ft at Rs 300 per sq ft works out to Rs 3.6 lakh, the maximum benefit for the largest apartment 2,100 sq ft at Rs 600 per sq ft is Rs 12.6 lakh. This is also the highest price cut announced for an ongoing project by any promoter in Chennai after the economic crisis set in. Significantly, the promoter has also decided not to collect any interest for delayed payment from existing customers.
Speaking about reasons for taking such a drastic step, Raman said: "With unprecedented events in the world economy affecting the real estate sector here, bringing changes in input cost and interest rates, DLF went back to the drawing board and created further efficiencies. These benefits are being passed on to consumers."
DLF entered Chennai's residential sector with a bang in January 2008 by announcing the biggest project of 3,493 apartments spread over 53.5 acres in Semmanchery, 2 km off OMR. Its soft-launch made headlines with close to 2,200 people booking flats in less than two weeks. All major empanelled realty consultants were in the race for clocking the maximum number of bookings for the project. Three months later, when the formal launch happened, several hundred customers opted out, perhaps anticipating the market downturn in the months to follow. The DLF sales team took several months to make up for those cancellations. Currently, the project has about 1,800 bookings in the first two phases.
Ramesh Nair, MD, Jones Lang LaSalle, an international realty consultant, said: "DLF's price revision could drive up demand for the project as it becomes more affordable for home buyers. It will also lead to most developers reducing their unit sizes and building specifications apart from reconsidering their pricing strategy."
At least half-a-dozen residential projects on OMR, in which private equity funds, mostly foreign, have been parked on a pre-agreed condition that sales will be effected at a minimum price of Rs 3,200 per sq ft, will be affected by the DLF move. Also, customers who had booked apartments in other ongoing projects on OMR at higher prices could apply pressure on their builders. In short, a price correction for properties on the much-hyped OMR is perhaps underway.
Saturday, 21 February 2009
Goldman Sachs Research - Building up to a crisis
Also shows the trends are the last downturn in 1996.
Via R.N. Bhaskar at livemint.com. The original PDF can be found here.
Quoting Bhaskar:
Check out the article.
The Mumbai attacks tipped real estate prices down by another 5-10%. This brings the decline in real estate prices in Mumbai to around 25% from peak levels. But market watchers say real estate prices in Mumbai could fall by another 25% over the next six months. Expectedly, most developers are bracing themselves for the worst of times (see the next item). The only silver lining appears to be the reduction in rates on home loans. But with consumers expecting real estate prices to fall much further, it is doubtful if too many people will queue up for such loans right away.
The last time when there was a crash in property prices (in 1996), it took four years for real estate prices to bottom out. This time, while property prices have fallen 25% rather sharply, the bottoming out is expected to take at least another year. So, evidently, the real estate sector could experience either a sharp downturn, or a slow prolonged one (see table).
For a responsible citizen, is investing in land the wrong thing to do?
Like a few other NRIs, I got carried away during the boom years of Bangalore Real Estate and invested in land. I tend to think I am a responsible citizen, so in order to avoid the normal trappings of black money, went with a 'BDA approved developer' in an approved layout. All the money I put in was accounted for money - directly from my savings earned through my full time job. I made sure the money I paid was properly accounted for, receipts issued and so on.
To my surprise, at the time of land registration, the land was being registered for a fraction of what I paid for and the rest of the money going towards 'community development' towards the developer. Again, since this was all documented correctly in the documents I signed and since I had written proof, I didn't think twice about this. I was now a proud land owner in Bangalore.
Early 2007, I visited India and tried to sell the land. I was told that the best deal I could sell the land was through a 50:50 split of black vs white money. Even if I find a buyer to pay completely through white money, I would run into trouble trying to register the land at that face value, since the face value might be much higher than the prevailing rate or the rate the Government sets as fair price value.
Now the quandary. I dislike black money. I strongly feel it feeds corruption, feeds the mafia monster and in general prevents India from truly becoming the great nation it ought to be. From a pure investment point of view, as white money, I have barely beaten the Fixed Deposit rates offered by the banks and I have generated an equivalent amount of black money. The preferred way of disposing off the black money would be to re-invest the money into real estate, thereby feeding the corrupt system even more fodder. I disliked the idea and I haven't sold the land yet.
Every person I talk to treat this with an very casual attitude, "Every one does it, so what is the big deal?" - "There are much bigger fish to fry in India, no one comes after you and me".
In my view, it is pretty callous and the domino effect caused by many of us small investors is what drives the parallel Indian black economy. The more you feed the mafia monster, the more it grows. It controls countries in the long run.
Hence the title of the blog. For a responsible citizen, is investing in land the wrong thing to do? To be very clear, I am not looking for suggestions of what to do with black money - I am looking to hear from you what responsible citizens would do to avoid the black money mess in the first place.
To my surprise, at the time of land registration, the land was being registered for a fraction of what I paid for and the rest of the money going towards 'community development' towards the developer. Again, since this was all documented correctly in the documents I signed and since I had written proof, I didn't think twice about this. I was now a proud land owner in Bangalore.
Early 2007, I visited India and tried to sell the land. I was told that the best deal I could sell the land was through a 50:50 split of black vs white money. Even if I find a buyer to pay completely through white money, I would run into trouble trying to register the land at that face value, since the face value might be much higher than the prevailing rate or the rate the Government sets as fair price value.
Now the quandary. I dislike black money. I strongly feel it feeds corruption, feeds the mafia monster and in general prevents India from truly becoming the great nation it ought to be. From a pure investment point of view, as white money, I have barely beaten the Fixed Deposit rates offered by the banks and I have generated an equivalent amount of black money. The preferred way of disposing off the black money would be to re-invest the money into real estate, thereby feeding the corrupt system even more fodder. I disliked the idea and I haven't sold the land yet.
Every person I talk to treat this with an very casual attitude, "Every one does it, so what is the big deal?" - "There are much bigger fish to fry in India, no one comes after you and me".
In my view, it is pretty callous and the domino effect caused by many of us small investors is what drives the parallel Indian black economy. The more you feed the mafia monster, the more it grows. It controls countries in the long run.
Hence the title of the blog. For a responsible citizen, is investing in land the wrong thing to do? To be very clear, I am not looking for suggestions of what to do with black money - I am looking to hear from you what responsible citizens would do to avoid the black money mess in the first place.
Friday, 20 February 2009
Prices of starter homes
This is my first post to this excellent blog. Thanks to Vik for the opportunity.
One of the blogs I follow regularly is The Big Picture. Barry had an extremely interesting blog yesterday about home prices (in the US), but the similarities are very striking in India as well.
Real Estate is unique from most other goods and services, in that the purchase is not independent of other transactions. Buy 100 shares of stock, or a new or used car, or a can of soup, and only two parties are involved: The buyer and the seller.
Buy a home, and you are likely involved in a long transaction chain with five, six or even more other buyers and sellers. A newlywed couple buys a starter home from a family (with another child on the way), who are moving to a bigger home, and whose seller is moving to an even nicer part of town, and so on. It is a long chain, not of mere lateral moves, but increases in size, cost (and property taxes). If any of those sales fall through, the entire chain collapses.
And therein lies the problem.
The concept of constantly upgrading your home may not be as common in India, but has the real estate industry in India completely ignored the long tail of non IT earners? Entry level two bedroom apartments in Bangalore seem to sell for about 30 lakhs in a reasonable neighborhood, which given a Rs.30,000 per month salary, is about 9-10 years gross annual income.
Assuming this recession cleans up the speculators in the Indian real estate segment, in my opinion, the resurrection of the realty segment totally depends upon the long tail entry level homes.
I think we are somewhat beginning to see this happen already in Bangalore. From a recent Craigslist ad:
You would be delighted to know that DLF's premium homes project in Bangalore – WESTEND HEIGHTS, DLF BTM Extn. is now being launched as Westend Heights, New Town - DLF BTM Extn. We have completely redesigned the project to bring you an even better lifestyle experience than before to maximize comfort and convenience.
The new mix has come with an unbelievable price!
Apartment area Unit rate
1085 sft - 1225 sft Rs. 2000 / sft
1345 sft - 1410 sft Rs. 1900 / sft
1570 sft - 1820 sft Rs. 1850 / sft
This is an Unbelievable offer .Could you afford to miss it out ......
Is this the start of a trend? Is sanity returning?
Non-Immigrant visa and the housing bubble
I was browsing Murthy.com forums and came across this unfortunate situation of a laid of H1-b visa holder. Its painful to see the implications of of a temorary visa and iliquid assets backed by debt. The poor laid off employee probably did everything right but still coudn't escape the deathly spiral of foreclosure, layoffs and a temporary visa. Its a reminder for everyone to keep debt levels manageable, regardless of Visa status. If you have a housing loan, make sure you have atleast six months or more of emergency funds. Sometimes life comes at you hard, when you are not looking.
>>>
I got laid off from a Job almost a week ago. I just have 2 months left on my 6 year H-1B expiry.The chances of finding a new job in this market are very slim. I have a home and car in US. It will be extremely difficult for me, if not impossible, to continue with paying mortgage w/o any source of income. What if I have to go back to India in order to avoid being "Out of Status", in the event I am unable to find a new job. Do I need to file for bankruptcy/foreclosure for the home? I can still sell off my car, but to go thorugh the home foreclosure process may take months..I will not have that much time in the event I have to leave the country..What happens in a case like mine? I genuinely want to stay in US and find a job to pay my mortgage, but in the event, I have to leave the country, who eventually is responsible for the home? And what implications it could have on my future visit to US?Prompt reply will be really appreciated.
Thursday, 19 February 2009
The end of Secret Swiss banking
Bloomberg reports on the collapse of secrecy in the Swiss Banking industry. From what I hear, Singapore is the new offshore destination for secret banking since their laws are tighter then Switzerland.
If India did something similar to the US, how many skeletons would tumble out of the closet ?
Switzerland’s unprecedented decision to let UBS AG hand U.S. tax authorities clients’ details risks damaging a banking industry that relies on a pledge of confidentiality to win business, legal scholars said.
“This could open the floodgates,” Peter V. Kunz, head of the business law department at the University of Berne, said in a telephone interview today. “Giving in to the U.S. sends a signal to other countries and the European Union. I don’t see what would stop them from acting in the same way.”
The Swiss Financial Market Supervisory Authority said yesterday it would allow UBS to pass on some client data to save the country’s biggest bank from criminal charges in the U.S. that it said could have “put its existence at risk.”
Switzerland is being increasingly pressed by countries such as neighboring Germany to amend banking secrecy laws, first introduced in 1934, which they say promote tax evasion. German Finance Minister Peer Steinbrueck said last year the Swiss should be put on a “blacklist” of uncooperative tax havens. The European Commission proposed this month to end anonymity for bank account holders within the 27-nation area, and may seek to expand the measure to cover Switzerland and Liechtenstein.
“Swiss banking secrecy will not exist in today’s form in two or three years,” said Dirk Nitzsche, a senior finance lecturer at Cass Business School in London. “Switzerland has already done a lot over the past couple of years. But the international community wants more.”
Offshore Center
Client confidentiality is a cornerstone of Switzerland’s banking industry, which has attracted some 27 percent of all privately held offshore assets, according to the Swiss Banking Association. U.S. law views tax evasion as a crime. Swiss law doesn’t. The Swiss view tax fraud as a more serious offense.
The U.S.’s success “is likely to encourage other tax authorities to pursue claims against the Swiss more vigorously,” Dirk Hoffmann-Becking, an analyst at Sanford Bernstein & Co., said in a note to clients today.
The U.S. is likely to continue to put pressure on both UBS and the Swiss government to make it harder for individuals to move money offshore as President Barack Obama’s administration attempts to finance its economic stimulus plan, he added.
The European Commission, the European Union’s executive arm, today said it welcomed any effort to improve governance.
“We expect a similar request from EU member states to Switzerland would not receive different treatment,” Maria Assimakopoulou, spokeswoman on tax issues for the agency, told reporters in Brussels today.
Justice Department
Swiss Finance Minister Hans-Rudolf Merz described the settlement as an “isolated case” after the U.S. authorities set a Feb. 18 deadline for UBS to reach a deal or face indictment. While it’s “problematic” that the official procedure wasn’t followed, an indictment and possible failure of UBS would have had consequences for the whole Swiss economy, he stressed.
The U.S. Justice Department accused UBS of conspiring to defraud the country by helping 17,000 Americans hide accounts from the Internal Revenue Service. The U.S. will drop the charge in 18 months if the bank reforms its practices, aids prosecutors and pays $780 million. UBS will immediately turn over names of about 250 clients, according to people familiar with the matter.
“The U.S. authorities didn’t want to wait, as a constitutional state is supposed to do, but pressured for an exceptional allowance,” Kunz said. “The legal basis for such actions is very thin.”
‘Problematic’
The government should have followed the information-exchange agreement it has with the U.S. and waited for a Swiss court to rule on the matter, legal professors say. Clients have to be notified before their data is released under Swiss law. The federal administrative court received objections in November.
“What concerns me the most is that evidently legal protection for these clients is being impeded,” said Rainer Schweizer, a law professor at the University of St. Gallen. “Clients have to complain about this to the federal court.”
UBS agreed only to the immediate disclosure of account holders involved in fraudulent or sham offshore account structures, according to people familiar with the matter. The Swiss finance ministry has had some 40 people working on the case, trying to determine whether any of the clients whose information was requested committed tax fraud.
Merz said that data on some 200 to 300 clients that is transferred to the U.S. “clearly” relates to tax fraud rather than tax evasion. UBS Chairman Peter Kurer told Swiss television in an interview that the clients had made “false statements in writing” to the U.S. tax authorities.
If India did something similar to the US, how many skeletons would tumble out of the closet ?
Switzerland’s unprecedented decision to let UBS AG hand U.S. tax authorities clients’ details risks damaging a banking industry that relies on a pledge of confidentiality to win business, legal scholars said.
“This could open the floodgates,” Peter V. Kunz, head of the business law department at the University of Berne, said in a telephone interview today. “Giving in to the U.S. sends a signal to other countries and the European Union. I don’t see what would stop them from acting in the same way.”
The Swiss Financial Market Supervisory Authority said yesterday it would allow UBS to pass on some client data to save the country’s biggest bank from criminal charges in the U.S. that it said could have “put its existence at risk.”
Switzerland is being increasingly pressed by countries such as neighboring Germany to amend banking secrecy laws, first introduced in 1934, which they say promote tax evasion. German Finance Minister Peer Steinbrueck said last year the Swiss should be put on a “blacklist” of uncooperative tax havens. The European Commission proposed this month to end anonymity for bank account holders within the 27-nation area, and may seek to expand the measure to cover Switzerland and Liechtenstein.
“Swiss banking secrecy will not exist in today’s form in two or three years,” said Dirk Nitzsche, a senior finance lecturer at Cass Business School in London. “Switzerland has already done a lot over the past couple of years. But the international community wants more.”
Offshore Center
Client confidentiality is a cornerstone of Switzerland’s banking industry, which has attracted some 27 percent of all privately held offshore assets, according to the Swiss Banking Association. U.S. law views tax evasion as a crime. Swiss law doesn’t. The Swiss view tax fraud as a more serious offense.
The U.S.’s success “is likely to encourage other tax authorities to pursue claims against the Swiss more vigorously,” Dirk Hoffmann-Becking, an analyst at Sanford Bernstein & Co., said in a note to clients today.
The U.S. is likely to continue to put pressure on both UBS and the Swiss government to make it harder for individuals to move money offshore as President Barack Obama’s administration attempts to finance its economic stimulus plan, he added.
The European Commission, the European Union’s executive arm, today said it welcomed any effort to improve governance.
“We expect a similar request from EU member states to Switzerland would not receive different treatment,” Maria Assimakopoulou, spokeswoman on tax issues for the agency, told reporters in Brussels today.
Justice Department
Swiss Finance Minister Hans-Rudolf Merz described the settlement as an “isolated case” after the U.S. authorities set a Feb. 18 deadline for UBS to reach a deal or face indictment. While it’s “problematic” that the official procedure wasn’t followed, an indictment and possible failure of UBS would have had consequences for the whole Swiss economy, he stressed.
The U.S. Justice Department accused UBS of conspiring to defraud the country by helping 17,000 Americans hide accounts from the Internal Revenue Service. The U.S. will drop the charge in 18 months if the bank reforms its practices, aids prosecutors and pays $780 million. UBS will immediately turn over names of about 250 clients, according to people familiar with the matter.
“The U.S. authorities didn’t want to wait, as a constitutional state is supposed to do, but pressured for an exceptional allowance,” Kunz said. “The legal basis for such actions is very thin.”
‘Problematic’
The government should have followed the information-exchange agreement it has with the U.S. and waited for a Swiss court to rule on the matter, legal professors say. Clients have to be notified before their data is released under Swiss law. The federal administrative court received objections in November.
“What concerns me the most is that evidently legal protection for these clients is being impeded,” said Rainer Schweizer, a law professor at the University of St. Gallen. “Clients have to complain about this to the federal court.”
UBS agreed only to the immediate disclosure of account holders involved in fraudulent or sham offshore account structures, according to people familiar with the matter. The Swiss finance ministry has had some 40 people working on the case, trying to determine whether any of the clients whose information was requested committed tax fraud.
Merz said that data on some 200 to 300 clients that is transferred to the U.S. “clearly” relates to tax fraud rather than tax evasion. UBS Chairman Peter Kurer told Swiss television in an interview that the clients had made “false statements in writing” to the U.S. tax authorities.
Wednesday, 18 February 2009
Inviting bloggers to contribute to the blog
Hello Guys,
I came across this feature in the blog settings where I could invite bloggers to contribute to the blog. If people are interested I could invite them. I think we have some good rational people which contribute meaningfuly to the blog. Drop me a note in the comments sections with your email address and I will add you to the list.
Thanks
Vik
I came across this feature in the blog settings where I could invite bloggers to contribute to the blog. If people are interested I could invite them. I think we have some good rational people which contribute meaningfuly to the blog. Drop me a note in the comments sections with your email address and I will add you to the list.
Thanks
Vik
Monday, 16 February 2009
20,000 defaulters to lose homes
Here is another video where Nassim Taleb and Daniel Kahneman discusses the crisis hitting the US and consequently the world. Officially Japan is in depression. Just as Lehman was leveraged 30:1, I expect the builders to have similar leverage. Financial wizadry aside, we now turn to psycology for answers.
Source Deccan Chronicle 17/Feb/2009
Around 20,000 houses in the twin cities are to be auctioned after borrowers defaulted on home loan payments. This is the first time that so many houses are being put up for auction. Many of the borrowers are IT employees who were unable to pay the equated monthly instalments because of the current slowdown in the software industry. Several techies who took loans have lost their jobs and others were forced to accept salary cuts making it difficult for them to meet their financial commitments.
Apart from techies, there are many employees in the aviation sector too who are unable to pay their EMIs. Banks are in a piquant situa tion since borrowers have not hurried to pay their EMIs despite the threat of the auction.
In fact, they are willing for the auction as they are not in a position to mobilise resources. The borrowers have no option but to forego the amount that they have invested may come to around 20 per cent of the property value. Banks which provided 80 per cent amount as loan fear that they may not get the amount even if they auction the properties. “There is no option for banks except to dispose the properties when the borrowers are reluctant to clear the dues,” said the IDBI director, Mr K. Narasimha Murthy. “More auctions will be held in the next few months since many borrowers are yet to receive final notices from banks.”
Source Deccan Chronicle 17/Feb/2009
Around 20,000 houses in the twin cities are to be auctioned after borrowers defaulted on home loan payments. This is the first time that so many houses are being put up for auction. Many of the borrowers are IT employees who were unable to pay the equated monthly instalments because of the current slowdown in the software industry. Several techies who took loans have lost their jobs and others were forced to accept salary cuts making it difficult for them to meet their financial commitments.
Apart from techies, there are many employees in the aviation sector too who are unable to pay their EMIs. Banks are in a piquant situa tion since borrowers have not hurried to pay their EMIs despite the threat of the auction.
In fact, they are willing for the auction as they are not in a position to mobilise resources. The borrowers have no option but to forego the amount that they have invested may come to around 20 per cent of the property value. Banks which provided 80 per cent amount as loan fear that they may not get the amount even if they auction the properties. “There is no option for banks except to dispose the properties when the borrowers are reluctant to clear the dues,” said the IDBI director, Mr K. Narasimha Murthy. “More auctions will be held in the next few months since many borrowers are yet to receive final notices from banks.”
Baseline scenario outlook on India
I just came across this site which seem to discuss all the economic situation of today and the Obama stimulus plan. What Obama does affects the world and India is no exception. Here is an excerpt from their outlook on India from a macro-economic perspective. The full link is to article is here. Simon Johnson's interview with Bill Moyers on the stimulus package and bank oligarchy in the US. With the 30:1 leverage we've seen how Lehman and Bear Stearns have helped dig a hole deeper then anyone could imagine.
India
India
There are striking similarities between the current policy debate in India and in the Eurozone. In both places, there is little or no concern that inflation will rebound any time soon. At least for people based in Delhi, there is as a result confidence that aggressive monetary policy can cushion the blows coming from the global economy. As in the Eurozone, all eyes are on monetary policy because of fears that fiscal policy cannot do much more than it is already doing, given that government debt levels are already on the high side.
The discordant note comes from the business community. They feel that Delhi does not fully understand that the real economy is already in bad shape. Sectors such as real estate and autos are hurting badly. Small businesses, in particular, are bearing the brunt of the blow. The banking picture seems more murky, but is surely not good. And of course the Satyam accounting scandal could not come at a worse time.
Overall, official growth forecasts need to be marked down for India, although the monsoon was good and the agricultural sector is not highly leveraged. India will likely cut interest rates further quite soon (and has space for additional cuts), but we should not expect much more from the fiscal side.
Saturday, 14 February 2009
ICICI CEO and DLF talk price corrections
Looks like the banks are exerting pressure on the builders to dispose off inventory and pay their debts. DLF has slashed prices of its Bangalore Bannerghatta road prices to Rs 2000 per sq/ft.
Now with Banerghatta road at 2000rs, what should be the prices in Whitefield, Devanahalli, Electronic City all peripheral locations to Bangalore. With DLF starting a price war, the small builders will be squeezed to liquidate their holdings. Brigade, Prestige and Sobha might have the holding capacity to wade thru the DLF marketing blitz. Incidentally DLF did the same in Chennai for its project on OMR road. However even after 1 year of booking, there is hardly any construction activity on that project. Incredible as it sounds, the price of thin air is still Rs 2000 rs. Realistically this concrete jungle of G+19 floors should take another 4 years to complete. God save the investors.
Reuters reporting.
India property prices need to fall 20 pct or more-ICICI exec
MUMBAI, Feb 14 (Reuters) - The incoming head of India's largest private bank ICICI Bank (ICBK.BO) said real estate prices needed to fall by 20 percent or more as the market corrects amid the economic slowdown, the Times of India reported on Saturday.
Prices need to fall by "maybe 15-20 percent, or maybe more", Chanda Kochhar, who is set to become chief executive of the bank, was quoted as saying.
"Piecemeal corrections have already happened ... But they also need an adjustment in the paradigm."
Kochhar said there was no pressure on the bank's books from souring housing and auto loans.
"Maybe a little delayed, but there is no real increase in losses or non-performing assets," she said according to the report. "But we have not only substantially tightened credit norms there, we have also budgeted for any losses that may arise there."
She added interest rates and loans were expected to fall. (Reporting by Ruchira Singh; Editing by Jan Dahinten)
Now with Banerghatta road at 2000rs, what should be the prices in Whitefield, Devanahalli, Electronic City all peripheral locations to Bangalore. With DLF starting a price war, the small builders will be squeezed to liquidate their holdings. Brigade, Prestige and Sobha might have the holding capacity to wade thru the DLF marketing blitz. Incidentally DLF did the same in Chennai for its project on OMR road. However even after 1 year of booking, there is hardly any construction activity on that project. Incredible as it sounds, the price of thin air is still Rs 2000 rs. Realistically this concrete jungle of G+19 floors should take another 4 years to complete. God save the investors.
Reuters reporting.
India property prices need to fall 20 pct or more-ICICI exec
MUMBAI, Feb 14 (Reuters) - The incoming head of India's largest private bank ICICI Bank (ICBK.BO) said real estate prices needed to fall by 20 percent or more as the market corrects amid the economic slowdown, the Times of India reported on Saturday.
Prices need to fall by "maybe 15-20 percent, or maybe more", Chanda Kochhar, who is set to become chief executive of the bank, was quoted as saying.
"Piecemeal corrections have already happened ... But they also need an adjustment in the paradigm."
Kochhar said there was no pressure on the bank's books from souring housing and auto loans.
"Maybe a little delayed, but there is no real increase in losses or non-performing assets," she said according to the report. "But we have not only substantially tightened credit norms there, we have also budgeted for any losses that may arise there."
She added interest rates and loans were expected to fall. (Reporting by Ruchira Singh; Editing by Jan Dahinten)
Wednesday, 11 February 2009
Al-Jazeera's coverage of the Indian housing bubble
Unfinished projects, shattered dreams, uncertain future, rampant greed, no accountability. This is what I was afraid of. Parsavanath and others builders need to take a lesson from this crash. Gravity is universal. In the credit unwinding spiral, there is the genuine buyer who is going to pay the price for the greed of the few. Lesson to be learnt for buyers. Go with completed projects and haggle hard. This is your time. Any investment in a project which is kicking off or half completed is destined to drag longer then you ever expected.
Here is Parsvanath's pricing At $400k per apt, at Rs 7000 per sq-ft, this is a price headed for a 50% correction in the next few years. I hope the couple hasn't take loans. If they have they will be bleeding pre EMI interest of close to 1.5L a month, not to mention the EMI interest which will kick in. This is a real life scary situation. God save these guys.
Thanks to Anon @ 9:34 am for the link
Here is Parsvanath's pricing At $400k per apt, at Rs 7000 per sq-ft, this is a price headed for a 50% correction in the next few years. I hope the couple hasn't take loans. If they have they will be bleeding pre EMI interest of close to 1.5L a month, not to mention the EMI interest which will kick in. This is a real life scary situation. God save these guys.
Thanks to Anon @ 9:34 am for the link
Monday, 9 February 2009
DLF feels the heat of CNBC's coverage
from moneycontrol.com
CNBC-TV18 learns that the company's Garden City project in Chennai is on shaky ground. CNBC-TV18 has access to e-mails of buyers of the project, including an online survey showing that over 50% of them want to pull out. The company started bookings last April and promised to sign the agreement within 45days. But nearly one year later, the project has not even got the necessary approvals.Of the reported 1800 apartments sold in the project, nearly 53% of buyers want an out according to the survey citing delays in signing the buyers agreement. Other reasons including cost price, which DLF had hoped would be their USP has also gone against the company. At the
time of announcing the project DLF had quoted prices of 2800 per square foot, while the prevailing rates was around 3300 square foot. The prices now average between 1700-2700 per square foot and buyers are demanding that the company revise prices.
The final approval required is the stamping of the drawings by MSB panel. The panel meeting was completed on Jan 28, 2009 and we are expecting the final stamping approval anytime now. The price of Rs 2,800 per square foot is in itself the lowest price compared to prices charged by leading national and local brands and we are discussing this with an open view and are yet to take a decision.
When contacted, a DLF spokesperson said, ”The final approval required is the stamping of the drawings by MSB Panel. The panel meeting was completed on 28 Jan 2009 and we are expecting the final stamping approval anytime now. The price of Rs 2800 per square foot is in
itself the lowest price compared to prices charged by leading national and local brands. We are discussing this with an open view and are yet to take a decision.”
There are other issues as well; buyers want an Undivided Share Land clause to be signed by the company. Also; clubhouse facilities, which DLF claimed were exclusively for buyers' use, is now being thrown open to outsiders as well.
What are the options now available to the buyers? A minority section of say they might just re consider their decision to pull out if the company meets their demands. The others though say that they want their money refunded and have given the company till February 12 to do
so.
Sunday, 8 February 2009
Hiranandani Faces Penalty, Denies MMRDA Violation Claims
How many thousands of crores have been paid to the politicians and babu's for this scam to go unnoticed for 23 years. It will be naive to think, Hirananadani is going to accept these acccusations without bringing down the house. These same allegations should be levied on the Raheja's for selling Jodi flats in the Malad(w) link road area where they have destoryed all the mangroves. These scams are part of the Indian scenario and nothing will be learnt. The Satyam case provides enough evidence that whistle blowing on these scams are just lip service to further personal agendas. The Indian legal and political system is of the rich, for the rich and by the rich. All the common man can do is to be vigilant and aware and not get caught up in this cesspool of corruption. In the past some reports have suggested Hiranandani was given the Powai land at 40 paisa per sq ft. The government officials who approved this paperwork should be prosecuted before Hiranandani. If someone approves such a deal, any moron with an iota of grey matter will take it. Why blame Hirananandani for a ultra ineffecient corrupt system ?
By ugesh sarkar, Section Real Estate
Posted on Thu Feb 05, 2009 at 09:38:36 PM EST
In what could be the highest penalty imposed on a builder for alleged gross violation of land misuse, the Mumbai Metropolitan Region Development Authority (MMRDA) has recommended to the state urban development department that developer Hiranandani Group be made to pay a penalty of Rs 2,000 crore. Though the developer is yet to receive a notice of levy for the amount, Niranjan Hiranandani, MD, Hiranandani Group, has denied the charge in totality, stating that the state agency was unaware that no development in the area had been done without obtaining the necessary permissions and sanctions of government departments.
Meanwhile, the metro authority has charged the builder with constructing large apartments instead of the 40 sq m and 80 sq m flats, for which permission was accorded. The second charge is for building commercial complexes in violation of the original agreement and the third, an add-on penalty component, for utilisation of transfer of development rights.
Hiranandani said development rules and notifications, since the 23-year-old Powai Area Development Scheme, comprising 92.2 hectares, was signed, had undergone changes and consequently implemented after sanctions during different periods. The MMRDA has used the current ready reckoner rates to compute the alleged violations to arrive at the penal sum of Rs 1,993 crore.
The Powai Area Development Scheme was not classified under any scheme for weaker section / lower income group of the society, he said adding that a Bombay High Court decision in 2005 stated that the development at Powai was not for any weaker section / lower income group of the society and the same does not apply to the said lands.
On increase in the size of tenements, Hiranandani said the scheme came after a tripartite agreement was signed on November 19, 1986. Under the agreement, there was a condition restricting sizes of the tenements. However, the MMRDA permitted the amalgamation of tenements as per its order dated August 18, 1989.
The larger premises were constructed utilising transfer of development rights subsequently, when the TDR concept was introduced in 1991. During the period when the tripartite agreement was executed, the development by TDR was not available.
The Bombay High Court is hearing public interest litigation petitions pertaining to the project development.
The MMRDA has also recommended that all concessions extended to the builder be withdrawn, to which Hiranandani said he had not availed himself of any concessions thus far.
Posted on Thu Feb 05, 2009 at 09:38:36 PM EST
In what could be the highest penalty imposed on a builder for alleged gross violation of land misuse, the Mumbai Metropolitan Region Development Authority (MMRDA) has recommended to the state urban development department that developer Hiranandani Group be made to pay a penalty of Rs 2,000 crore. Though the developer is yet to receive a notice of levy for the amount, Niranjan Hiranandani, MD, Hiranandani Group, has denied the charge in totality, stating that the state agency was unaware that no development in the area had been done without obtaining the necessary permissions and sanctions of government departments.
Meanwhile, the metro authority has charged the builder with constructing large apartments instead of the 40 sq m and 80 sq m flats, for which permission was accorded. The second charge is for building commercial complexes in violation of the original agreement and the third, an add-on penalty component, for utilisation of transfer of development rights.
Hiranandani said development rules and notifications, since the 23-year-old Powai Area Development Scheme, comprising 92.2 hectares, was signed, had undergone changes and consequently implemented after sanctions during different periods. The MMRDA has used the current ready reckoner rates to compute the alleged violations to arrive at the penal sum of Rs 1,993 crore.
The Powai Area Development Scheme was not classified under any scheme for weaker section / lower income group of the society, he said adding that a Bombay High Court decision in 2005 stated that the development at Powai was not for any weaker section / lower income group of the society and the same does not apply to the said lands.
On increase in the size of tenements, Hiranandani said the scheme came after a tripartite agreement was signed on November 19, 1986. Under the agreement, there was a condition restricting sizes of the tenements. However, the MMRDA permitted the amalgamation of tenements as per its order dated August 18, 1989.
The larger premises were constructed utilising transfer of development rights subsequently, when the TDR concept was introduced in 1991. During the period when the tripartite agreement was executed, the development by TDR was not available.
The Bombay High Court is hearing public interest litigation petitions pertaining to the project development.
The MMRDA has also recommended that all concessions extended to the builder be withdrawn, to which Hiranandani said he had not availed himself of any concessions thus far.
Thursday, 5 February 2009
Flat buyers exempt from service tax
What happens to people who have already paid service tax ? Will that tax be refunded by the builders to the buyers ? As usual the order is incomplete and ambigous. Kudos to the tax board.
DNAIndia reports.
Mumbai: The Central Board of Excise and Customs (CBEC) has made it clear that flat buyers, developers and builders are not liable to pay service tax.
In a circular (F.No.137/12/2006- CX.4) issued on January 29, the board has said that generally, the initial agreement between the developer (promoter/builder) and the buyer is an "agreement to sell". As per provisions of the Transfer of Property Act, this does not "create any interest in or charge on such property".
It is only after the construction is completed and the agreed sum is paid that a sale deed is executed, transferring the ownership of the property from the builder/developer to the buyer, the board has said.
Any service provided by the developer during the construction of a residential complex -- before the execution of the sale deed -- would be "self-service" and, consequently, not attract service tax, the board has clarified.
If the buyer enters into a contract for construction of a residential complex for personal use with a developer (promoter/builder), who provides design, planning and construction, then such an arrangement would also not invite service tax.
Flat buyers don't need to pay service tax
It is excluded from service tax under the definition of "residential complex", the board has said.
However, in both these situations, if services of a contractor, designer or a similar service provider are taken, then such persons would be liable to pay service tax, the circular says.
The board has clarified that the builder is not a service provider and, hence, not liable to collect service tax. But contractors or designers engaged by the builder should charge service tax from him.
The Authority for Advance Ruling had in the case of Hare Krishna Developers ruled that the builder/developer was liable to pay service tax.
But in the case of Magus Construction Pvt Ltd, the Gauhati high court had ruled that the builder/developer was not liable to service tax.
The two conflicting judgments had created confusion, which the CBEC circular has now put to rest.
Mumbai: The Central Board of Excise and Customs (CBEC) has made it clear that flat buyers, developers and builders are not liable to pay service tax.
In a circular (F.No.137/12/2006- CX.4) issued on January 29, the board has said that generally, the initial agreement between the developer (promoter/builder) and the buyer is an "agreement to sell". As per provisions of the Transfer of Property Act, this does not "create any interest in or charge on such property".
It is only after the construction is completed and the agreed sum is paid that a sale deed is executed, transferring the ownership of the property from the builder/developer to the buyer, the board has said.
Any service provided by the developer during the construction of a residential complex -- before the execution of the sale deed -- would be "self-service" and, consequently, not attract service tax, the board has clarified.
If the buyer enters into a contract for construction of a residential complex for personal use with a developer (promoter/builder), who provides design, planning and construction, then such an arrangement would also not invite service tax.
Flat buyers don't need to pay service tax
It is excluded from service tax under the definition of "residential complex", the board has said.
However, in both these situations, if services of a contractor, designer or a similar service provider are taken, then such persons would be liable to pay service tax, the circular says.
The board has clarified that the builder is not a service provider and, hence, not liable to collect service tax. But contractors or designers engaged by the builder should charge service tax from him.
The Authority for Advance Ruling had in the case of Hare Krishna Developers ruled that the builder/developer was liable to pay service tax.
But in the case of Magus Construction Pvt Ltd, the Gauhati high court had ruled that the builder/developer was not liable to service tax.
The two conflicting judgments had created confusion, which the CBEC circular has now put to rest.
U.S. Housing Slump Has ‘Just Begun,’ Says Forecaster Talbott
Feb. 5 (Bloomberg) -- Let’s say you own a $1 million home in Santa Barbara, California.
The house seemed like a steal when you bought it with that adjustable-rate mortgage in 2005. You still love the white beaches and those yachts bobbing up and down in the harbor.
Then you awaken early one morning, troubled that your monthly payments will soon double. You go out to pick up your newspaper and see for-sale signs on five houses on the street. One identical to yours just sold for $500,000.
Are you going to pay the bank $1 million plus interest for your place? John R. Talbott, a former investment banker for Goldman Sachs, poses that hypothetical question in his latest book of financial prophesy, “Contagion.”
His answer: “I don’t think so,” he says. “If I’m right, then this housing decline has only just begun.”
Talbott is an oracle with a track record: His previous books predicted the collapse of both the housing bubble and the tech-stock binge before it. A friend who runs a New York steak house introduces him as Johnny Nostradamus, he says.
What sets him apart from other doomsayers is his relentless emphasis on simple arithmetic. He walks you through the numbers to show how U.S. house prices got so out of kilter with wages, rental prices and replacement values -- the cost of buying a property and building a home. (“Homes in California by 2006 were selling at three to five times what it would cost to build a similar home from scratch,” he writes.)
Five More Years
Talbott’s latest predictions are sobering. The U.S. is only halfway through the total potential decline in housing prices, he says. Home values will continue to deteriorate for four to five years, he forecasts. Adjustable-rate mortgages issued in 2004 and 2005, for example, are only now resetting for the first time, he notes.
Bankers may “try to blame the crisis on poor Americans with bad credit histories, but that is not the real cause of the housing crisis,” he says. “The greatest home-price appreciations and the homes most subject to price readjustment are in America’s wealthiest cities and its glitziest neighborhoods.”
At the end of 2008, a record 19 million U.S. homes stood empty and homeownership sank to an eight-year low as banks seized homes faster than they could sell them, the U.S. Census Bureau said this week. Almost one in six owners with mortgages owed more than their homes were worth, Zillow.com said the same day.
By the time the crash ends, Talbott predicts, homeowners will have lost as much as $10 trillion, with investors and banks worldwide losing almost $2 trillion. And just as the U.S. starts getting over a prolonged recession, the first big wave of baby boomers will retire, depriving the economy of their productivity (and high consumption), he says.
Back to 1997
So how far will the price of your home on the range fall? Citing historical data and trends, Talbott concludes that real prices should return to their average 1997 levels, adjusted for inflation. Why 1997? A 120-year historical graph shows that real home prices in the U.S. stayed relatively flat for 100 years, then began rising in 1981 and surged from 1997 to 2006.
A return to 1997 prices “would get us out of the heady, crazy days from 1997 to 2006 in which banks were lending large amounts of money under poor supervision and aggressive terms.”
How did we get into this mess? Talbott blames everyone from average Americans who caught “the greed bug” to hedge funds and credit-default swaps. The single biggest error, he says, was for U.S. citizens to allow their national politicians to take large campaign contributions from big business and Wall Street -- a theme Kevin Phillips developed in “Bad Money.”
‘No Accident’
“This crisis was no accident,” he says. It began, in Talbot’s view, because the U.S. government was “co-opted” into deregulating the financial industry. Politicians were “paid to deregulate industry,” taking billions of dollars each year in campaign contributions.
His investment advice for this prolonged recession: Hang on to cash and invest in gold or Treasury Inflation-Protected Securities, or TIPS. If he had to invest in stocks, he would put his money in China.
Living in smaller houses with their savings gutted, U.S. baby boomers will face yet another big challenge, Talbott says:
“The toughest job to get in the future will be the elderly person greeting you as you enter the local Wal-Mart.”
“Contagion: The Financial Epidemic That Is Sweeping the Global Economy . . . and How to Protect Yourself From It” is from Wiley (256 pages, $24.95, 15.99 pounds, 19.20 euros).
The house seemed like a steal when you bought it with that adjustable-rate mortgage in 2005. You still love the white beaches and those yachts bobbing up and down in the harbor.
Then you awaken early one morning, troubled that your monthly payments will soon double. You go out to pick up your newspaper and see for-sale signs on five houses on the street. One identical to yours just sold for $500,000.
Are you going to pay the bank $1 million plus interest for your place? John R. Talbott, a former investment banker for Goldman Sachs, poses that hypothetical question in his latest book of financial prophesy, “Contagion.”
His answer: “I don’t think so,” he says. “If I’m right, then this housing decline has only just begun.”
Talbott is an oracle with a track record: His previous books predicted the collapse of both the housing bubble and the tech-stock binge before it. A friend who runs a New York steak house introduces him as Johnny Nostradamus, he says.
What sets him apart from other doomsayers is his relentless emphasis on simple arithmetic. He walks you through the numbers to show how U.S. house prices got so out of kilter with wages, rental prices and replacement values -- the cost of buying a property and building a home. (“Homes in California by 2006 were selling at three to five times what it would cost to build a similar home from scratch,” he writes.)
Five More Years
Talbott’s latest predictions are sobering. The U.S. is only halfway through the total potential decline in housing prices, he says. Home values will continue to deteriorate for four to five years, he forecasts. Adjustable-rate mortgages issued in 2004 and 2005, for example, are only now resetting for the first time, he notes.
Bankers may “try to blame the crisis on poor Americans with bad credit histories, but that is not the real cause of the housing crisis,” he says. “The greatest home-price appreciations and the homes most subject to price readjustment are in America’s wealthiest cities and its glitziest neighborhoods.”
At the end of 2008, a record 19 million U.S. homes stood empty and homeownership sank to an eight-year low as banks seized homes faster than they could sell them, the U.S. Census Bureau said this week. Almost one in six owners with mortgages owed more than their homes were worth, Zillow.com said the same day.
By the time the crash ends, Talbott predicts, homeowners will have lost as much as $10 trillion, with investors and banks worldwide losing almost $2 trillion. And just as the U.S. starts getting over a prolonged recession, the first big wave of baby boomers will retire, depriving the economy of their productivity (and high consumption), he says.
Back to 1997
So how far will the price of your home on the range fall? Citing historical data and trends, Talbott concludes that real prices should return to their average 1997 levels, adjusted for inflation. Why 1997? A 120-year historical graph shows that real home prices in the U.S. stayed relatively flat for 100 years, then began rising in 1981 and surged from 1997 to 2006.
A return to 1997 prices “would get us out of the heady, crazy days from 1997 to 2006 in which banks were lending large amounts of money under poor supervision and aggressive terms.”
How did we get into this mess? Talbott blames everyone from average Americans who caught “the greed bug” to hedge funds and credit-default swaps. The single biggest error, he says, was for U.S. citizens to allow their national politicians to take large campaign contributions from big business and Wall Street -- a theme Kevin Phillips developed in “Bad Money.”
‘No Accident’
“This crisis was no accident,” he says. It began, in Talbot’s view, because the U.S. government was “co-opted” into deregulating the financial industry. Politicians were “paid to deregulate industry,” taking billions of dollars each year in campaign contributions.
His investment advice for this prolonged recession: Hang on to cash and invest in gold or Treasury Inflation-Protected Securities, or TIPS. If he had to invest in stocks, he would put his money in China.
Living in smaller houses with their savings gutted, U.S. baby boomers will face yet another big challenge, Talbott says:
“The toughest job to get in the future will be the elderly person greeting you as you enter the local Wal-Mart.”
“Contagion: The Financial Epidemic That Is Sweeping the Global Economy . . . and How to Protect Yourself From It” is from Wiley (256 pages, $24.95, 15.99 pounds, 19.20 euros).
Wednesday, 4 February 2009
EMI Quiz
I was running some numbers thru an EMI calculator and was surprised at some of the results, so I thought why not play a little game with the bloggers and have some fun.
Q-1.
Assuming a principal of 10L, interest rate of 12% and repayment of 20 years, how much of the EMI payment would go towards interest at the end of 5 years ?
Interest paid
A) 2.52 L
B) 3.85 L
C) 5.78 L
D) EMI = equal interest and principal payments so does not matter.
Q-2.
Now if a US homeowner borrowed the same at 6% what would be the result
A) 1.20 L
B) 2.78 L
C) 3.21 L
D) Half of the answer of Q-1
The answer as some people have pointed out is C for Q1 and B for Q2. The black magic of the EMI is responsible for a payment of more then 500% of the EMI towards interest as opposed to principal. After 5 years the borrower wouldve paid 80k as principal and 5.8L as interest. At the end of 10 years the principal payment is 2.3L as opposed to the interest of 10.8 L. After 15 years, you have finally paid of 1/2 the principal and 15L as interest. At 20 years you have paid off the 10L principal and 16.4L as interest.
Now for an average apt of 1crore in Mumbai with 10% down lets do the numbers for 90L loan. Here I wouldve paid an interest of 1.4 crores for a 90L loan and god forbid if I couldn't make the EMI after 5 years and had to sell the apt I wouldve paid 52L as interest with 7L as principal and the house would have to be worth atleast 1.4 crores to break even.
The EMI method of loan repayment is one of the worst methods of calculation and benefits the banks the most, leaving the borrower shackled in loans forever. As finance professionals will tell you, there are many ways of calculating interest where interest and principal are paid off in equal chunks per payment. Here the interest payment is drastically reduced due to the reducing principal. Unfortunately the bank has no interest (pun not intended) in principal payments and all they care about is the interest.
Q-1.
Assuming a principal of 10L, interest rate of 12% and repayment of 20 years, how much of the EMI payment would go towards interest at the end of 5 years ?
Interest paid
A) 2.52 L
B) 3.85 L
C) 5.78 L
D) EMI = equal interest and principal payments so does not matter.
Q-2.
Now if a US homeowner borrowed the same at 6% what would be the result
A) 1.20 L
B) 2.78 L
C) 3.21 L
D) Half of the answer of Q-1
The answer as some people have pointed out is C for Q1 and B for Q2. The black magic of the EMI is responsible for a payment of more then 500% of the EMI towards interest as opposed to principal. After 5 years the borrower wouldve paid 80k as principal and 5.8L as interest. At the end of 10 years the principal payment is 2.3L as opposed to the interest of 10.8 L. After 15 years, you have finally paid of 1/2 the principal and 15L as interest. At 20 years you have paid off the 10L principal and 16.4L as interest.
Now for an average apt of 1crore in Mumbai with 10% down lets do the numbers for 90L loan. Here I wouldve paid an interest of 1.4 crores for a 90L loan and god forbid if I couldn't make the EMI after 5 years and had to sell the apt I wouldve paid 52L as interest with 7L as principal and the house would have to be worth atleast 1.4 crores to break even.
The EMI method of loan repayment is one of the worst methods of calculation and benefits the banks the most, leaving the borrower shackled in loans forever. As finance professionals will tell you, there are many ways of calculating interest where interest and principal are paid off in equal chunks per payment. Here the interest payment is drastically reduced due to the reducing principal. Unfortunately the bank has no interest (pun not intended) in principal payments and all they care about is the interest.
Tuesday, 3 February 2009
Realtor debt to be twice revenues
From the article below it looks like the financiers who have loaned money to the builders against pledged shares have been subprimed due to the rapid fall in real estate stock valuations. This is looks like a case of mini Fannie and Freedie who were forced into nationalization since the valiue of the their underlying assets were indeterminate. The ponzi scheme of builder bidding against each other using loaned money has collapsed under its own weight.
As a reminder in this article we are not taking about the availablity of land, the demand/supply situation, the GDP growth of 8% or the exploding population in cities.
Everything which can go wrong in financing has gone wrong with the construction industy and the relentless greed to acquire land has landed these folks into the a death spiral. DNAIndia has this report
Realtor debt to be twice revenues:-
Pooja Sarkar
Tuesday, February 3, 2009 2:48 IST
Mumbai: Ah ! well a-day ! what evil looks Had I from old and young ! Instead of the cross, the Albatross About my neck was hung.
-- Samuel Taylor Coleridge, in The Rime of the Ancient Mariner
Hung it is, around the neck of realtors. For their debt repayments are likely to be twice their revenues over the next 12 months, analysts assess.
That's the new concern for realty players after their worst quarterly results. All major players except Anant Raj Industries and Indiabulls Real Estate -- including DLF, Unitech, Puravankara and Sobha -- are in the line of fire.
"In most cases, we expect debt repayments to be more than twice revenues over the next 12 months," said Bhaskar Chakraborty and Param Desai of institutional brokerage IIFL.
DLF, India's largest realty player according to market capitalisation, reported a 62% drop in its revenues in the December quarter to Rs 1,367 crore as against last year's Rs 3,598 crore. DLF has to repay Rs 4,300 crore of debt in the next six months.
Rajiv Singh, vice-chairman of the company, said funds to the tune of around Rs 3,000 crore have already been tied up for this.
At an analyst call on Monday, Singh said receivables from DLF Assets Ltd (DAL) are approximately Rs 5,000 crore with no money during this financial year.
"Receivables as at end of current fiscal are likely to outstriprevenues if DAL is unable to raise funds in the current fourth quarter. We feel this could be one of the reasons why sales to DAL have been stopped," Chakraborty and Desai said in a note on Monday.
Ergo, DLF has had to fund the receivables via incremental borrowings.
Singh said the company's target of developing 50 million square feet this year is in doldrums.
"God knows when it can be completed," Singh said. Chakraborty and Desai expect Unitech, India's No.2 realtor, to have revenues of Rs 1,200 crore and debt repayments of more than Rs 3,000 crore next fiscal.
To top it, the company has to repay Rs 2,500 crore by the end of this financial year.
Similarly Bangalore-based Puravankara Projects had raised debt worth Rs 830 crore of which loans maturing within next twelve months is Rs 427 crore. It's revenues in the December quarter was nearly halved to Rs 80 crore.
Ditto another Bangalore builder Sobha Developers. Its revenues also nearly halved to Rs 180 crore in the December quarter. The company has Rs 1,090 crore of debt to repay.
Another analyst with a European brokerage, who did not wish to be named, said even though developers' debt is more than revenues, banks and financial institutions can do nothing more than extend the loan period or rollover short-term loans into long-term loans.
However, another analyst from a domestic brokerage, who, too, did not want to be named, said lenders may rather prefer to unload shares held as collateral.
Realtor debt to be twice revenues:-
Pooja Sarkar
Tuesday, February 3, 2009 2:48 IST
Mumbai: Ah ! well a-day ! what evil looks Had I from old and young ! Instead of the cross, the Albatross About my neck was hung.
-- Samuel Taylor Coleridge, in The Rime of the Ancient Mariner
Hung it is, around the neck of realtors. For their debt repayments are likely to be twice their revenues over the next 12 months, analysts assess.
That's the new concern for realty players after their worst quarterly results. All major players except Anant Raj Industries and Indiabulls Real Estate -- including DLF, Unitech, Puravankara and Sobha -- are in the line of fire.
"In most cases, we expect debt repayments to be more than twice revenues over the next 12 months," said Bhaskar Chakraborty and Param Desai of institutional brokerage IIFL.
DLF, India's largest realty player according to market capitalisation, reported a 62% drop in its revenues in the December quarter to Rs 1,367 crore as against last year's Rs 3,598 crore. DLF has to repay Rs 4,300 crore of debt in the next six months.
Rajiv Singh, vice-chairman of the company, said funds to the tune of around Rs 3,000 crore have already been tied up for this.
At an analyst call on Monday, Singh said receivables from DLF Assets Ltd (DAL) are approximately Rs 5,000 crore with no money during this financial year.
"Receivables as at end of current fiscal are likely to outstriprevenues if DAL is unable to raise funds in the current fourth quarter. We feel this could be one of the reasons why sales to DAL have been stopped," Chakraborty and Desai said in a note on Monday.
Ergo, DLF has had to fund the receivables via incremental borrowings.
Singh said the company's target of developing 50 million square feet this year is in doldrums.
"God knows when it can be completed," Singh said. Chakraborty and Desai expect Unitech, India's No.2 realtor, to have revenues of Rs 1,200 crore and debt repayments of more than Rs 3,000 crore next fiscal.
To top it, the company has to repay Rs 2,500 crore by the end of this financial year.
Similarly Bangalore-based Puravankara Projects had raised debt worth Rs 830 crore of which loans maturing within next twelve months is Rs 427 crore. It's revenues in the December quarter was nearly halved to Rs 80 crore.
Ditto another Bangalore builder Sobha Developers. Its revenues also nearly halved to Rs 180 crore in the December quarter. The company has Rs 1,090 crore of debt to repay.
Another analyst with a European brokerage, who did not wish to be named, said even though developers' debt is more than revenues, banks and financial institutions can do nothing more than extend the loan period or rollover short-term loans into long-term loans.
However, another analyst from a domestic brokerage, who, too, did not want to be named, said lenders may rather prefer to unload shares held as collateral.
Monday, 2 February 2009
Builders and their inflation predictions
It comes as no surprise to me that the members of the real estate community including investors are disappointed at the contents and comments on this blog. Lets put things in perspective and maybe they can understand a bit more about investing and economic boom and bust cycles. When the biggest builder DLF makes a comment on national TV that real estate prices will to return to inflation adjusted prices of 1998, that is a pretty strong statement.
Lets examine the official inflation numbers from 1998 as reported by Reserve Bank of India publication. I'm no economist but cursory look at the inflation numbers shows an average WPI inflation of 5.1% over 1995-2004. If we go with another average for the subsequent period of 7% for the period 2004-2008, we have a combined average of (5.1 + 7)/2 = 6.05% inflation adjusted numbers for a 10 year period 1998-2008. To keep up with the compounded inflation of 6.05% annual inflation 100 rupees in 1998 should be worth Rs 187.71 in 2008, a total return of 87.71%%. If DLF is correct prices have to be roughly 1.87 times 1998 prices. A 3 bed room apt worth 20L in 1998 should be worth 37L in 2008, however we have seen that this apt is now worth 80L, a 400% return over a 10 year period instead of an 87% percent return. This apt has to drop 50% from the 2008 level to revert to the inflation adjusted number of approx 40L.
Even we we assume the alternative inflation number of 8.1% listed in the document for 1995-2004 and assuming an 10% inflation number for 2004-2008. We still have an inflation number of 9% compounded leading to a return of 137% over a 10 year period, still far cry from the 400% number we have seen in real estate pricing.
Either prices have to fall 50% to return to mean, or DLF is making statements they don't believe in.
Real estate using leverage is a great investment when money supply is infinite and loans are granted without scrutiny. Under any other situation, the game is going to end only one way, with a big thud. If this was not the case, we wouldn't see block buster ipo's of 2007 now trading at 5% of their peak value in a period of 15 months. For all the perma-bulls like Dilip who are still hanging by the thread of godly deliverance and hope, I have a bridge to sell.
I just started reading this article on economic theory and I hope Dilip reads it. He is probably surfing at 28.8k bits right now so expecting him to read and understand it is akin to asking a caveman the boiling point of water. Many people didn't buy over-priced real estate and missed the big boom. However they ended up leaving the apartments mentally bankrupt folks who are now keeping awake all night worrying about EMI's, while they the smart ones are sleeping soundly in their rental bliss.