By Parag Parikh | firstname.lastname@example.org
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.
This first appeared as an article in Business Standard dt. October 20, 2010.