Real Estate gold price denomination: I did some actual research and found these historical gold prices per 10 Grams in Rupee:
1925 18
1930 18
1935 30
1940 36
1945 62
1950 99
1955 79
1960 111
1965 71
(Rs)
1970 184
1975 540
1980 1,330
1985 2,130
1990 3,200
1995 4,658
1996 5,713
1997 4,750
1998 4,050
(Rs)
1999 4,220
2000 4,395
2001 4,410
2002 5,030
2003 5,260
2004 6,005
2005 6,165
2006 8,210
2007 9,500
Since I have actual DDA flat price data only from 1980 when it was 50,000 for 2BHK, I have calculated below the price of flat in gms psf:
Gold price DDA FLAT PRICE
1980: 133 per gm (gold bubble) 50 psf = 0.37 gm psf
1985: 213 per gm 250 psf= 1.2 gm psf
1990: 332 per gm 800 psf= 2.4 gm psf
1995: 465 per gram 1600 psf = 3.4 gm psf
2000: 439 per gram 1600 psf = 3.6 gm psf
2006: 821 per gram 3500 psf = 4.2 gm psf
2009: 1570 per gram 8000 psf = 5 gm psf
2011: 2200 per gram 14000 psf = 6.36 gm psf
As per this data, excluding the 1980 price as being an outlier due to the 1979 oil crisis and historical peak of gold prices, average price from 1985 to 2009 has been about 2.7 gm psf. But there has been a secular trend of increasing RE prices from 1980 to 2011 which has shown about a 1gm psf increase every 5 years or so.
Assuming 1gm psf in 1985, in 1990 it is 2 gm psf, in 1995 3gm psf, in 2000 4 gm psf, 2005 5 gm psf and 2010 6 gm psf.
According to this trend of 20 years, RE has been increasing steadily and hence current levels probably represent fair value.
I am unable to comprehend this trend properly or find any real explanation - we need to think about this. According to this trend, RE increases by 1gm of gold psf every 5years in India.
I dont think anyone has ever talked about this that I have read about. This is new stuff.
Probable cause: Increasing tendency to overvalue real estate as time goes on, because of "percieved" safe haven status. Otherwise in real prices, RE price should keep pace with inflation.
Another cause for overvalue is because of changing location premium. In 1980, DDA flats bere built at the outskirts. Now they are in the center of the city.
If we look at the prices for remote flats at outskirts of the city, prices would be:
Gold price DDA FLAT PRICE
1980: 133 per gm (gold bubble) 50 psf = 0.37 gm psf (Yusuf Sarai)
1985: 213 per gm 100 psf= 0.46 gm psf (East of Kailash)
1990: 332 per gm 500 psf= 1.5 gm psf (Mayur Vihar)
1995: 465 per gram 1000 psf = 2.15 gm psf (Dwarka)
2000: 439 per gram 1000 psf = 2.27 gm psf (Gurgaon)
2006: 821 per gram 1900 psf = 2.31 gm psf (Sohna Road)
2007: 950 per gram (RE bubble) 3300 psf = 3.47 gm psf (Sohna Road)
2009: 1570 per gram 3000 psf = 1.91 gm psf (NOIDA Expressway)
2011: 2200 per gram (Gold re-bubble?) 2000 psf = 0.9 gm psf (NOIDA Extention)
According to this analysis, cost of a flat is betwee 1 to 2 gm psf in the edge of the city. When the flat price drops to 0.5 gm psf, then gold is getting into a bubble. When cost psf drops to below 0.5 gms psf, then price of gold is likely to crash.
Conversely, when price of RE rises above 2.5 gms psf, then RE is overvalued. When price of RE is more than 3-3.5 gms psf, then RE is likely to crash.
According to this analysis, current RE valuation is fair value - whereas gold is getting overvalued. Chances of gold prices correcting are more than RE prices correcting.
Thursday, June 30, 2011
Thursday, June 23, 2011
[QUOTE=Kimmig;201595]Awesome analysis in the above note .. but let's get down to basic fundamentals .. how can prices of dwellings in India be more or even equal to those in developed nations (in relatively comparable neighbourhods .. let's say in terms of commute time to the central business district) WHEN
1. The average salary of people in India is nowhere near that of people in the developed nations
2. The infrastructure cannot be compared to those in developed nations
3. The quality of construction / fittings cannot be compared to those in developed nations
4. Even the type of ownership cannot be compared to those in the developed nations. What we terms as "flats" are termed as "co-ops" in the US .. these are considerably cheaper than independent houses / condos as one does not own the 4 walls of the apartment or the land on which the dwelling stands. Can someone tell me how much it would cost to have a 3 bed "house" (not flat) in Mumbai??
Any thoughts? I know a lot of people make a lot of money in India .. but am talking abt the Average Joe on the street not the investment banker types here. For me .. the math just doesn't add up. People are paying 1.5 Lakhs rent in Bandra .. that's as much as one would pay in Manhattan in one of the swanky towers there .. and from what I could make out of the note .. this is just the beginning .. jeez .. give me a break.
Look at any of the recently released buildings .. not even 10-20% of the lights are on in the evenings .. as middle class .. are we just shooting ourselves chasing this dream of owning a home?[/QUOTE]
The answer to your question is simple - currency depreciation.
Right now, Indian Rupee is temporarily strong. So you are calculating 1Crore = 200,000 dollars. But if our currency depreciated to 90Rs to the dollar, 1Cr = 100,000 dollars.
Since whatever you have said above is absolutely true, something has to give way and that something is our currency.
So expecting 60Rs to the dollar within the next one year would not be wrong. Only reason it hasnt happened is because US rates are abnormally low.
The moment US rates start tightening (and it has to happen at some time in the next few years), our currency will depreciate like crazy.
Let us assume a few approximate prices and see (dont remember exact prices)
Year X USD/Rupee X Median US house price X DDA flat 2BHK price in Rs (dollar) X Ratio India house/US house
1982 X ? 12 X50,000$ X1,00,000 Rs (=8000$) X6.25
1987 X? 18 X75,000$ X8,00,000 Rs (=40,000$)X 1.85
1992 X30 X100,000$ X6,00,000 Rs (=50,000$) X2.0
1997 X35 X150,000$ X25,00,000 Rs (=70,000$)X 2.0
2002 X45 X200,000$ X35,00,000 Rs (=70,000$)X 2.85
2007 X45 X250,000$ X80,00,000 Rs (=175,000$) X1.42
2011 X45 X225,000$ X125,00,000 Rs (=275,000$)X 0.81
So historically US homes have costed around twice the price of a DDA flat. 1982 I dont remember the US exchange rate (strangely, could not find a good web site going back that far - anyone can post a good link????) , but US median housing price readily available - I have rounded off for easy analysis. For rIndia, I went with DDA flat whose market price I know.
Currently, US homes are cheaper than in India. For reversion to mean, this ratio, currently 0.8 has to go back to about 2.
So one of three things has to happen
1. US homes have to appreciate by 100% (double). Seems impossible, but with inflation stoking by printing currency, ultimately it will happen
2. India prices have to fall 50% (RE bull theory proved wrong guys believe this).
3. USD has to appreciate 100% (i.e double to 90 per dollar).
It can happen in any ratio. Over the long term, probably, 30% of each of these will happen i.e US prices will rise 30%, Indian prices will fall 30% and USD will appreciate 30% i.e Rupee depreciation of 30%.
Question is which will come first? I as a RE bull theory proven right person, believe the order will be: Fall in Indian prices by 30% (happening right now), Rupee depreciation by 30% (expect to happen in next one year) and then US house appreciation by 30% (probably take 5 years and more)
OR - Rupee can show run away depreciation. I remember 1991 when there was flight of capital. We had to devalue and shift to semi float. From 18Rs to dollar price went to 30 Rs to dollar if I remember right.
If there is flight of capital, same thing can happen again. All of our forex reserve is hot money from FII who want to chase our volatile stock markets.
We cannot allow them to put money in our gilt bonds - because with US rate at 0% and Indian rate at 8.4% or so, that is an arbitrage which will either bankrupt us or shift our rates to about 4% which would stoke the wildest inflation we have ever seen and collapse our monetary system.
Our only option is to allow them to take their money and go and face a massive depreciation of Rupee - which will cause a bad recession and also stoke oil price inflation.
The truth will lie somewhere in between -30/30/30 I wrote above is the safest prediction possible
1. The average salary of people in India is nowhere near that of people in the developed nations
2. The infrastructure cannot be compared to those in developed nations
3. The quality of construction / fittings cannot be compared to those in developed nations
4. Even the type of ownership cannot be compared to those in the developed nations. What we terms as "flats" are termed as "co-ops" in the US .. these are considerably cheaper than independent houses / condos as one does not own the 4 walls of the apartment or the land on which the dwelling stands. Can someone tell me how much it would cost to have a 3 bed "house" (not flat) in Mumbai??
Any thoughts? I know a lot of people make a lot of money in India .. but am talking abt the Average Joe on the street not the investment banker types here. For me .. the math just doesn't add up. People are paying 1.5 Lakhs rent in Bandra .. that's as much as one would pay in Manhattan in one of the swanky towers there .. and from what I could make out of the note .. this is just the beginning .. jeez .. give me a break.
Look at any of the recently released buildings .. not even 10-20% of the lights are on in the evenings .. as middle class .. are we just shooting ourselves chasing this dream of owning a home?[/QUOTE]
The answer to your question is simple - currency depreciation.
Right now, Indian Rupee is temporarily strong. So you are calculating 1Crore = 200,000 dollars. But if our currency depreciated to 90Rs to the dollar, 1Cr = 100,000 dollars.
Since whatever you have said above is absolutely true, something has to give way and that something is our currency.
So expecting 60Rs to the dollar within the next one year would not be wrong. Only reason it hasnt happened is because US rates are abnormally low.
The moment US rates start tightening (and it has to happen at some time in the next few years), our currency will depreciate like crazy.
Let us assume a few approximate prices and see (dont remember exact prices)
Year X USD/Rupee X Median US house price X DDA flat 2BHK price in Rs (dollar) X Ratio India house/US house
1982 X ? 12 X50,000$ X1,00,000 Rs (=8000$) X6.25
1987 X? 18 X75,000$ X8,00,000 Rs (=40,000$)X 1.85
1992 X30 X100,000$ X6,00,000 Rs (=50,000$) X2.0
1997 X35 X150,000$ X25,00,000 Rs (=70,000$)X 2.0
2002 X45 X200,000$ X35,00,000 Rs (=70,000$)X 2.85
2007 X45 X250,000$ X80,00,000 Rs (=175,000$) X1.42
2011 X45 X225,000$ X125,00,000 Rs (=275,000$)X 0.81
So historically US homes have costed around twice the price of a DDA flat. 1982 I dont remember the US exchange rate (strangely, could not find a good web site going back that far - anyone can post a good link????) , but US median housing price readily available - I have rounded off for easy analysis. For rIndia, I went with DDA flat whose market price I know.
Currently, US homes are cheaper than in India. For reversion to mean, this ratio, currently 0.8 has to go back to about 2.
So one of three things has to happen
1. US homes have to appreciate by 100% (double). Seems impossible, but with inflation stoking by printing currency, ultimately it will happen
2. India prices have to fall 50% (RE bull theory proved wrong guys believe this).
3. USD has to appreciate 100% (i.e double to 90 per dollar).
It can happen in any ratio. Over the long term, probably, 30% of each of these will happen i.e US prices will rise 30%, Indian prices will fall 30% and USD will appreciate 30% i.e Rupee depreciation of 30%.
Question is which will come first? I as a RE bull theory proven right person, believe the order will be: Fall in Indian prices by 30% (happening right now), Rupee depreciation by 30% (expect to happen in next one year) and then US house appreciation by 30% (probably take 5 years and more)
OR - Rupee can show run away depreciation. I remember 1991 when there was flight of capital. We had to devalue and shift to semi float. From 18Rs to dollar price went to 30 Rs to dollar if I remember right.
If there is flight of capital, same thing can happen again. All of our forex reserve is hot money from FII who want to chase our volatile stock markets.
We cannot allow them to put money in our gilt bonds - because with US rate at 0% and Indian rate at 8.4% or so, that is an arbitrage which will either bankrupt us or shift our rates to about 4% which would stoke the wildest inflation we have ever seen and collapse our monetary system.
Our only option is to allow them to take their money and go and face a massive depreciation of Rupee - which will cause a bad recession and also stoke oil price inflation.
The truth will lie somewhere in between -30/30/30 I wrote above is the safest prediction possible
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