A new blog address for my musings

A new blog address

ttps://balablogsdotcom.wordpress.com/2015/08/04/thank-you-google-for-pushing-me-here/

Bringing Down Interest Rates- A Parallax View

Interest rates are also a function of 'expectations'.  Our base is set by the savings bank interest rates. As we keep going higher along the risk curve, we demand higher and higher interest rates.

Every developed nation has a 'low' interest rate regime. India has a 4% to 14% interest regime. This is exceedingly high. So, let us bring down expectations. That can be done in the following ways:

i) Make savings bank interest as ZERO. SB accounts are the base level from which interest rate expectations flow. Once this is zero, our expectations come down;
ii) Ban all non banks from accepting public deposits. We are probably the only country that allows companies, known and unknown, to take public money as 'deposits' , 'NCD' etc.  This should be brought to a halt. So this plugs the second biggest avenue for retail money to earn anything and brings down the 'expectations';

This will drive people to mutual funds. And since savings money will be happy with even a couple of percentage points for short term money, we can bring down the short term borrowing rates through Commercial Paper etc. Government can issue Treasury Bills at lower rates.

We can have a cascading effect on interest rates. I know it sounds very simplistic, but I am sure will result in a lower interest rate structure.

Real Estate- Investing

Investing in Real Estate has been a global favourite. The belief is that prices can only go higher. Most of the people think that investing in equities is risky, stock prices can fall dramatically and erode wealth. They believe that if investment is made in RE, the asset stays forever and prices can only move up.

However, since the last ‘bom’ which collapsed in 2008, most of us have burnt our fingers. I know of instances where people who booked apartments in 2007-08 are now staring at same to lower prices in many cities. We may have stray examples of some locations where money has tripled in this period, but those are exceptions rather than the rule.

I was looking at a Real Estate Index named “Residex” that has been developed by the National Housing Bank. I am sure many of us may not fully agree with that. The index has a base of 100 for the year 2007. I have added the annualised return based on that numbers for each city.

CITY WISE HOUSING PRICE INDEX
CITIES	2007 Index
		July-Sept
		2014 Index	Annual returns
Hyderabad	100	93
			Negative
Faridabad	100	216
			11%
Patna	100	153
			6%
Ahmedabad	100	217
			11%
Chennai	100	362
			17%
Jaipur	100	101
			0
Lucknow	100	196
			10%
Pune	100	242
			13%
Surat	100	160
			7%
Kochi	100	88
			Negative
Bhopal	100	232
			13%
Kolkata	100	209
			11%
Mumbai	100	238
			13%
Bengaluru	100	109
			1%
Delhi	100	189
			9%
Bhubaneswar	100	197
			10%
Guwahati	100	160
			7%
Ludhiana	100	146
			5%
Vijayawada	100	161
			7%
Indore	100	188
			9%
Chandigarh	100	174
			8%
Coimbatore	100	180
			8%
Dehradun	100	188
			9%
Meerut	100	159
			7%
Nagpur	100	180
			8%
Raipur	100	165
			7%

(Source:NHB-http://www.nhb.org.in/Residex/Data&Graphs.php )

As per the table, Chennai shows a return of 17%. I wish it were true. It is for some prime pockets in Chennai, but if you look at the new extended Chennai along OMR or GST Road, the returns are closer to zero! And this does not factor in the property taxes and maintenance you have paid, if you got posession of your flat. You may say that you got rental. But if you honestly sit down and do the numbers, pay the taxes on the rents, the returns are not going to change much.

And from these index numbers, we have to deduct the capital gains, add the transaction costs. And it is an AVERAGE number. Some properties would be higher, some would be lower.

And unlike investing in shares, you cannot exit part of your portfolio. You will hang in there thinking that one day the property will come back to your purchase price. And in the meanwhile, your wealth keeps eroding. If you think you are smarter than the rest and will beat the averages, good luck to you.

Property as an investment is an inferior choice. Yes, we are socially designed to buy one own home. We probably consider our first home as a necessity. Given today’s unaffordable housing, even that requirement needs to be re-evaluated. Maybe rental house is a good option rather than buying a home for a couple of crores in the metropolitan cities.

And more important, properties are illiquid, unless you are in a prime location, where there is not much supply coming in. And do you factor in the interest loss when you buy an under construction house till you actually get the posession? Do that and the maths will frighten you.

Today, there is an over abundance of unsold homes. And the funny part is that prices are still not cracking. Banks have lent huge amounts to the construction sector and are staring at NPAs. Something has to give. Many cities will see price corrections of significant magnitude. There are many projects that have been scaled down. And projects are taking longer to complete. The money backing the construction industry must be worried.

Think hard before you buy a property for ‘investment’. And unlike the past, the newer properties come with more and more amenities and facilities, making old properties unattractive. This means that as properties age, their resale would be difficult, especially if it is a high priced apartment. Some one who can put in a couple of crores would go for a newer construction rather than settle for an older one. The older one will find it difficult to find buyers unless there is a significant discount.