Monday, October 22, 2012
Monday, October 15, 2012
Rent control
Rent control is most regressive and anticonsumer.
Rent control results in very few properties being rented out - and has the paradoxical effect of increasing the cost of renting because of massive undersupply of rental property. It also results in either pughreee system (Bombay) for which a massive upfront payment is needed to rent or with gundagiri for evictions (seen in Bombay and in Delhi unauthorised constructions).
Dharavi has its origin in rent control - without rent control, the massive slums would have been apartment blocks like in US and European cities. Because of rent control, it became a slum.
Rent control means you are forced to buy - because you cannot rent anything because of undersupply - and if there is so much demand to buy, prices shoot up. Bombay is a prime example of such massive flat prices, higher than Manhattan. Did you not see Gharonda? If you are from a new generation, please do see it.
So rent control has the opposite effect in a double whammy - it increases rent and it increases flat prices.
Only beneficiaries of rent control are goondas/politicians running tenements and crooked builders - and their political cronies who manipulate zoning laws, land ceiling acts and circle rates.
Best way to lower rent and apartment cost is through competition and oversupply. Build roads and new townships with good number of flats (with electiricity , water and transport unlike disasters like Narela) - and rent will come down automatically. So will flat prices.
Rent control results in very few properties being rented out - and has the paradoxical effect of increasing the cost of renting because of massive undersupply of rental property. It also results in either pughreee system (Bombay) for which a massive upfront payment is needed to rent or with gundagiri for evictions (seen in Bombay and in Delhi unauthorised constructions).
Dharavi has its origin in rent control - without rent control, the massive slums would have been apartment blocks like in US and European cities. Because of rent control, it became a slum.
Rent control means you are forced to buy - because you cannot rent anything because of undersupply - and if there is so much demand to buy, prices shoot up. Bombay is a prime example of such massive flat prices, higher than Manhattan. Did you not see Gharonda? If you are from a new generation, please do see it.
So rent control has the opposite effect in a double whammy - it increases rent and it increases flat prices.
Only beneficiaries of rent control are goondas/politicians running tenements and crooked builders - and their political cronies who manipulate zoning laws, land ceiling acts and circle rates.
Best way to lower rent and apartment cost is through competition and oversupply. Build roads and new townships with good number of flats (with electiricity , water and transport unlike disasters like Narela) - and rent will come down automatically. So will flat prices.
GDP and mortgages
As a rule -
total mortgages of a country equal the annual GDP
stock market capitalization equals the annual GDP
For total mortgages, one should add the residential plus commercial. So if you add 20% commercial to 80% residential in USA, it adds up to the annual GDP:
http://seekingalpha.com/article/145361-composition-of-total-mortgage-amounts-outstanding-in-the-u-s
In India, equity markets are developed and market capitalization is equal to the annual GDP.
While mortgages do not equal the GDP.
However the amounts lent to builders should also be added and private equity should also be added as proxy for commercial mortgage (amounting to probably about 5Lakh Crore = 5 trillion rupees = 100 billion dollars or 5% of GDP)
Since majority of the population (who contribute to maybe 25-50% of GDP) dont qualify for a mortgage, it is no wonder that mortgages form only 20-25% of annual GDP
Wednesday, October 3, 2012
Thoughts on inflation
Your assumption of 15% inflation may not be correct.
If we look at the items which have inflated (to the best of my memory and limited math ability in calculation of 70 divided by x which is how I have estimated the percentages:
1. Food. Has gone from around 6000 to 15,000 in 12 years. Thats approx 7% inflation (for a vegetarian).
eating out has gone from 500 for a family to 1000 for a family in evergreen =5% inflation. In Pandara road it has gone from 1000 to 2000, multiplex tickets have gone from 125 to 250, popcorn from 50 to 100. So all are at 5% inflation ball park figure.
2. Manufactured items: have remained stagnant or fallen (durables and FMCG) so negative or 0% inflation
3. Electronics prices have fallen. Discretionary spend on fancy phones and lap tops has increased a lot - but that is discretionary. Again negative inflation.
Phone bills have increased with usage, not by inflation. Again negative inflation
Power bills are also stagnant from 2006 to 2012 with similar AC usage. So 0% inflation
4. Cars prices are stagnant. 0% inflation
Flight costs have doubled in 12 years, so 6% inflation
5. Petrol: cant remember, but petrol probably went from 40 something to 70 or so now = 5% inflation over 12 years
6. School fees in 2003 was 45000PA, now it is 80000PA. That is around 6.5% inflation.
7. Clothes - cheapest Peter England used to be 400, now it is 700 or so = 5% inflation.
8. Gold has gone from 5000 to 30000 so about 15% inflation.
9. RE has gone from 25L to 1.25 crore for delhi 2bhk = 15% inflation.
10 dollar has gone from 40 to 55 = 3% inflation.
11. Rent has gone from 10000 to 40000 = 12% inflation.
Wisey, the only thing which is inflating so much is none other than RE prices and its derivative rent !!!!! And its inputs. Cement went from 150 to 300 per bag.
And gold has also inflated.
Both are investible appreciating assets.
Doesnt it make the case for RE bull theory proved right?
Basically, the inflation affects those who were earning almost the same salary as expenditure and had no surplus. For those with surplus, the absolute quantum of surplus has increased quite a bit freeing up money for RE.
The reason why we are worried about inflation is because it didnt happen for 6/12 years, all of it has happened all of a sudden after congress came to power and more recently than in the first half of the decade.
It is a fact that there are three important inflations seen in India.
1. Food (linked to energy prices) affects the poor.
2. Education (linked to the economic performance) affects the middle class
3. And real estate - it is always in short supply and just out of reach of the middle class. Those who have it become rich class.
Everything else shows much less inflation.
Food and education (especially higher education) cannot be helped.
RE inflation you can do something about. Which has been my contention for a long time now
He who buys RE early in life in India always becomes a rich man. It is always a stretch to buy. EMI hurts awfully for 5 years, moderately for next 5 years and becomes insignificant after 10 years.
A corollary - if you have taken a home loan and the EMI is not hurting you - you are underinvesting in RE.
Other inflating items: From nil, there are some 3 broadbands at 800 per connection. Cell phones cost 50,000 per annum. Restaurant and multiplex bills I had already calculated as some 5% from 2000 levels - not as high as I had suspected. Mall shopping (you can chose your brand) was also 5% per annum only compared to 2000 - when also one did mall shopping. Travel expenses in terms of air fares is also 5% per annum only, assuming 2 holidays per annum. Again - if your standard of living in 2000 was similar to 2012, then the actual percentage increase per annum is only some 5% or so.
It seems more because after many years of price stability and price fall (in 2005 flights were cheaper than 2000) we have seen sudden dramatic inflation.
But one should always differentiate between inflation of essentials and discretionary. Housing is usually considered essential along with food, clothing and education. Disretionary spending comes down with inflation - it also comes down with sheer boredom (nothing is as boring as mall shopping or traveling to the same or similar hill station. And every international city feels exactly the same - though scenery is always refreshingly different)
If we look at the items which have inflated (to the best of my memory and limited math ability in calculation of 70 divided by x which is how I have estimated the percentages:
1. Food. Has gone from around 6000 to 15,000 in 12 years. Thats approx 7% inflation (for a vegetarian).
eating out has gone from 500 for a family to 1000 for a family in evergreen =5% inflation. In Pandara road it has gone from 1000 to 2000, multiplex tickets have gone from 125 to 250, popcorn from 50 to 100. So all are at 5% inflation ball park figure.
2. Manufactured items: have remained stagnant or fallen (durables and FMCG) so negative or 0% inflation
3. Electronics prices have fallen. Discretionary spend on fancy phones and lap tops has increased a lot - but that is discretionary. Again negative inflation.
Phone bills have increased with usage, not by inflation. Again negative inflation
Power bills are also stagnant from 2006 to 2012 with similar AC usage. So 0% inflation
4. Cars prices are stagnant. 0% inflation
Flight costs have doubled in 12 years, so 6% inflation
5. Petrol: cant remember, but petrol probably went from 40 something to 70 or so now = 5% inflation over 12 years
6. School fees in 2003 was 45000PA, now it is 80000PA. That is around 6.5% inflation.
7. Clothes - cheapest Peter England used to be 400, now it is 700 or so = 5% inflation.
8. Gold has gone from 5000 to 30000 so about 15% inflation.
9. RE has gone from 25L to 1.25 crore for delhi 2bhk = 15% inflation.
10 dollar has gone from 40 to 55 = 3% inflation.
11. Rent has gone from 10000 to 40000 = 12% inflation.
Wisey, the only thing which is inflating so much is none other than RE prices and its derivative rent !!!!! And its inputs. Cement went from 150 to 300 per bag.
And gold has also inflated.
Both are investible appreciating assets.
Doesnt it make the case for RE bull theory proved right?
Basically, the inflation affects those who were earning almost the same salary as expenditure and had no surplus. For those with surplus, the absolute quantum of surplus has increased quite a bit freeing up money for RE.
The reason why we are worried about inflation is because it didnt happen for 6/12 years, all of it has happened all of a sudden after congress came to power and more recently than in the first half of the decade.
It is a fact that there are three important inflations seen in India.
1. Food (linked to energy prices) affects the poor.
2. Education (linked to the economic performance) affects the middle class
3. And real estate - it is always in short supply and just out of reach of the middle class. Those who have it become rich class.
Everything else shows much less inflation.
Food and education (especially higher education) cannot be helped.
RE inflation you can do something about. Which has been my contention for a long time now
He who buys RE early in life in India always becomes a rich man. It is always a stretch to buy. EMI hurts awfully for 5 years, moderately for next 5 years and becomes insignificant after 10 years.
A corollary - if you have taken a home loan and the EMI is not hurting you - you are underinvesting in RE.
Other inflating items: From nil, there are some 3 broadbands at 800 per connection. Cell phones cost 50,000 per annum. Restaurant and multiplex bills I had already calculated as some 5% from 2000 levels - not as high as I had suspected. Mall shopping (you can chose your brand) was also 5% per annum only compared to 2000 - when also one did mall shopping. Travel expenses in terms of air fares is also 5% per annum only, assuming 2 holidays per annum. Again - if your standard of living in 2000 was similar to 2012, then the actual percentage increase per annum is only some 5% or so.
It seems more because after many years of price stability and price fall (in 2005 flights were cheaper than 2000) we have seen sudden dramatic inflation.
But one should always differentiate between inflation of essentials and discretionary. Housing is usually considered essential along with food, clothing and education. Disretionary spending comes down with inflation - it also comes down with sheer boredom (nothing is as boring as mall shopping or traveling to the same or similar hill station. And every international city feels exactly the same - though scenery is always refreshingly different)
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