25th June 2012-06-25
The only "real" asset is human effort. US maintains its premier position because there are 300 million of them with 45000$ per annum productivity.
gold - RE - paper - bonds - shares - all are not as as real as work and productivity.
The day Indians become as productive as Americans, our currency will be backed by our work and will be strongest.
The Yen, Sterling, Swiss Kroner, Deutsch mark, Franks, Yuan - each is backed by its people. Not by gold but by productivity.
When there is recession and productivity falls - currency has to fall.
Right now, there is massive recession globally and every currency is backed by much less productivity = all currencies are weak.
Until productivity increases again, currencies are all going to be weak. You cannot hide from it in any asset class - except to have skills and earn well.
Main problem in developed world is that productivity levels have remained static at 45000 levels for over a decade. Every time one person has become more productive, two more have fallen in productivity or others in other countries are doing the same work for less. So productivity per capita in developed countries remains same while production is shifting around in the globe.
This is inevitable and will remain so until the playing field is even.
India and China will continue to benefit from this multi decade phenomenon and so will shrug off the depression and get back to growth path after a year or two to adjust to new realities
21st June:
currencies are all going to be too choppy to call for a while.
Long term trend for dollar is for strength from 2012 to 2016 or so - since US cannot increase QE but can definitely raise rates - there is massive margin for raising rates (100% margins!)
So Rupee likely to stay weak and sway with inflows and outflows. As I said before - within my prediction of long term weakness in Rupee, I hadnt factored in the effect of flows - now it appears that flows are very significant - much more than I had thought earlier.
In fact it transpires that even the 1991 devaluation was because of a sudden drying up of inflows.
Long term flow will be into India and this will lift up Rupee. So a steady state somewhere around 55 with a +/- 5 Rs due to short term effects seems to be the direction for the next 10 years.
RBI has effectively devalued Indian currency from 45 to 55 by its actions. It seems to have been a pre-determined effort on the part of RBI. It purposely did not defend Rupee. Even today it did not defend.
HAs to be a purposeful thing. Industry and equity markets should respond within a few months to this devaluation.
because at some point the FED will have to start raising rates.
this is the crux of the problem.
A fall of the Rupee to the tune of maybe 50-60% has to happen when US starts raising rates. Fortunately this is now postposed till 2014 mid at least.
Issue is this - would the Rupee harden before weakening further - or will it keep on weakening from here?
With US keeping twist going, dollar carry trade is inevitable uptil mid 2014 at least. At some point the smart money will see that a big move into and then out of India would be highly rewarding. At that point, there will be influx of dollars into India. At that point Rupee will harden and stocks will rise. I think I see this happening within 6 months - and a jump in stocks and Rupee will happen.
Then it will be a game of chicken to see which FII pulls out the earliest to book profit and cause a stampede out of India - at which point equities and Rupee will both fall. The first one to time entry into India and the first to time exit out of India will both make a killing.
The last to enter India will lose - the last to leave India - after the Rupee has been thrashed - will also lose.
Its a carry trade waiting to happen. Most likely, it will happen within the month - as those who were sitting on US bonds book profits after the recent bond yield collapse start looking for the next sure thing. With Europe, China and Japan being poor destinations, with commodities collapsing Brasil and Russia are also poor targets.
All we need is one round of reforms/announcements from Govt - even if they dont deliver - and the race will begin.
Most bond fund investors within India (like me) are also wrong sided by the RBI refusing to soften and will be looking to shift to another asset soon.
Not gold because already high. Not dollar because already high. Not bonds - not moving. That leaves just equity.
Monday, June 25, 2012
June IREF: On Investing
And outstanding posts from Punjabi, Abhishek, Wiseman and others.
My own two bits - this discussion is putting the cart before the horse. For financial planning, the purpose is to replace your main income with passive income. So if you are having 2L per month income, when you accumulate 2 Crore or some such, you can retire on the income and stop working.
Without knowing the income amount and age, one cannot calculate the amounts which can be generated from passive investments.
If the target is 5Crores, then why in 10 years? Why not a simple aim - I want to be rich.
There are only two ways (apart from the jokes already made :-)
1. Earn more in a better job
2. Start your own business
First you need to know yourself - do you have it in you?
If the thought of starting own business gives you a heart attack - dont do it. In business you have to survive many heart attacks and put up with many vagaries out of your control.
Why not try for a better job? Why not emigrate to better paying countries? Cant you upgrade your skills and get a better job? A person in their 20s should spend all their time doing only these things.
Investments will not ever make you rich. They can only make your situation slightly better - it cannot change the order of magnitude of your money.
But for many people, business might be too difficult because of deficient people skills - and a better job might not be possible - and emigrating might not be possible.
For them, Abhshek (and one other person's idea) is best - if you can make 4-5 hours of time every day, after your main job, do a low risk business. Possible low risk options (already mentioned by others):
1. Real estate (requires capital - need to start with 1Crore) and good understanding of business and real estate cycles. Those with deficiencies in both attributes - stay away or be lucky (luck has made many people I know quite rich)
2. Cars, vehicular hire - low risk business, requires some amount of risk taking with good returns. Many low level govt servants earn well in this
3. Rental property:
4. Shops - if you can meet an existing demand, you will become quite rich
5. Writing (like wisey, I am intrigued how the blogger made money)
At the end of the day, being rich wont make you happy. The 4 hours making money in the evening might be better spent in relaxation and family - after al that is what money is for - it is ony a means to an end.
Another point - there is little point in earning more than 1 Lakh per month in India - even if you have more, it wont improve your quality of life much. Most things which can be bought with money are already available in that salary -or it is simply unavailable (like water, electricity, air, good food, good people, good homes, clean cities.
Of course, periodic inflation adjustment is needed for that salary.
And who knows - after a while your low risk business might make you much more money than your salary
Buy the 2BHK now - but buy the best investment location and dont try to live in it . Just rent it out. It is an investment, not to be mixed up with own home.
While waiting for equity of various kinds (including home equity) to accumulate so that you can buy the best - live well in a rented 3BHK in a good location.
Treat your 3/4BHK as a "purchase" i.e. chose the location which suits you, the size which suits you, the quality which suits you - dont compromise. This is an expenditure. The 2BHK was an investment. Dont confuse.
But also, while waiting, dont compromise the quality of your life by trying to live in the 2BHK just to save a little rent - there is no harm in renting a house which gives you a better quality of life than the flat you can afford - rent in a good area with good schools, close to work, with good shopping. The money spent on renting is not a waste - it is money well spent. Take advantage of the fact that rentals are low in India. In fact, rent a home in your dream location where you would buy in future - make the area your own, make friends and also live the same life which you would lead in the future - when you shift from rented to own.
And never make the mistake of buying in a hurry the wrong home in the wrong location just because prices are rising every day. There are ways to hedge against the price rise as already detailed above.
Your location and size should be decided properly based on expected accumulated equity of all kinds at about 45 years of age i.e. project the best possible price you can pay when you are about 45 - jack in 12% per annum price appreciation for homes into it - and estimate what your affordability is (45 is the target age because one assumes 15 years home loan and 60 years retirement). Based on this factor only your location and size of flat should be determined - not based on what you can afford now or the locations sold to you as up and coming by builders
The time to buy is always now - provided you can afford it (talking about roof over the head here - not second house). It should be done
1. When career is well settled. Buying too early is also wrong - the 20s should be spent in bettering one's earning capacity. Buy when career path and ideally even city is well settled.
2. When you can pay down 50% of the cost if needed - that means financially well secure
3. Buy the best - dont settle for "buy a 2BHK and then shift to 3BHK later" type of thinking - again, that usually happens when one buys too early when career is not settled and bank balance is too low.
4. If you are not buying what you need right away, split the cost of RE into 2 and buy a plot (within capacity) now - sell the plot to buy the flat when you are ready.
5. If you cannot afford a plot, put part of money is a short term (5-6 year) RE investment. Remember, EMI is another name for a systematic investment plan into RE. Keep EMI low so that your other savings can also accumulate i.e dont overinvest in RE component - try to split investments into 30%RE, 30% stocks and 30% fixed return.
So if your investible surplus is 30,000 per month, then EMI should be for 10,000 Rs i.e. you can take a 10L RE loan without skewing your investment into RE. Since you cannot get anything for 10L, exept small shops, get that if your career has peaked - or wait for a bigger capacity - since if you have 10L in FD, your loan bearing capacity increases to 20L since the 10L in FD pays interest of around that much.
Best way is a do it yourself SIP - buy group of funds whenever market fall.
Another way is SIP plus bulk buys into same funds whenever markets fall.
Both need some market knowledge
My bond funds have also done well and even gilt funds are now giving return. Naturally since we already had a 50bps cut couple of months ago - lets see what happens monday.
Returns are likely to be muted going forward. I dont expect Repo rate below 7.5% no matter how much Indian growth slows done - because it is a stagflation and RBI just cant lower it to prevent runaway inflation.
I will exit all bond and gilt funds when Repo touches 7.5% and switch to stocks.
A 1% drop in Repo from 8.5 to 7.5 if faithfully translated into a 1% drop in gilts will give a 10% return on a bond/gilt fund. Assuming a years time for yields to drop by 1% and an 8% return on the bond for one year, one can anticipate an 18% return from gilt/bond funds assuming bought at 8.5% repo and sold after repo touches 7.5% over holding period of 1 year.
Good for you that you are waiting and accumulating a downpayment amount. Kudos.
But you are making one essential mistake in your analysis. Real estate has to be "REAL"
Booking of under-construction flat is "UNREAL" - you are trying to discover a price for something which does not exist.
"Real" estate means registered property with people living in it.
"Unreal" estate means flat bookings and plots where nobody can live. These are speculations and subject to crazy price movements based on herd instinct and external factors.
Your booking or plot is just a piece of paper which you can trade.
If real estate is like a share, unreal estate is like a futures and options contract with your builder buyer agreement being the contract.
People keep mixing up investment (in "real" estate) - (an investment means buying a future stream of return), speculation (in "unreal" estate) - (speculation means buying something whose price can fluctuate, hoping you can make a return) and expenditure (buying a house to live in - roof whether rented or own being an essential requirement for life - which millions in our country lack)
Prudent people will take care of their expenditure, then make investments and only then go for speculation (to boost their returns, since their risk bearing capacity has increased)
In India people make a flat booking and think they have done all three when actually it is just a castle in the air. Sometimes it works, sometimes it doesnt - it is totally chaoic and irrational and unpredictable.
As far as I am concerned, unless quite rich, a person buying a roof over his head should buy RTM. If capital is scarce, it should not be risked in speculation over "bookings" and "plots". First house should be bought after career is settled, (usually mid thirties). Later, one can go for a "booking" for an upgrade in their late 40s or so.
Indian RE is a black market where people corner a scarce commodity (RE) and have enormous holding power.
The day Indian RE stops being scarce, its prices will drop. That requires RE reforms.
All indications are that it will continue to be a scarce commodity. So Indian RE should be analysed as a black market and not as a regular market.
Basically the small supply of new properties will be cornered by a small group of well to do individuals who will dictate prices - as it happens today. This situation needs different type of analysis.
India will essentially double its supply of upper middle class people as the children of the current middle class grow up. They will provide the captive market for this RE expansion. The money for this will come from Mummy Papa's savings.
As it does today - right no
RE is scarce in India because people buy vacant property and keep it locked up (at least in Delhi). THey have enough money and dont want to sell it.
Try buying a RTM flat - nobody will negotiate prices with you because it is a seller's market and buyer has no option.
Number of vacancies has no relation to the number of properties on the market. Flats kept empty become a store of wealth for the future. Also a store of black money (selling RE without paying capital gains tax is also the biggest source of black money in our economy - not corruption)
Not everyone has bought flats for their children - that activity is ongoing and will consume most of the fresh supply for the next many years. Captive customer base of well to do people, who started earning well in the last decade and have another 2 decades of working life left.
Otherwise, prices would be one third of current prices
As someone said on another thread elsewhere - property (plots) in India gives 10-12% return every year, except in one or two "leap" years where it gives 20-40% spurts. Every ten years, there is a temporary 20% drop in resale plots, always followed by quick recovery.
The last 2 such "leaps" were seen in 2007 and 2010. The last 2 slumps were in 1996/7 and 2008/9
All I can say for sure is that there will be no leap in 2012 or 2013.
Inflation can also destroy value of money - in inflationary times, a 30% weight in RE is the best way to stay safe and preserve capital.
10 years from now, 1 or even 5 crore might seem a trivial amount.
Remember how 1 L was a big sum 10 years ago? Now it is monthly salary for many and writing 1L cheque is routine - in 1995 1L was my entire lifetime of savings
Rupee depreciation can also play a role - ridiculous current dollar valuation of property can then seem normal - since dollar value of the property will drop as rupee depreciates.
I actually said wealth preservation - so if you have 1Crore, putting 30L in RE (flat booking) makes sense.
With bigger net worth of 5Crore, putting 2 Crores in a couple of plots makes sense.
The only time loan for property makes sense is for own home - and that is an expenditure, not an investment and is based on personal things.
Taking a 11% loan for an investment giving 2-3% (rental) yield is not so great an idea - one can do it, if your own roof is paid for and you feel you can rebuild your stock and bond portfolio - even then, at least 50% downpayment should come from own funds.
Or if you are a really long term player and dont mind a high maintenance illiquid asset like rental property - then a loan for maybe 25% of income going out as EMI may be justified, given the tax breaks for rental property - and only for RTM flat.
In any case, property investments require a lot more effort and headache than stocks.
Right now is a recession and not a bubble - a time for slow projects and project abandonments, not price correction - some people will lose their shirt if their builder collapses. As inventory is destroyed in this fashion, prices wil paradoxically rise for the remaining good projects
On Stocks
In every stock recommendation, I look only for "sell" recommendations. The buy reccos are usually a dime a dozen and in one week of business dailies, almost every company in NSE will geta buy recco.
Thanks for your sell recco - I have some underwater Chinese funds (down 10-15%) and will sell them off now - the sums are small and after 1.5 years of following them (one tends to track what one owns much better - so I always buy a tracking amount to see how it goes), I see no hope of any sensible recovery. Better to exit.
Also, better to exit LAtin American funds also. In fact I plan to exit all international funds - as a whole I must have made some 2-3% return after one year of staggered SIP entry - one fund (global real estate fund) - gave good returns, rest lost money on the stocks but made money on currency depreciation, mostly breaking even.
Caveat to above - From 2003 to 2005, PE ratio stayed same at low levels, while earnings grew so fast, company stock prices raced.
Same thing can happen with earnings degrowth - curent PE of 14 can go up to 20 also, with a 30% earning degrowth.
The whole stock market question is this - how low will the next 2 quarters earnings be? Static or degrowth?
I am personally staggering investments over next 6 months keeping this uncertainty in mind.
Regarding building strong equity portfolio, 5L is too small an amount for individual stocks - go with a good large cap fund like Franklin bluechip or a balanced fund like HDFC prudence and buy on every dip, stagering investments through next 2 quarters of earnings.
Ideal fund portfolio has about 40% in large cap (2 funds), 20% in small/mid cap (1 or 2 funds), and the rest depends on liquidity needs - if you need the money in next 3-4 years, keep rest 40% in balanced fund (2 funds) or go with 20% balanced and 20% FMCG fund. Either way you get 5-6 funds.
If you dont have liquidity needs at all and can ride for 15 years, stay with 40% large cap (2 funds), 30% mid cap (1 fund) and 30% smal cap (2 funds) for a total of 5-6 funds again.
All fund entry should be during bear markets (like now) and exit in bull markets (expected somethime in next 5 years). This is because fund managers have to be in equity at all times - whereas we can hold cash as individual investors. Funds fall and rise with the markets - we can however be fully in equity in bear times and pull out systematically when market gets overvalued in bull phases.
Once corpus exeeds about 10L, one can allot next 5L for direct equity.
In bear markets like now, always select only large cap sense-x/nifty companies and avoid small and mid cap totally. Reason for direct stock investment is only one - fund manager will never stick with contra ideas. With direct stocks, contra ideas can be explored and held through recessions - for example, in the current recession, metals and infrastructure are beaten down - you can buy a L and T and a Tata steel and hold it for whatever time is neded to get good returns. Direct equity is always - ALWAYS - or time periods exeeding 15 years if necessary.
My own two bits - this discussion is putting the cart before the horse. For financial planning, the purpose is to replace your main income with passive income. So if you are having 2L per month income, when you accumulate 2 Crore or some such, you can retire on the income and stop working.
Without knowing the income amount and age, one cannot calculate the amounts which can be generated from passive investments.
If the target is 5Crores, then why in 10 years? Why not a simple aim - I want to be rich.
There are only two ways (apart from the jokes already made :-)
1. Earn more in a better job
2. Start your own business
First you need to know yourself - do you have it in you?
If the thought of starting own business gives you a heart attack - dont do it. In business you have to survive many heart attacks and put up with many vagaries out of your control.
Why not try for a better job? Why not emigrate to better paying countries? Cant you upgrade your skills and get a better job? A person in their 20s should spend all their time doing only these things.
Investments will not ever make you rich. They can only make your situation slightly better - it cannot change the order of magnitude of your money.
But for many people, business might be too difficult because of deficient people skills - and a better job might not be possible - and emigrating might not be possible.
For them, Abhshek (and one other person's idea) is best - if you can make 4-5 hours of time every day, after your main job, do a low risk business. Possible low risk options (already mentioned by others):
1. Real estate (requires capital - need to start with 1Crore) and good understanding of business and real estate cycles. Those with deficiencies in both attributes - stay away or be lucky (luck has made many people I know quite rich)
2. Cars, vehicular hire - low risk business, requires some amount of risk taking with good returns. Many low level govt servants earn well in this
3. Rental property:
4. Shops - if you can meet an existing demand, you will become quite rich
5. Writing (like wisey, I am intrigued how the blogger made money)
At the end of the day, being rich wont make you happy. The 4 hours making money in the evening might be better spent in relaxation and family - after al that is what money is for - it is ony a means to an end.
Another point - there is little point in earning more than 1 Lakh per month in India - even if you have more, it wont improve your quality of life much. Most things which can be bought with money are already available in that salary -or it is simply unavailable (like water, electricity, air, good food, good people, good homes, clean cities.
Of course, periodic inflation adjustment is needed for that salary.
And who knows - after a while your low risk business might make you much more money than your salary
Buy the 2BHK now - but buy the best investment location and dont try to live in it . Just rent it out. It is an investment, not to be mixed up with own home.
While waiting for equity of various kinds (including home equity) to accumulate so that you can buy the best - live well in a rented 3BHK in a good location.
Treat your 3/4BHK as a "purchase" i.e. chose the location which suits you, the size which suits you, the quality which suits you - dont compromise. This is an expenditure. The 2BHK was an investment. Dont confuse.
But also, while waiting, dont compromise the quality of your life by trying to live in the 2BHK just to save a little rent - there is no harm in renting a house which gives you a better quality of life than the flat you can afford - rent in a good area with good schools, close to work, with good shopping. The money spent on renting is not a waste - it is money well spent. Take advantage of the fact that rentals are low in India. In fact, rent a home in your dream location where you would buy in future - make the area your own, make friends and also live the same life which you would lead in the future - when you shift from rented to own.
And never make the mistake of buying in a hurry the wrong home in the wrong location just because prices are rising every day. There are ways to hedge against the price rise as already detailed above.
Your location and size should be decided properly based on expected accumulated equity of all kinds at about 45 years of age i.e. project the best possible price you can pay when you are about 45 - jack in 12% per annum price appreciation for homes into it - and estimate what your affordability is (45 is the target age because one assumes 15 years home loan and 60 years retirement). Based on this factor only your location and size of flat should be determined - not based on what you can afford now or the locations sold to you as up and coming by builders
The time to buy is always now - provided you can afford it (talking about roof over the head here - not second house). It should be done
1. When career is well settled. Buying too early is also wrong - the 20s should be spent in bettering one's earning capacity. Buy when career path and ideally even city is well settled.
2. When you can pay down 50% of the cost if needed - that means financially well secure
3. Buy the best - dont settle for "buy a 2BHK and then shift to 3BHK later" type of thinking - again, that usually happens when one buys too early when career is not settled and bank balance is too low.
4. If you are not buying what you need right away, split the cost of RE into 2 and buy a plot (within capacity) now - sell the plot to buy the flat when you are ready.
5. If you cannot afford a plot, put part of money is a short term (5-6 year) RE investment. Remember, EMI is another name for a systematic investment plan into RE. Keep EMI low so that your other savings can also accumulate i.e dont overinvest in RE component - try to split investments into 30%RE, 30% stocks and 30% fixed return.
So if your investible surplus is 30,000 per month, then EMI should be for 10,000 Rs i.e. you can take a 10L RE loan without skewing your investment into RE. Since you cannot get anything for 10L, exept small shops, get that if your career has peaked - or wait for a bigger capacity - since if you have 10L in FD, your loan bearing capacity increases to 20L since the 10L in FD pays interest of around that much.
Best way is a do it yourself SIP - buy group of funds whenever market fall.
Another way is SIP plus bulk buys into same funds whenever markets fall.
Both need some market knowledge
My bond funds have also done well and even gilt funds are now giving return. Naturally since we already had a 50bps cut couple of months ago - lets see what happens monday.
Returns are likely to be muted going forward. I dont expect Repo rate below 7.5% no matter how much Indian growth slows done - because it is a stagflation and RBI just cant lower it to prevent runaway inflation.
I will exit all bond and gilt funds when Repo touches 7.5% and switch to stocks.
A 1% drop in Repo from 8.5 to 7.5 if faithfully translated into a 1% drop in gilts will give a 10% return on a bond/gilt fund. Assuming a years time for yields to drop by 1% and an 8% return on the bond for one year, one can anticipate an 18% return from gilt/bond funds assuming bought at 8.5% repo and sold after repo touches 7.5% over holding period of 1 year.
Good for you that you are waiting and accumulating a downpayment amount. Kudos.
But you are making one essential mistake in your analysis. Real estate has to be "REAL"
Booking of under-construction flat is "UNREAL" - you are trying to discover a price for something which does not exist.
"Real" estate means registered property with people living in it.
"Unreal" estate means flat bookings and plots where nobody can live. These are speculations and subject to crazy price movements based on herd instinct and external factors.
Your booking or plot is just a piece of paper which you can trade.
If real estate is like a share, unreal estate is like a futures and options contract with your builder buyer agreement being the contract.
People keep mixing up investment (in "real" estate) - (an investment means buying a future stream of return), speculation (in "unreal" estate) - (speculation means buying something whose price can fluctuate, hoping you can make a return) and expenditure (buying a house to live in - roof whether rented or own being an essential requirement for life - which millions in our country lack)
Prudent people will take care of their expenditure, then make investments and only then go for speculation (to boost their returns, since their risk bearing capacity has increased)
In India people make a flat booking and think they have done all three when actually it is just a castle in the air. Sometimes it works, sometimes it doesnt - it is totally chaoic and irrational and unpredictable.
As far as I am concerned, unless quite rich, a person buying a roof over his head should buy RTM. If capital is scarce, it should not be risked in speculation over "bookings" and "plots". First house should be bought after career is settled, (usually mid thirties). Later, one can go for a "booking" for an upgrade in their late 40s or so.
Indian RE is a black market where people corner a scarce commodity (RE) and have enormous holding power.
The day Indian RE stops being scarce, its prices will drop. That requires RE reforms.
All indications are that it will continue to be a scarce commodity. So Indian RE should be analysed as a black market and not as a regular market.
Basically the small supply of new properties will be cornered by a small group of well to do individuals who will dictate prices - as it happens today. This situation needs different type of analysis.
India will essentially double its supply of upper middle class people as the children of the current middle class grow up. They will provide the captive market for this RE expansion. The money for this will come from Mummy Papa's savings.
As it does today - right no
RE is scarce in India because people buy vacant property and keep it locked up (at least in Delhi). THey have enough money and dont want to sell it.
Try buying a RTM flat - nobody will negotiate prices with you because it is a seller's market and buyer has no option.
Number of vacancies has no relation to the number of properties on the market. Flats kept empty become a store of wealth for the future. Also a store of black money (selling RE without paying capital gains tax is also the biggest source of black money in our economy - not corruption)
Not everyone has bought flats for their children - that activity is ongoing and will consume most of the fresh supply for the next many years. Captive customer base of well to do people, who started earning well in the last decade and have another 2 decades of working life left.
Otherwise, prices would be one third of current prices
As someone said on another thread elsewhere - property (plots) in India gives 10-12% return every year, except in one or two "leap" years where it gives 20-40% spurts. Every ten years, there is a temporary 20% drop in resale plots, always followed by quick recovery.
The last 2 such "leaps" were seen in 2007 and 2010. The last 2 slumps were in 1996/7 and 2008/9
All I can say for sure is that there will be no leap in 2012 or 2013.
Inflation can also destroy value of money - in inflationary times, a 30% weight in RE is the best way to stay safe and preserve capital.
10 years from now, 1 or even 5 crore might seem a trivial amount.
Remember how 1 L was a big sum 10 years ago? Now it is monthly salary for many and writing 1L cheque is routine - in 1995 1L was my entire lifetime of savings
Rupee depreciation can also play a role - ridiculous current dollar valuation of property can then seem normal - since dollar value of the property will drop as rupee depreciates.
I actually said wealth preservation - so if you have 1Crore, putting 30L in RE (flat booking) makes sense.
With bigger net worth of 5Crore, putting 2 Crores in a couple of plots makes sense.
The only time loan for property makes sense is for own home - and that is an expenditure, not an investment and is based on personal things.
Taking a 11% loan for an investment giving 2-3% (rental) yield is not so great an idea - one can do it, if your own roof is paid for and you feel you can rebuild your stock and bond portfolio - even then, at least 50% downpayment should come from own funds.
Or if you are a really long term player and dont mind a high maintenance illiquid asset like rental property - then a loan for maybe 25% of income going out as EMI may be justified, given the tax breaks for rental property - and only for RTM flat.
In any case, property investments require a lot more effort and headache than stocks.
Right now is a recession and not a bubble - a time for slow projects and project abandonments, not price correction - some people will lose their shirt if their builder collapses. As inventory is destroyed in this fashion, prices wil paradoxically rise for the remaining good projects
On Stocks
In every stock recommendation, I look only for "sell" recommendations. The buy reccos are usually a dime a dozen and in one week of business dailies, almost every company in NSE will geta buy recco.
Thanks for your sell recco - I have some underwater Chinese funds (down 10-15%) and will sell them off now - the sums are small and after 1.5 years of following them (one tends to track what one owns much better - so I always buy a tracking amount to see how it goes), I see no hope of any sensible recovery. Better to exit.
Also, better to exit LAtin American funds also. In fact I plan to exit all international funds - as a whole I must have made some 2-3% return after one year of staggered SIP entry - one fund (global real estate fund) - gave good returns, rest lost money on the stocks but made money on currency depreciation, mostly breaking even.
Caveat to above - From 2003 to 2005, PE ratio stayed same at low levels, while earnings grew so fast, company stock prices raced.
Same thing can happen with earnings degrowth - curent PE of 14 can go up to 20 also, with a 30% earning degrowth.
The whole stock market question is this - how low will the next 2 quarters earnings be? Static or degrowth?
I am personally staggering investments over next 6 months keeping this uncertainty in mind.
Regarding building strong equity portfolio, 5L is too small an amount for individual stocks - go with a good large cap fund like Franklin bluechip or a balanced fund like HDFC prudence and buy on every dip, stagering investments through next 2 quarters of earnings.
Ideal fund portfolio has about 40% in large cap (2 funds), 20% in small/mid cap (1 or 2 funds), and the rest depends on liquidity needs - if you need the money in next 3-4 years, keep rest 40% in balanced fund (2 funds) or go with 20% balanced and 20% FMCG fund. Either way you get 5-6 funds.
If you dont have liquidity needs at all and can ride for 15 years, stay with 40% large cap (2 funds), 30% mid cap (1 fund) and 30% smal cap (2 funds) for a total of 5-6 funds again.
All fund entry should be during bear markets (like now) and exit in bull markets (expected somethime in next 5 years). This is because fund managers have to be in equity at all times - whereas we can hold cash as individual investors. Funds fall and rise with the markets - we can however be fully in equity in bear times and pull out systematically when market gets overvalued in bull phases.
Once corpus exeeds about 10L, one can allot next 5L for direct equity.
In bear markets like now, always select only large cap sense-x/nifty companies and avoid small and mid cap totally. Reason for direct stock investment is only one - fund manager will never stick with contra ideas. With direct stocks, contra ideas can be explored and held through recessions - for example, in the current recession, metals and infrastructure are beaten down - you can buy a L and T and a Tata steel and hold it for whatever time is neded to get good returns. Direct equity is always - ALWAYS - or time periods exeeding 15 years if necessary.
June IREF: On Retirement Homes:
oorg is great. A little remote for airport access and small roads.
Mysore is fantastic
Ranikhet is also great. Close to Corbett. A place along the Kosi river, a little away from Ramnagar and before the Ranikhet road would be great. Amazing scenery in the Kosi valley.
Chail is also great but a little far to drive from plains. Kasauli is closer but I dont like it so much. Chandigarh plus Kasauli is a good option - also Chandigarh plus Chail/Barog - or a farm near Sadupul.
Mussoorie is easy to drive to but very crowded and horrible. Very rough crowd. I always prefer the Kumaon hills with nicer people. Perhaps one of the smaller valleys near Mussoorie would be good.
Simla is too crowded. Mashobra is great but too far from Kalka.
I visited Dehradun just 2 weeks ago. Not that bad. Maybe something on the outskirts near airport. Much cooler than Delhi by some 3-4 degrees at least.
Pondicherry is quite hot.
Coimbatore, Ooty, most places in Karnataka including Bangalore, Mysore, Goa, Pune and the Himalayan foothills are the best places.
Go where the British went - they went to the best places - even if they had to build a road to reach there !!!!
I agree with Sanjana on this - price stagnation for 2 years in small cities is inevitable.
Frankly, I would never buy except in a metro or outskirts of a metro city - prices appreciate most there only.
In small towns, it is really cheap to rent. If you buy in Delhi and rent it out, this rental income will suffice to rent out a really big bangalow in any small town.
In TVM, a 1000 yards plot with big house was renting for 3L per annum - capital value was 3 crore - i.e rental yield of 1%.
Its crazy to buy any such thing.
In any case, retirement should be in the city with the best hospitals.
Re: DDN, I saw a really nice group of villas for about 75L each on the haridwar DDN road - with the naturoville spa hotel inside it. Really good, on 1000 yard plots, excellent maintenance and amenities. Once the road is finally widened beyond Muzaffarnagar, will be very well connected.
I would always go with apartment in Delhi plus villa in the DDN/Rishikesh plus small cottage in one or two hill stations nearby based on choice. Never put all your eggs in one basket. And never start with the hill station - progression should be city - town in foothills - hill station (from most to least appreciation and rent).
Wiseman, RE for personal consumption is always the best bet - think of it as expenditure, forget all investment related thought process and just buy what you want!
And yes, the pleasure of living in own cottage is always so much greater than a rented room. Pottering around in one's garden is also definitely worth it. And yes, spending time with relatives and friends is always what life is all about - the mad rat race is a most unpleasant thing, to be avoided if possible.
Sharp, agree with the point that nobody rents a house to live in 15-20 days in a year. Most tier 2 and 3 cities have seen price rises, but this is nothing compared to the rises possible in times of very high inflation. Also, as rural/small town people's incomes rise, it will sustain a multiyear bull market in tier 2 and 3 cities. So buying property there is definitely justified.
Only caveat - you will make good absolute gains in small towns much above FD rates but in terms of percentage gain, big metros will always outpace small towns. But then the ticket size in metros will also be big - whereas you can get someting decent sized for even 20-30 Lakhs.
In a few more years, 20-30 Lakhs will seem like small change, the way inflation has been working its black magic.
Re: Solar panels, I believe there is a finite life for these panels and you have to replace every few years - and the lead accumulators also need replacement every 4 years or so. A petrol/diesel generator is a much cheaper, more practical and portable option - just load it into the back of your 4WD and you can carry your power source with you if the grid fails. One gen set will serve for all your houses.
Except for the pollution (noise and smoke).
If you are based in Bangalore, then thats the obvious choice, no matter how degraded the city might have become - it is still better than most others in India. Chennai is clearly a investment property - so Bangalore would probably be the choice for a good apartment - any day 1000 times better for living in than Chennai. Airport will also develop along much better lines in Bangalore in future.
So apartment in Bangalore, big villa in mysore and a couple of cottages in Ooty/Coorg would be about all the RE any normal human would be able to consume on his own - unless your kids can use it (unlikely - kids will go their own way).
Another option is a farmhouse in Karnataka hinterland - nix one of the cottages (it is always better to rent a hotel room when and where you need it - get a club mahindra membership)
Hyderabad, Kodaikanal and Chennai are all too far for easy and frequent driving from the core area of Bangalore/Mysore/Ooty. Drivability is very important.
And do it as an expenditure - forget about the investment aspect of RE - it will never ever make any sense !
Have fun!
Mysore is fantastic
Ranikhet is also great. Close to Corbett. A place along the Kosi river, a little away from Ramnagar and before the Ranikhet road would be great. Amazing scenery in the Kosi valley.
Chail is also great but a little far to drive from plains. Kasauli is closer but I dont like it so much. Chandigarh plus Kasauli is a good option - also Chandigarh plus Chail/Barog - or a farm near Sadupul.
Mussoorie is easy to drive to but very crowded and horrible. Very rough crowd. I always prefer the Kumaon hills with nicer people. Perhaps one of the smaller valleys near Mussoorie would be good.
Simla is too crowded. Mashobra is great but too far from Kalka.
I visited Dehradun just 2 weeks ago. Not that bad. Maybe something on the outskirts near airport. Much cooler than Delhi by some 3-4 degrees at least.
Pondicherry is quite hot.
Coimbatore, Ooty, most places in Karnataka including Bangalore, Mysore, Goa, Pune and the Himalayan foothills are the best places.
Go where the British went - they went to the best places - even if they had to build a road to reach there !!!!
I agree with Sanjana on this - price stagnation for 2 years in small cities is inevitable.
Frankly, I would never buy except in a metro or outskirts of a metro city - prices appreciate most there only.
In small towns, it is really cheap to rent. If you buy in Delhi and rent it out, this rental income will suffice to rent out a really big bangalow in any small town.
In TVM, a 1000 yards plot with big house was renting for 3L per annum - capital value was 3 crore - i.e rental yield of 1%.
Its crazy to buy any such thing.
In any case, retirement should be in the city with the best hospitals.
Re: DDN, I saw a really nice group of villas for about 75L each on the haridwar DDN road - with the naturoville spa hotel inside it. Really good, on 1000 yard plots, excellent maintenance and amenities. Once the road is finally widened beyond Muzaffarnagar, will be very well connected.
I would always go with apartment in Delhi plus villa in the DDN/Rishikesh plus small cottage in one or two hill stations nearby based on choice. Never put all your eggs in one basket. And never start with the hill station - progression should be city - town in foothills - hill station (from most to least appreciation and rent).
Wiseman, RE for personal consumption is always the best bet - think of it as expenditure, forget all investment related thought process and just buy what you want!
And yes, the pleasure of living in own cottage is always so much greater than a rented room. Pottering around in one's garden is also definitely worth it. And yes, spending time with relatives and friends is always what life is all about - the mad rat race is a most unpleasant thing, to be avoided if possible.
Sharp, agree with the point that nobody rents a house to live in 15-20 days in a year. Most tier 2 and 3 cities have seen price rises, but this is nothing compared to the rises possible in times of very high inflation. Also, as rural/small town people's incomes rise, it will sustain a multiyear bull market in tier 2 and 3 cities. So buying property there is definitely justified.
Only caveat - you will make good absolute gains in small towns much above FD rates but in terms of percentage gain, big metros will always outpace small towns. But then the ticket size in metros will also be big - whereas you can get someting decent sized for even 20-30 Lakhs.
In a few more years, 20-30 Lakhs will seem like small change, the way inflation has been working its black magic.
Re: Solar panels, I believe there is a finite life for these panels and you have to replace every few years - and the lead accumulators also need replacement every 4 years or so. A petrol/diesel generator is a much cheaper, more practical and portable option - just load it into the back of your 4WD and you can carry your power source with you if the grid fails. One gen set will serve for all your houses.
Except for the pollution (noise and smoke).
If you are based in Bangalore, then thats the obvious choice, no matter how degraded the city might have become - it is still better than most others in India. Chennai is clearly a investment property - so Bangalore would probably be the choice for a good apartment - any day 1000 times better for living in than Chennai. Airport will also develop along much better lines in Bangalore in future.
So apartment in Bangalore, big villa in mysore and a couple of cottages in Ooty/Coorg would be about all the RE any normal human would be able to consume on his own - unless your kids can use it (unlikely - kids will go their own way).
Another option is a farmhouse in Karnataka hinterland - nix one of the cottages (it is always better to rent a hotel room when and where you need it - get a club mahindra membership)
Hyderabad, Kodaikanal and Chennai are all too far for easy and frequent driving from the core area of Bangalore/Mysore/Ooty. Drivability is very important.
And do it as an expenditure - forget about the investment aspect of RE - it will never ever make any sense !
Have fun!
June IREF: On Productivity
Most Indian currently joining the work force in their millions are worth 20-25000 pm kind of white/blue collar jobs only, barring a small group of highly skilled workers who are exceptions and not the rule.
This kind of shift has two main features:
1. It is going to happen regardless of what mess the govt creates
2. Without massive training and retraining, these people will find it exceptionally difficult to move up the ladder.
Room for a lot of discontent here - in a few years, 20-25000 jobs will not satisfy this massive young population.
Expect fireworks in the 2014 and subsequent elections
This is the kind of disruptive new ways of doing things which can well upset the RE bubble cart. Good one.
It will become useful when people earning 20,000 Rs per month are able to work from home town. They are the ones who cant afford the city.
Unfortunately, most of the tier 3 youngsters are technologically challenged and also cant do call center work because of poor English
If the very best earners leave the city, numbers will be too few and wont have impact.
But my experience is that city people need the city and feel upset with the lack of everything even while on holidays - how many times we scream that our iPad's network is poor - instead of leaving that thing behind at home?
think you are missing the main point.
In India we have two kinds of people - those earning 1-2 L (still middle class) and those earning 25-50.000 pm.
Those in the second group will have to struggle to buy own flat - whether they save up or whether they get EMI. This group are in the group where many of our fathers were - no matter how high a position they held, for them RE was always expensive
It is the first group that are unable to forget their past and keep buying RE - because of the special "attraction" which is a relic of the past hardships. Most of them already have one inherited home, those in their 40s would have already bought another - and still they are busy chasing after yet another flat - despite being professionals - and tying their life down to be EMI slaves.
They cause the bubble. If everyone bought one flat which fulfilled their needs, then why a bubble?
But think of people in the IT industry - all have 2-3 flats and have seen massive capital appreciation - and all they can think of is the next booking. They are unable to find anything better to do with their money - so they keep buying flats.
As for spoilt children - I meant that todays children are denied nothing and dont know the meaning of hardship. At least my generation had a very deprived childhood because our parents despite being good wage earners for their time, lived in the deprived 79s and early 80s. So we value small things and attach a "deprivation value" to a lot of things.
Our children with a more balanced upbringing do not do so. Unfortunately, they also dont learn the value of hard work as well as most of us did - this I have observed in all countries including developed countries.
Re: buying at 25 vs buying at 45 - if you buy at 25 the property appreciation is yours while the inflation is the banks.
If you buy at 45, then property appreciaqtion someone else pockets while you bear the cost of inflation - a double whammy.
Only reason our parents did not use leverage was because it was too expensive at usurius rates in the 70s and 80s. The mortgage revolution is just 10-15 years old in India.
Unfortunately, if you are buying property at 2022 or 2032 valuation in 2012 - then you and the bank share the depreciation while the builder laughs all the way to the bank with both groups money - he has extracted the lions share for himself.
Actually our fathers scraped money from miniscule salaries, saved up and with great difficulty bought one flat.
Those days there were no home loans (24% ROI anyone?) and no reputable builders. The cost of the flat was some entire lifetimes savings.
This thinking that flat is some much sought after and difficult to acquire thing of great value has seeped from our parents consciousness into our own.
Many people earning well cannot think of anything else to do with money - when we were children, we were taught not to waste and we cannot change our thinking. None of us have learnt the line which distinguishes waste from useful but big expenditure.
And alas, none of us knows at what price a flat becomes a wasteful expenditure - a humongous waste which puts all other wasteful expenditures into the shade. How can we - we have grown up thinking a flat is a mona lisa - priceless.
And so we keep piling on to more and more real estate and jewellery as if it is the purpose in life to acquire flats and plots and jewellery.
Our children, who we think we are spoiling - might grow up without these hangups and make more informed decisions on what is worth it and what is wasteful
I agree with your sentiments and much of your logic - though you have exagerated the numbers.
In the 1980s, we had 10% plus inflation, 15-17% interest for debentures, over 12% interest in bank FDs, 18% plus home loan rates. And amazing RE price inflation.
When same kind of horrible govt comes, with same stupid policies, why wouldnt we get the same results?
I do think rest of the 2 years of UPA2 will have some good policies. But much of the damage is already done.
India is currently not productive enough to get better salaries. Current levels will be static for maybe a decade - in fact Indians were getting overpaid when Rupee was strong, after 20% depreciation, we are correctly paid. Our productivity justifies only current salaries.
In other countries, big cities bring about massive increase in productivity with increased efficiency.
Indian cities are inefficient and dont do that. So although urbanization is happening increasingly, the limits of efficiency gains are being reached too quickly - making it easier to develop industry/services in tier 3 cities and towns because of better roads and telecom.
BJP ushered in both the telecom and road revolutions. Congress and socialists traditionally try to prevent this type of development. So in 8 years of Congress, both telecom and roads are being spoilt.
But people have tasted the improvements and I see all villages now developing on site without migrations regardless of Congress and socialist backwardisation.
The biggest asset in villages is land and it can be leveraged to increase productivity in many ways.
Indian sailors are in great demand by foreign vessels and might crew about 1/3rd of all sailors in the world (not sure)- we rank with norway in having largest numbers of sailors.
It is difficult to find a ship registered anywhere in the world, which doesnt have Indians. They are known for taking orders, putting up with hardships and not fighting.
Most ordinary sailors will also earn more than IT pros working in India (and me). Usualy they buy flats in Bombay, Mangalore, Cochin, Chennai, Vishakapatnam etc.
Unlike other countries, their wives wait for them (any other country their wife will divorce them or they cannot get married at all). Hence becoming a sailor is a viable career option in India
This kind of shift has two main features:
1. It is going to happen regardless of what mess the govt creates
2. Without massive training and retraining, these people will find it exceptionally difficult to move up the ladder.
Room for a lot of discontent here - in a few years, 20-25000 jobs will not satisfy this massive young population.
Expect fireworks in the 2014 and subsequent elections
This is the kind of disruptive new ways of doing things which can well upset the RE bubble cart. Good one.
It will become useful when people earning 20,000 Rs per month are able to work from home town. They are the ones who cant afford the city.
Unfortunately, most of the tier 3 youngsters are technologically challenged and also cant do call center work because of poor English
If the very best earners leave the city, numbers will be too few and wont have impact.
But my experience is that city people need the city and feel upset with the lack of everything even while on holidays - how many times we scream that our iPad's network is poor - instead of leaving that thing behind at home?
think you are missing the main point.
In India we have two kinds of people - those earning 1-2 L (still middle class) and those earning 25-50.000 pm.
Those in the second group will have to struggle to buy own flat - whether they save up or whether they get EMI. This group are in the group where many of our fathers were - no matter how high a position they held, for them RE was always expensive
It is the first group that are unable to forget their past and keep buying RE - because of the special "attraction" which is a relic of the past hardships. Most of them already have one inherited home, those in their 40s would have already bought another - and still they are busy chasing after yet another flat - despite being professionals - and tying their life down to be EMI slaves.
They cause the bubble. If everyone bought one flat which fulfilled their needs, then why a bubble?
But think of people in the IT industry - all have 2-3 flats and have seen massive capital appreciation - and all they can think of is the next booking. They are unable to find anything better to do with their money - so they keep buying flats.
As for spoilt children - I meant that todays children are denied nothing and dont know the meaning of hardship. At least my generation had a very deprived childhood because our parents despite being good wage earners for their time, lived in the deprived 79s and early 80s. So we value small things and attach a "deprivation value" to a lot of things.
Our children with a more balanced upbringing do not do so. Unfortunately, they also dont learn the value of hard work as well as most of us did - this I have observed in all countries including developed countries.
Re: buying at 25 vs buying at 45 - if you buy at 25 the property appreciation is yours while the inflation is the banks.
If you buy at 45, then property appreciaqtion someone else pockets while you bear the cost of inflation - a double whammy.
Only reason our parents did not use leverage was because it was too expensive at usurius rates in the 70s and 80s. The mortgage revolution is just 10-15 years old in India.
Unfortunately, if you are buying property at 2022 or 2032 valuation in 2012 - then you and the bank share the depreciation while the builder laughs all the way to the bank with both groups money - he has extracted the lions share for himself.
Actually our fathers scraped money from miniscule salaries, saved up and with great difficulty bought one flat.
Those days there were no home loans (24% ROI anyone?) and no reputable builders. The cost of the flat was some entire lifetimes savings.
This thinking that flat is some much sought after and difficult to acquire thing of great value has seeped from our parents consciousness into our own.
Many people earning well cannot think of anything else to do with money - when we were children, we were taught not to waste and we cannot change our thinking. None of us have learnt the line which distinguishes waste from useful but big expenditure.
And alas, none of us knows at what price a flat becomes a wasteful expenditure - a humongous waste which puts all other wasteful expenditures into the shade. How can we - we have grown up thinking a flat is a mona lisa - priceless.
And so we keep piling on to more and more real estate and jewellery as if it is the purpose in life to acquire flats and plots and jewellery.
Our children, who we think we are spoiling - might grow up without these hangups and make more informed decisions on what is worth it and what is wasteful
I agree with your sentiments and much of your logic - though you have exagerated the numbers.
In the 1980s, we had 10% plus inflation, 15-17% interest for debentures, over 12% interest in bank FDs, 18% plus home loan rates. And amazing RE price inflation.
When same kind of horrible govt comes, with same stupid policies, why wouldnt we get the same results?
I do think rest of the 2 years of UPA2 will have some good policies. But much of the damage is already done.
India is currently not productive enough to get better salaries. Current levels will be static for maybe a decade - in fact Indians were getting overpaid when Rupee was strong, after 20% depreciation, we are correctly paid. Our productivity justifies only current salaries.
In other countries, big cities bring about massive increase in productivity with increased efficiency.
Indian cities are inefficient and dont do that. So although urbanization is happening increasingly, the limits of efficiency gains are being reached too quickly - making it easier to develop industry/services in tier 3 cities and towns because of better roads and telecom.
BJP ushered in both the telecom and road revolutions. Congress and socialists traditionally try to prevent this type of development. So in 8 years of Congress, both telecom and roads are being spoilt.
But people have tasted the improvements and I see all villages now developing on site without migrations regardless of Congress and socialist backwardisation.
The biggest asset in villages is land and it can be leveraged to increase productivity in many ways.
Indian sailors are in great demand by foreign vessels and might crew about 1/3rd of all sailors in the world (not sure)- we rank with norway in having largest numbers of sailors.
It is difficult to find a ship registered anywhere in the world, which doesnt have Indians. They are known for taking orders, putting up with hardships and not fighting.
Most ordinary sailors will also earn more than IT pros working in India (and me). Usualy they buy flats in Bombay, Mangalore, Cochin, Chennai, Vishakapatnam etc.
Unlike other countries, their wives wait for them (any other country their wife will divorce them or they cannot get married at all). Hence becoming a sailor is a viable career option in India
On Capital Gains Tax
Opinion 1: If you book a flat and sell it before possesion letter, your investment is considered a capital investment. By selling after 3 years of allotment letter, you can book a long term capital gain from property. This can qualify for LTGC gains under 54 and re-investment of other properties which can make your tax liability nil. So you can go for all white transaction.
2. If you book a flat under CLP and get possesion and sell it 3 years after allotment letter is issued (or BBA registered) - same situation as above. Some rulings on sale of industrial plots and DDA flats support this.
3. Some people say - if you book and sell booking, it is ok. But if possesion letter is issued and then you sell - you have to consider possesion letter as date of acquisition. That possesion letter means it is a proper property, allotment letter is an agreement and so possesion letter changes the nature of the property. Case laws seem to be against this - but tax authorities can trouble you - you might need to go to court for this.
4. Contrary to popular perception (and my own until a few months ago) - registration is not the date for acquisition. Agreement and possesion are the main dates. But again, many tax people either out of poor knowledge or just to trouble us and extract a bribe o overlook us - might trouble us on this issue and slap a fine on us.
This is my current understanding of the issue. Might need some modification as more instances come to light
If you sell a booking 3 years after allotment letter, and reinvest - you have to get delivery of the new (one only) flat to get benefit of no LTCG. You cannot serially flip it because the money is in a special account and has to go out to one property only. If for some reason you dont get delivery, - if builder delays - you have to pay the LTCG.
If you keep selling before 3 years, you have to pay short term capital gains on each transaction.
Most people do it in black and dont bother so much.
2. If you book a flat under CLP and get possesion and sell it 3 years after allotment letter is issued (or BBA registered) - same situation as above. Some rulings on sale of industrial plots and DDA flats support this.
3. Some people say - if you book and sell booking, it is ok. But if possesion letter is issued and then you sell - you have to consider possesion letter as date of acquisition. That possesion letter means it is a proper property, allotment letter is an agreement and so possesion letter changes the nature of the property. Case laws seem to be against this - but tax authorities can trouble you - you might need to go to court for this.
4. Contrary to popular perception (and my own until a few months ago) - registration is not the date for acquisition. Agreement and possesion are the main dates. But again, many tax people either out of poor knowledge or just to trouble us and extract a bribe o overlook us - might trouble us on this issue and slap a fine on us.
This is my current understanding of the issue. Might need some modification as more instances come to light
If you sell a booking 3 years after allotment letter, and reinvest - you have to get delivery of the new (one only) flat to get benefit of no LTCG. You cannot serially flip it because the money is in a special account and has to go out to one property only. If for some reason you dont get delivery, - if builder delays - you have to pay the LTCG.
If you keep selling before 3 years, you have to pay short term capital gains on each transaction.
Most people do it in black and dont bother so much.
June IREF
Quite the contrary. When own "money" is at stake, taking extreme sides will make you very poor very fast.
Amit has a fairly well thought out asset allocation plan. Kudos.
Saying RE is overvalued and therefore I wont invest - that is ostrich strategy - get a handle on the market and strike a balance = middle path.
Money is money. It is not a joke.
Gandhi, Dandavate, NS Rao and MMS were discussed to learn from the past - and understand the differences between 1991 and 2012. Also one fact about the Indian psyche - that we are easily misled and have mistaken opinions about exalted people from the past - that history instead of laying things bare becomes obscured by poor quality of historians who dont call a spade a spade. And dont call a moron a moron even though they are long dead. That our collective understanding of what actually happened is frequently totally wrong.
For example, when you read Gandhi's experiments with truth and realise what he believed in - the poor quality of intellectual capital demonstrated by that piece of writing - then only can we understand the poor quality of political forces which have shaped our nation - and why there are so many deficiencies in it. The father of our nation requires more serious study than what our squeamish, sycophantic and unable to criticise intellectuals are able to devote to it. After all, the man is dead - what we say now cannot hurt him.
But when it hurts others of today - we have to wonder why our countrymen are so easily hurt.
As you say - there exists reality. And we are trying to fine tune our understanding of it - in the hope that
1. We dont repeat past mistakes
2. When past events repeat or threaten to repeat, we position ourselves to prevent loss and if possible, to make profit.
Frankly, my discussions here over the last 3 years have really honed my thinking process no end. My own limitations and fallacies get exposed too. Thanks to all those who argued with me.
Amit has a fairly well thought out asset allocation plan. Kudos.
Saying RE is overvalued and therefore I wont invest - that is ostrich strategy - get a handle on the market and strike a balance = middle path.
Money is money. It is not a joke.
Gandhi, Dandavate, NS Rao and MMS were discussed to learn from the past - and understand the differences between 1991 and 2012. Also one fact about the Indian psyche - that we are easily misled and have mistaken opinions about exalted people from the past - that history instead of laying things bare becomes obscured by poor quality of historians who dont call a spade a spade. And dont call a moron a moron even though they are long dead. That our collective understanding of what actually happened is frequently totally wrong.
For example, when you read Gandhi's experiments with truth and realise what he believed in - the poor quality of intellectual capital demonstrated by that piece of writing - then only can we understand the poor quality of political forces which have shaped our nation - and why there are so many deficiencies in it. The father of our nation requires more serious study than what our squeamish, sycophantic and unable to criticise intellectuals are able to devote to it. After all, the man is dead - what we say now cannot hurt him.
But when it hurts others of today - we have to wonder why our countrymen are so easily hurt.
As you say - there exists reality. And we are trying to fine tune our understanding of it - in the hope that
1. We dont repeat past mistakes
2. When past events repeat or threaten to repeat, we position ourselves to prevent loss and if possible, to make profit.
Frankly, my discussions here over the last 3 years have really honed my thinking process no end. My own limitations and fallacies get exposed too. Thanks to all those who argued with me.
June IREF: On Rain Water Harvesting:
t is a common misperception that open soil conserves water.
Actually, rain soaks only top couple of meters of soil - like a sponge - and then evaporates it out into the air after rain stops.
So soil is the enemy of rain water harvesting and recharging aquefiers.
What is needed is complete concretisation - so rain water runs off without absorption - into rain water channels - which feed aquefiers.
However, these systems wont work in India - our sewage is so poor, rain water channels will turn into sewers. Also people defecate and piss in open.
Recharging such contaminated water into aquefiers will poison it.
First people and our poor quality of civil engineering needs to change. India gets enough rain for 10000 litres of water "per person PER DAY" - all of which goes into sea mixed with sewage.
God has given everything in abundance to India except people.
__________________
without proper recharge, water percolating enough to reach water table is very low.
Even then, our monsoons are so heavy that it does recharge water table.
Once the top 2 meters of soil get soaked, fresh rain tends to run off into the drainage system (otherwise called nullah - or nala - a natural arroyo which is used for sewage outside monsoons - and reaches the sea.
Everything worked in the past because rain gods blessed India so abundantly and we had 3 months of continuous rain
North India is also blessed - not only with rain and perennial rivers, but also a water table at 10-15 feet - basically UP and Bihar are sitting on a giant lake which God has provided (knowing that on their own, people wouldnt do anything?) - just dig and you get water.
No other country is so blessed.
But now look at the over-extraction of water in Gurgaon region - the satellite photos are really alarming - a permanent destruction of the water table - we cannot even use what God has already given us sensibly
Actually, rain soaks only top couple of meters of soil - like a sponge - and then evaporates it out into the air after rain stops.
So soil is the enemy of rain water harvesting and recharging aquefiers.
What is needed is complete concretisation - so rain water runs off without absorption - into rain water channels - which feed aquefiers.
However, these systems wont work in India - our sewage is so poor, rain water channels will turn into sewers. Also people defecate and piss in open.
Recharging such contaminated water into aquefiers will poison it.
First people and our poor quality of civil engineering needs to change. India gets enough rain for 10000 litres of water "per person PER DAY" - all of which goes into sea mixed with sewage.
God has given everything in abundance to India except people.
__________________
without proper recharge, water percolating enough to reach water table is very low.
Even then, our monsoons are so heavy that it does recharge water table.
Once the top 2 meters of soil get soaked, fresh rain tends to run off into the drainage system (otherwise called nullah - or nala - a natural arroyo which is used for sewage outside monsoons - and reaches the sea.
Everything worked in the past because rain gods blessed India so abundantly and we had 3 months of continuous rain
North India is also blessed - not only with rain and perennial rivers, but also a water table at 10-15 feet - basically UP and Bihar are sitting on a giant lake which God has provided (knowing that on their own, people wouldnt do anything?) - just dig and you get water.
No other country is so blessed.
But now look at the over-extraction of water in Gurgaon region - the satellite photos are really alarming - a permanent destruction of the water table - we cannot even use what God has already given us sensibly
Monday, June 11, 2012
June IREF: On Macroeconomics
n stagflation, it is the contrary.
Land which is unusable loses value - nobody has money to waste on empty land. So plot prices plummet - nobody has money to spend on construction - construction costs also inflate. Empty plot is useless - its prices rises in good times only. Remember plot prices in 1996, 2001 and 2008? Some 50% drop from peak. Similarly, a flat in remote places like Daruhera, greater noida etc will lose value. People wont live there because petrol for commute is expensive.
Actual rentable property - in places close to jobs or good shop locations - they maintain value.
Rentals actually go up a lot. Remember the 70s and 80s - rent for flat used to be one half of salary in places like Bombay.
When the "inflation" part of stagflation makes everything expensive, the base rent (smallest livable flat i.e. small 2BHK flats in Delhi's unauthorised colonies) - they go up a lot.
It has already done so recently. Rent for the base flat in Gautam Nagar of South Delhi is now 12,000 Rs per month. In 2008 it was 5-6000Rs. That is a 100% increase. So a guy earning 25000 per month is now forking out 50% of salary as rent. Or living remote and biking to work 25Km each way = 70Rs a day = 2000 per month.
Thats the floor - rent for the cheapest flat. And the kind of people who own these types of flats dont compromise on rental value - mostly rough badmash types who bought the property through all kinds of means - the types who squeeze the maximum out of their property.
In recession, one buys in main metros without new supply - because in recession people dont have money and so prices dont go up so much. Only there, in the middle of metros, will the rentals increase with stagflation. Rentals in far flung places will fall.
In boom times one buys away from main cities in up and coming areas - because prices in main cities go up too much and in boom time, there is more development.
Buying in far flung areas during recession is a big mistake. I have learned this the hard way - when in 2009 I went for DEay location instead of GCX.
In boom time one plays the booking game. In recession/stagflation one buys prime property
A bubble can burst in 2 ways - either the prices come down - or the currency loses value to reflect the new price as normal.
Traditionally, in USA and Britain before that - i.e. developed country with steady currency, prices come down.
In India, traditionally, inflation and depreciation of currency are what normalise the prices. So in the early 80s, in 1990-91, in 2008 and right now - it is the currency which gave way - not the RE prices.
There are other ways for bubbles to burst. Those without RE in portfolio will surely regret. 2003 to 2008 in India was an extraordinary time wiht low rates. Never seen before.
It may never be seen again. India is now back to normal - a bumbling mess.
Did you know that the lions share of "services" in India is contributed by "Govt?". And that "productivity" in Govt is measured as expenditure?
So money spent on NREGA, fertilizer subsidy, defence expenditure and salaries to govt servants is straight jacked in as "GDP"
Dont recall exactly, but last I remember some 30% of India's GDP is calculated on the basis of this servises i.e. money spent plus "salary paid to Govt servants" - both central and state combined.
Whether there is any level of productivity there is not counted at all.
Now you know why the component of services is rising in our economy - because of govt pay commissions!!!!! and spending sprees.
If you build a road for 1billion dollars, and it is washed out in rain and next year you again spend 1.05 billion, then it is counted twice - this year and next year - and since next year you spent more i.e 1.05billion - voila - there is your 5% GDP growth !!!!!!
The soviets went bankrupt with this kind of "productivity" and ran their country into the ground.
Well, its not that bad - Govt expenditure is mentally "discounted" by people.
And mind you, Industry and software was also growing - something has to grow for the govt to tax and spend after all.
Basically the taxation and inefficient expenditure became too much. Govt spending has three levels of inefficiency attached to it.
1. Usually, govt spends money where it shouldnt - like NREGA or fertilizer subsidy or minimum support price grain purchase
2. Second, there is an element of leakage and corruption where politicians and babus loot much of the money
3. This generates black money which notoriously has much slower velocity than white money.
Many people actually praise black money as "preventing RE crash". But what they fail to realise is that black money has a habit of stopping money velocity in its tracks.
In a white transaction, if you spend 100Rs, the person you give it to again spends it to and so on - the same 100Rs will exchange hands many times - each time someone gets a 100Rs as income. Each time he again spends it, he generates employment and someone else earns that 100Rs. There is a huge beneficial effect. This is the effect of money velocity.
Each time that 100Rs gets spent, 10Rs gets taxed by govt - so it is possible to get 200Rs in tax if the same 100Rs passes hands 20 times
Now black money is not spent similarly. Most black money ends up as an empty plot, empty flat, gold in a locker, cash under someone's bed or sent abroad in hawala so that the velocity benefits other countries.
OR - black money gets spent in totally useless ways - like boozing, or other bad habits. Adds little to useful product and generates more problems than the utility of the velocity generated.
The only time black money gets converted into white money is at election time - when jeep walas, printers and other people are paid for their services and the money gets back into circulation.
Everytime real estate and gold gets into a bubble, it is an indicator of the underlying malaise of black money. It means economy will come to a grinding halt.
Until we get rid of the problems in our govt, get rid of corruption, get rid of black money and hawala - they will always overwhelm the good parts of our economy - manufacturing and IT.
And Sanjana, in 2006-7 I always remember my visits to Bombay - just looking out of the window of the car with Sense-x at 20,000 and thinking - look at these people - how is India shining? They look like beggars! And my relatives would talk about how much money they were making in the stock market - so was I - and the picture outside the window was completely different.
Any other country which is shining - look out of the window an you see a modern city. Hong Kong, Shanghai, even Bangkok. Or even Kuwait or Dubai.
We look out and we see only dirt and poor people.
No wonder slumdog millionaire got made. India was never shining. Some people in middle class got paid somewhat similar to the same kind of job elsewhere because of globalization.
The majority were unemployable. And the hype misled us. I sold out my stocks in November 2007, thinking this is too much. I was right.
Unfortunately I didnt get back in when we hit 8000 sense=x in 2009. Still lamenting the missed opportunity
Land which is unusable loses value - nobody has money to waste on empty land. So plot prices plummet - nobody has money to spend on construction - construction costs also inflate. Empty plot is useless - its prices rises in good times only. Remember plot prices in 1996, 2001 and 2008? Some 50% drop from peak. Similarly, a flat in remote places like Daruhera, greater noida etc will lose value. People wont live there because petrol for commute is expensive.
Actual rentable property - in places close to jobs or good shop locations - they maintain value.
Rentals actually go up a lot. Remember the 70s and 80s - rent for flat used to be one half of salary in places like Bombay.
When the "inflation" part of stagflation makes everything expensive, the base rent (smallest livable flat i.e. small 2BHK flats in Delhi's unauthorised colonies) - they go up a lot.
It has already done so recently. Rent for the base flat in Gautam Nagar of South Delhi is now 12,000 Rs per month. In 2008 it was 5-6000Rs. That is a 100% increase. So a guy earning 25000 per month is now forking out 50% of salary as rent. Or living remote and biking to work 25Km each way = 70Rs a day = 2000 per month.
Thats the floor - rent for the cheapest flat. And the kind of people who own these types of flats dont compromise on rental value - mostly rough badmash types who bought the property through all kinds of means - the types who squeeze the maximum out of their property.
In recession, one buys in main metros without new supply - because in recession people dont have money and so prices dont go up so much. Only there, in the middle of metros, will the rentals increase with stagflation. Rentals in far flung places will fall.
In boom times one buys away from main cities in up and coming areas - because prices in main cities go up too much and in boom time, there is more development.
Buying in far flung areas during recession is a big mistake. I have learned this the hard way - when in 2009 I went for DEay location instead of GCX.
In boom time one plays the booking game. In recession/stagflation one buys prime property
A bubble can burst in 2 ways - either the prices come down - or the currency loses value to reflect the new price as normal.
Traditionally, in USA and Britain before that - i.e. developed country with steady currency, prices come down.
In India, traditionally, inflation and depreciation of currency are what normalise the prices. So in the early 80s, in 1990-91, in 2008 and right now - it is the currency which gave way - not the RE prices.
There are other ways for bubbles to burst. Those without RE in portfolio will surely regret. 2003 to 2008 in India was an extraordinary time wiht low rates. Never seen before.
It may never be seen again. India is now back to normal - a bumbling mess.
Did you know that the lions share of "services" in India is contributed by "Govt?". And that "productivity" in Govt is measured as expenditure?
So money spent on NREGA, fertilizer subsidy, defence expenditure and salaries to govt servants is straight jacked in as "GDP"
Dont recall exactly, but last I remember some 30% of India's GDP is calculated on the basis of this servises i.e. money spent plus "salary paid to Govt servants" - both central and state combined.
Whether there is any level of productivity there is not counted at all.
Now you know why the component of services is rising in our economy - because of govt pay commissions!!!!! and spending sprees.
If you build a road for 1billion dollars, and it is washed out in rain and next year you again spend 1.05 billion, then it is counted twice - this year and next year - and since next year you spent more i.e 1.05billion - voila - there is your 5% GDP growth !!!!!!
The soviets went bankrupt with this kind of "productivity" and ran their country into the ground.
Well, its not that bad - Govt expenditure is mentally "discounted" by people.
And mind you, Industry and software was also growing - something has to grow for the govt to tax and spend after all.
Basically the taxation and inefficient expenditure became too much. Govt spending has three levels of inefficiency attached to it.
1. Usually, govt spends money where it shouldnt - like NREGA or fertilizer subsidy or minimum support price grain purchase
2. Second, there is an element of leakage and corruption where politicians and babus loot much of the money
3. This generates black money which notoriously has much slower velocity than white money.
Many people actually praise black money as "preventing RE crash". But what they fail to realise is that black money has a habit of stopping money velocity in its tracks.
In a white transaction, if you spend 100Rs, the person you give it to again spends it to and so on - the same 100Rs will exchange hands many times - each time someone gets a 100Rs as income. Each time he again spends it, he generates employment and someone else earns that 100Rs. There is a huge beneficial effect. This is the effect of money velocity.
Each time that 100Rs gets spent, 10Rs gets taxed by govt - so it is possible to get 200Rs in tax if the same 100Rs passes hands 20 times
Now black money is not spent similarly. Most black money ends up as an empty plot, empty flat, gold in a locker, cash under someone's bed or sent abroad in hawala so that the velocity benefits other countries.
OR - black money gets spent in totally useless ways - like boozing, or other bad habits. Adds little to useful product and generates more problems than the utility of the velocity generated.
The only time black money gets converted into white money is at election time - when jeep walas, printers and other people are paid for their services and the money gets back into circulation.
Everytime real estate and gold gets into a bubble, it is an indicator of the underlying malaise of black money. It means economy will come to a grinding halt.
Until we get rid of the problems in our govt, get rid of corruption, get rid of black money and hawala - they will always overwhelm the good parts of our economy - manufacturing and IT.
And Sanjana, in 2006-7 I always remember my visits to Bombay - just looking out of the window of the car with Sense-x at 20,000 and thinking - look at these people - how is India shining? They look like beggars! And my relatives would talk about how much money they were making in the stock market - so was I - and the picture outside the window was completely different.
Any other country which is shining - look out of the window an you see a modern city. Hong Kong, Shanghai, even Bangkok. Or even Kuwait or Dubai.
We look out and we see only dirt and poor people.
No wonder slumdog millionaire got made. India was never shining. Some people in middle class got paid somewhat similar to the same kind of job elsewhere because of globalization.
The majority were unemployable. And the hype misled us. I sold out my stocks in November 2007, thinking this is too much. I was right.
Unfortunately I didnt get back in when we hit 8000 sense=x in 2009. Still lamenting the missed opportunity
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