On price and recession prediction for 2012

Actually recessions are predictable - they come every 4 years in industry and every 7-8 years in RE.

Question is different

1. - how bad will the recession be?
2. -What kind of recession?

It is possible for each country to be in a different kind of recession. Looking at current data, it seems to me

1. USA: Standard heavy recession will continue with unemployment for prolonged period till 2020 with no big upmove in stocks or RE

2. UK: Shallow recession has ended and 2011 will see pick up in economy and RE. Both will peak in 2014

3. Germany: Same as UK. only stronger

4. France: Same as USA

5. Spain and Italy: Worse than USA, but same pattern as USA

6. Japan: Stagnation will continue till 2020.

7. China: Will continue spectacular growth

8. India: Will see standard business and RE cycles with exagerated stock and RE price movements, recap of USA from 1945 onwards

Obviously, investing strategy for each country has to be different.

In India, I expect best returns from stock market but with exagerated see saw. RE should be a smoother and safer bet.

I expect stagnation in Gurgaon with problems expected for leveraged and overinvested people whenever the stock market collapses - which I expect in Feb 2011. Same for Mumbai. But from 2014, prices will jump for Gurgaon and Mumbai

I expect two situations for NOIDA.

1. Currently under construction projects will go thru. But price for RE will be capped and will not give fantastic returns at all - I expect price stagnation / keeping pace with inflation with muted returns till 2014. People should expect good returns in NOIDA from 2014 onwards, but not as much as Gurgaon.

2. If there is a heavy recession in 2012 (expected in a 4 year cycle after 2008), many of the yet to be constructed projects will face severe delays or abandonment. People with bookings in such projects will miss out on the good returns expected from 2014 onwards.

I would therefore urge people to book only in projects where there is some assurance for construction, lest they miss out on the expected returns from 2014.

As for ATS, one can always hold for rental returns and keep quiet. One can sell for 2.5 crores in 2017 or so when the next RE bull phase reaches its peak.

Munish, best capital appreciation in RE is always in luxury category and not in affordable category. Advantage of affordable (and NOIDA in general) is that downside is limited. Unfortunately upside is also limited. Lluxury prices move maximum in bull phase but crash too much in recession, preventing exit effectively - except with huge loss).

NOIDA flat will find ready seller/buyer regardless of market timing. Gurgaon luxury flat will find seller/buyer only in good times (which is right now!).

NOIDA is a conservative investment and one should expect returns in line with inflation. Since it is currently some 14% (CPI) I expect some 40% return from your booking by completion in 2012-2013 which corresponds to Zohaibs prediction of around 4200 psf.

Later:
Hi all.

This was actually a post in NOIDA forum, in response to recession discussion, but wanted your valuable opinions as well from Gurgaon.

And I think you all have made valid points.

Sachin, this was individual perception only. I am pessimistic by nature, but my prediction for India was USA from 1945 to 2010 i.e. 65 years of superlative growth with recessions superimposed. Dow went from 300 to 14000.

Thats being optimistic only. There will be ups and downs but overall growth will be up. So I am nor predicting doomsday, but pointing out the reality of industrial growth and contraction being normal every 4 years.

Durbious, very good points. Gurgaon has definitely matured and may not see much downside. I think people now have holding power and the leveraged investors, flippers and heavy loan RE companies have learnt a lesson - and wont repeat.

But I expect static prices +/- 10% till 2014 when it will take off for a next bull run.

YOu are right, Gurgaon is much safer feeling than NOIDA, without doubt. We go to Gurgaon malls all the time and come home late. NOIDA is too scary after dark.

NOIDA will not see price fall, instead people will lose their bookings in case of major problems. Prices are so low, it cannot possibly fall further. And regardless of big or small recessions, some of the dodgy bookings will default on delivery and a lot of lower middle class people who have booked in NOIDA will lose their money to the builders.

RBBR, actually I am bullish on RE because of inflation effect. I dont think we have seen the last of inflation.

How to SIP in Real Estate

[QUOTE=puser;114570]keep writing in indian real estate forum [/QUOTE]

Hi all. Good discussion here. A few quick points.

1. A CLP is the closest you can get to SIP in RE. You lock in todays price, then keep paying slowly - but with inflation depreciated currency. So after 3 years, your 1L payment is actually 86,ooo because inflation devalued your money by 14% (rough example)

2. It is not necessary to invest in RE directly. You can also invest in stock proxies for RE, while waiting for right location price and downpayment accumulation. SIP into a basket of say DLF (Delhi), HDIL/HCC (Bombay), Leelaventures (Maharashtra), Royal Orchid (Bangalore) and Kajaria ceramics will capture whatever growth RE will give you. ICICIDirect also gives you a stock SIP option nowadays (you can place orders for market purchase at aftermarket times, since you may not be able to do it while working - whereas previously they only allowed limit orders at off market times

3.Taking a loan at floating rate does not beat inflation. If you are buying to beat inflation, stick to fixed rate of interest loan - currently some 2-3% higher than floating

Feelings on Indian economy

Hi Wiseman.

My fear is the same as yours - people cant afford these food prices. Hell even I cant afford these food prices. Restaurant prices for food is skyrocketing and we are cutting back on eating out - even cheaper restaurants are becoming unaffordable. And our home dlivery of pizzas is also dwindling - as it costs some 700 Rs for the whole family to eat in - and 1000 plus to eat out.

A friend of mine living in Delhi and earning 25000 per month is unable to make ends meet and is thinking of shifting his family to Kerala. And this after his mother pays for his two children's education.

Life is becoming tougher and tougher. Something has to give and things have to become more unpleasant.

Re: gold, it is obviously a response to the fed threat (supposedly couched in terms of inducement) of quantitative easing. Gold in dollar terms will rise as long as the fed prints money.

But it is a high risk speculation. Bond yields are only imperfectly under the fed control. Bonds are currently in a bubble. When the bubble bursts, Gold will fall flat to the ground.

So buy dollar gold only if you are sure of being nible footed and exit well before the bursting of this bubble. It is definitely a good trade but a bad investment.

Rupee gold if you notice has stood still because of receprocal relation between gold-dollar and Rupee-dollar relationship. Local ETF will make money if Rupee depreciates. Not otherwise. The way the fed is behaving, dollar is likely to be weak for at least 6 months, before sufficient economic data comes in for the fed to take a stance one way or another.

Rupee-gold is likely to stay static, even with Rupee appreciation. I am suspending further purchases of gold ETF until there is clarity. I think one can get the same or even less prices between now and march.

With this much dollar weakness, I am also suspending further stock sales, unless the sensex seems super bubbly. This much liquidity has to flow somewhere and better to ride the bubble than to stay out. In any case, I have sold some 10% of stock and finished 80% of stock portfolio rebalancing.

As for RE, I anticipate exactly what you propose - abandoned projects, shortages of flats, unfinished and delayed flats, people's money stuck, poor movement.

Re: inflation, India's dollar Rupee exchange rate in 2000 was around 45. Today it is still 45. USA has seen some 3% inflation (not precise data). India probably some 10% inflation over 10 years (again not precise data). With this difference, Rupee should have been 70 or 80 to the dollar.

Even last year, USA had zero inflation. India had 15% inflation. Rupee appreciated 5% recently, so actual Rupee appreciation keeping inflation in mond is some 20%. In just a few months or days.

Every country is in a race to depreciate and we are achieving 20% appreciation? This is quite crazy and unsustainable. Obviously something has to give.

What that something is I dont know. But some catastrophic calamity is looming. Better be prepared for whatever it is.

My bet is either a sudden catastrophic market fall triggered by some butterfly fluttering, or flight of capital because of the failure of quantitative easing and bursting of the US bond bubble. That will start a chain reaction which can cause

1. Rupee depreciating to some ridiculously low figure like 100 to the dollar
2. Balance of payment crisis
3. Super spike in commodity prices - imagine our oil import, copper import and machinery import bill suddenly doubling. Gold in Rupees will also double
4. Hyper inflation - how can India sustain a doubling of oil prices?
5. Corporate crisis as repayment of dollar loans by Indian companies becomes unsustainable. Watch out for Reliance - planning on a dollar loan of 1 billion dollars
6. Stagflation for a few years.

Things are bad and I get a feeling of impending doom even as I ride the euphoria of the current bubble.

However, I get this "doom" feeling for India but do not really see problems in USA.

Actually I feel that quantitative easing will be successful - the end of which is always marked by a rise of interest rates as the bond bubble deflates. Which spells doom for India. So at the end of the day. USA will get away with it while crucifying us.

I think Ben Bernanke is excellent at his job. He is using the right tool at the right time to achieve the US self interest.

Alan Greenspan was terrible at his job - he overstimulated USA after the locally contained dot com bubble - when real economy did not need it - and created the RE super bubble of 2007.

YV Reddy was excellent at his job. He correctly identified the RE bubble and took appropriate corrective action which was largely responsible for containing the crisis in India.

Subarao appears clueless. He seems to be under some govt pressure - why I dont know. His juniors are not getting extention, there is talk of setting up a finance ministry super-regulator over and above RBI, there is talk of divesting govt bond auctions away from RBI and then we have this unsterilised injection of liquidity into the Indian market.

While I dislike conspiracy theories (they are always wrong) I am unable to account for this much policy drift - it is totally dismaying and has to end badly - unless there is some vested interest which is responsible for this chaotic central banking.

Still at the end of the day, I must conclude on only extra-ordinary ineptitude on the part of RBI in recent days - and the current RBI governor is probably the worst we have ever seen.

Yes, I know, why would quantitative easing stop? I dont know, but sooner or later it has to.

But it is good for 6 months at least I feel. So for next 6 months, what you are saying seems likely.

All I can say is repeat my 1 and a half year old dictum of 30% stocks, 30% bonds, 30% RE and 5-10% gold ad nauseum.

Cant think of any other way to ride out these uncertain times and unpredictable global imbalances.

Munish, if you are so severely underweight equity, put your money in a liquid fund and do STP into a good fund of your choice - say 30,000 every month for 2 years - say DSP top 100, HDFC top 200, Franklin blue chip etc.

You should never be out of any of the 4 asset classes, only shift around 10-30% by changing the weight.

Returns come from the right asset allocation and not right instrument selection within an asset class

Stock Market view

I am fairly pessimistic on future prospects. Time to keep booking profits and ploughing into liquid funds - I am practicing what I am preaching.

If you were 60/40 in favour of stocks, time to rebalance to 50/50. I am still 60/40 (down from 70/30).

I am pessimistic on FMCG, Auto, Banking and NBFC/Housing finance.

Pharma and infrastructure should hold up better. Also dividend yield funds. I am buying in these sectors.

Re: US quantitative easing, it will reverse with a bang when long term yields fall to ridiculous levels (currently ~ 2.5% and falling) - and people start dumping US bonds (currently in a bubble). There will be a sudden and drastic rise in US yields, dollar index will rise, g-old will fall, rupee will fall, rupee g=old will rise or stay same (depends on just how much dollar g-old will fall)

FII money will stay for a while, and then withdraw to safer US yields of around 4%. Depending on extent of outflow, Rupee depreciation will be drastic.

I expect 55 to the dollar within 1 year.

On Rich becoming richer and poor becoming poorer in India

Wealth is not gold. Wealth is not Rupees.

Wealth is human effort - working hard to make each other's life better.

Indians are poor because they are illiterate and unable to be productive. They have a useless parasite govt. Much effort is wasted makings things over and over again because they were not done right the first time

Americans, Japanese, Europeans etc are wealthy because they are highly capable and are highly productive - and because, unlike Indians they understand what wealth means.

In a free market, anything that has value and is tradable is wealth. But it is not finite - as many of you said in the previous thread, which prompted my response. It is infinite, limited only by the capacity of humans to generate it. Many things which do not have value but are tradable (like art etc) are also wealth. (Note, that also requires human effort.) Name one item which is wealth but does not require human effort. Resources are finite. Wealth is infinite, limited only by human effort. Wealth includes a society with law and order, cleanliness, decent human values, entertainment, politeness, just rewards for human endeavour and other similar intangibles, which are not tradable except in a barter system. Nevertheless, these are a part of our wealth and contribute to out well being. In a dysfunctional society like India, there is no amount of money which can buy it for you. We are poor because we dont have these.

Gold doesnt come out of the ground without human effort. There is a cost to extraction of gold which is currently some 4-500 dollars. The price over and above that for gold is just a nominal tradable premium. If by using your brains, you figure out a cheaper way to take gold out of the ground, you have made yourself wealthier using the same resources. This use of brains is human effort.

In the past, India was the wealthiest nation in the world per capita, because God had bestowed the maximum of all resources on India. Human effort was hardly necessary to be wealthy.
All other nations became wealthier than us by their human effort - by working hard, being more inventive, fighting harder than us, being more productive. We, being already blessed, continued in our laziness and have become one of the poorest countries in the world. Because of lack of human effort.

Without labour, there is no produce. India is a good example of labour without produce. We build bridges which fall down, we make roads which wash away. These are examples of capital destruction i.e. waste of human effort. Because it does not generate wealth.


Whole of society is co-operative effort. Obviously individual effort is needed and self interest is also needed. You wont be very wealthy living in a forest alone. You may not even sleep well, given the dangers. Here, wretched examples of laziness exist. India, Sri Lanka, some African and South American countries come to mind. People despite their self interest being against it, live in laziness. These countries are not wealthy - despite the abundance of resources - because human effort is lacking.

Essentially, efficient allocation of capital is better achieved through market economics than through govt fiat. India is poor because it allocates too much capital through govt. Soviet Russia collapsed for the same reason. That is why China is trying hard to embrace market economics and so far has exeeded the original capitalist countries in its abilities

Capitalism has worked out exceptionally well for last 400 years.

Markets by nature are made up of traders who try to maximise their gain. There are some markets which are zero sum (like stock derivatives) and some markets which are not sero sum (like stock markets, commodity markets, land, commercial or residential real estate). In zero sum markets, for every winner, there has to be a loser. Other markets everyone wins, except when greed gets ahead of fundamentals and "efficiency" decreases.

Re. Quantitative easing, the govt of USA projects itself as a buyer of its own debt. It creates a bond bubble, which is currently on, as bond prices are bid higher and higher in a game of passing the parcel - safe in the knowledge that US govt will be finally left holding the parcel.
The US fed is making an educated gamble that this will stoke economic activity and inflation - at which time, the US bonds can be dumped, deflating the bubble with yields rising again to match inflation levels.

All current indicators point towards this gambit succeeding