Margin Trading in Real Estate…..

By Parag Parikh | pparikh@ppfas.com

We have created and nurtured a society where insanity works. Take the recent advertisements by builders selling flats with just 10% upfront down payment. The balance is to be paid on possession. It sounds so good and consumer centric but is it really so?

What an invention. Enter Margin trading in real estate. What is Margin trading? In short it is buying beyond your means. It is very popular in stock markets. At present real estate prices have doubled in the last year and the builders are only building flats. Investors are buying and waiting for the greater fool theory to work. They expect that someone will still buy it at a higher rate from them. However that is not happening. With so many residential premises coming in the market you need someone to buy it so the investors exit and make money. The consumer that is the real user of such flats is existent but he does not have the capacity and money to buy it. There is big latent demand for housing because people need houses but it does not mean that they will be able to afford the current prices. It is beyond most peoples’ means. How do you raise money to complete such projects and pay off high interest debts when there are no genuine buyers at such high prices?

This is how it works. The flat prices are at record highs. They have doubled in just a year fueled by investor demand. The flats are offered at just a down payment of 10%. The balance has to be paid on possession. However the fine print does specify certain conditions. One of the conditions is that one cannot get out of the deal and there is a heavy penalty if one chooses to do so. This is only for serious buyers thus goes the argument. The brokers who are able to get buyers are offered a brokerage of 2% and above packaged with gifts of Mercedes cars and other luxuries. That’s real hard selling. Real estate prices are currently highly inflated and even a correction of just 10% wipes away the buyer’s capital.

So the upfront 10% is just an incentive for one to get into the debt trap. When the time of the possession comes who knows the prevailing real estate prices. If they are lower than today imagine the plight of the buyer. Not only has his asset lost value but how will he be able to get a bank to finance him? The bank finance will come at the rate prevailing at that time. The loss in the value of the asset will wipe out his capital and he will have to opt for the debt trap. Imagine the interest one would pay when one does not have a bargaining power. And of course the high maintenance charges of these new luxurious buildings will be an added stress on the already burdened home buyer.

The lure of the new and such quick fix schemes need to be avoided at any cost. You can’t be margin trading in real estate especially when there is no exchange to let you know the fair market price of the real estate. It is run and regulated by the builders lobby itself. Surely these are signs of a big real estate bubble and crony capitalism allows such ponzi schemes to flourish.

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This first appeared as an article in Business Standard dt. October 20, 2010.

4 Comments

  1. Great article and insight…I remember the past real estate booms in Mumbai, specifically 1998-2000, where prices, then, corrected by 50% within a year or so. Everything seemed just right then too, and the prospect of a decline, in the face of rising income, markets, urbanisation etc etc seemed as remote as now. And look what happened.

    Another data point to consider, is that regular 3 or 4 bedroom apartments are now going for close to a million dollars and more, upto the Western suburb of Bandra in Mumbai. And Mumbai infrastructure, except for hi-jinks like the Sea Link, is creaking even falling apart. A million dollars, in most parts of the advanced countries of the world, will buy you so much more space and infrastrucure that it becomes a no-brainer to see that this is a massive bubble about to correct substantially at the first signs of financial trouble.

  2. dear sir,

    i concur with your views. but of lately i have come to think that since the rupee value is deteriorating so fast, ultimately only the values of assets increase with time.

    correction though expected (and very much required by buyers) in real estate will most likely a 10 % price correction and maybe 2-3 years time correction.

    tejas

  3. TRUE . THE MARGIN TRADING IN REAL ESTATE- arltile is good , but i still stronly feel , if managed rightly , nothing wrong . land cannot increase , thats the +point in real estate. infact this is how real estate business is done . Builder sees the land , sees the ownership papers , immeditey goes to the architect , finds a suitable layout , and works out its protibility and risk . No sooner he makes the deal 20 % of the property is sold off smartly to his old invetser who trusts them scince years and people who hve mde money investing with them at a reasonably low price then what they should be actually at the time of launching the project in public. In this process they are actully thru .True to the contents of the article , u have made a honest attempt to caution readers and thanks for that .

  4. This is for my fav ,Parag bhai . Of late i hv been interested and started acumulting, one script for long term basis and that is Albright and wilson chemical india ltd. would like to know more about it from you , I am sure You must be knowing this script. The reason i have entered in it is because the villan is out of this great company and promoter and hope fully good internationa governence and shareholder rewarding philosophy will prevail. Shall be greatful if you can throw some light , from your wisdom bank and share. A request and scincer Thanks.

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