Housing bubble burst is yet to come

Buying Property General Advice
#1

Hi Guys.

I live abroad and work with investment banks. I was here when real estate bubble burst in USA. But in Pakistan it still have to burst. Reason for this is people in Pakistan are not ready to accept it and not reducing prices as other countries did. Average house price is reduces to 50% from its original value. here since people buy property with loan and bank look at property before signing loan they are the one who put price for house. you cannot tell bank that property is 7 million so give me loan for 7 million. banker come over see property and tell that this worth not more that 1 million depending on neighborhood and house condition. Now in Pakistan there is no such things and people are not reducing prices as they should.

I give you simple example. lets say a piece of bread cost you 1 rupee. now people buy and sell it ahead for 1 rupee more and keep doing it over and over again till the same piece of bread prices reaches 100 rupee. but at that point no one wan to buy that for 100 rupee . now this guys who is holding this piece of bread is screwed cause there is no buyer as everyone know that actual prices of that bread was 1 rupee. this is the point when this bubble burst. No people who are sitting on 5 crore rupee property don't realize this phenomenon.

They have to understand that there is no 6karoor rupee buyer and not even 1 crore rupee buyer. They can either get rid of this bad asset for 2 crore for liquidity and take it as a loos which is normal thing in business if they don't this loss will keep increasing and not only that but there liquid asset "cash" will not be available. Of course they cannot eat their house. they need liquidity to buy other necessary of life. Here is real time example of mine. I was planning to buy house in Islamabad in March 2008 when real estate bubble burst. colleagues were telling me this is the time to buy. I said lets wait and this is long term phenomenon for bubble to burst at least 5 yr. so i have 200,000 dollar. I said okay let me sit on it.

I check house prices in Islamabad 8 marla house was for 2.5 crore. now this was 2008 and dollar was for 65 . if i would have bought house than i would have to send around 380,000 dollar. but i waited and dollar keep on going up and now after 4 yrs dollar is 95 and i am sure its going for 100 in next 2 months. so now if i have to buy i only have to send 263,000 dollar. i save my self 100,000 dollar. lucky me. but here comes the funny part. they guy who was selling me property for 2.5 crore came down also but only 50 lac. He is loosing but loosing minimum. he is not accepting that asset he is sitting on is crap.

I can now easily buy bigger house in NYC where I have lots of job opportunity, subways , buses, healthcare, security. they why in the hell i would buy house in country where there is no electricity, no security, no judge and no justice. sorry i spell it wrong it should be JUST US! not justice. Justice in Pakistan is only for JUST US! well my humble advise to people who are sitting on big assets is come to reality reduce their prices at least 60% and take loss and get rid of Pakistan.

Sitting on same house over a long period of time will only decrease its value. Allah helped me and save me from making bad investment. May Allah help people to these investors and bring them to reality also.

#2

You fail to take into account inflation. In Pakistan even if the prices are not droping, if you take inflation into account the prices are half of what they were say 5 years.

#3

Quite a fair analysis. the prime reason is investors here are mostly local, irrational and have conventional sentiments about real estate.

After the recession of 2008, real estate prices were reasonably corrected in big cities but if you check in smaller cities, they remained intact, again for the same reasons you explained, Not ready to accept the facts and being un-informed of market dynamics and theoretical principles.

So you're right that this bubble should burst. But in all economic or financial theories/principles or rationals, SOCIAL BEHAVIOR AND CULTURE are always taken as Exceptions which can lead to illogical market conditions.

And one more possible reason for slower decline in real estate is that people don't have choices for investment due to energy and security crisis. So they tend to buy plots to get a feeling of doing something at least.

I think it will take quite a few years for Pakistan to get along with international market dynamics. And probably by that time, our population would have soared to another 20Mn, so number of end users will sufficiently increase to occupy this under-development land. :) whereas birth rate is around 1% in west.

So, bigger and ever growing population has some benefits too

Economics is interesting, infinite possibilities.

#4

AOA, @Arshad

Inflation by definition means expansion of money supply by govt. More money govt print more value it loose in purchasing power but core part of inflation Does not include house prices. It include food and oil on which a country run. Here in USA we've seen 2 to 3 percent inflation but only in food and oil.

Rest everything else is deflating. Houses prices have to come down least 60 percent for market to move on else government have inflate money bubble as its already doing in Pakistan. Remember any thing in excess loses it value. Same is for money and houses. We have over constructed in last decade. Supply and demand got totally messed up.

There is so much supply but now due to high prices demand is low. To have demand back again people need to be convinced take a loss and sell it . Liquidity is core of business fundamentals that's why.I keep my assets liquidated to run business here. I guess investors in Pakistan don't know 101 of business.

#5

I am not sure what you are saying. What I was stating is that say a plot is worth 1 million rupees in 2007, now 5 years later price may not have fallen as in the U.S but it has not gone up either in Pakistan. So in relative terms prices have fallen in Pakistan, as your 1 million now would only have half the purchasing power of the 1 million that you would have got in 2007.

#6

OH you mad my point there. so purchasing power went down not because more money got printed income did not increase as it should with inflation. so people now have no money to buy and that exactly we call inflated bubble here and that eventually leads to crash. I know many people in Pakistan who invested in plaza and big building now there whole money is stuck in it. they invested 100 crore. wanted to make 150 crore but now no buyer. so they are almost on the streets. but funny part is they are not selling it for 75 crore. I am sure if they make it 75 crore it will go out like hot cakes.

With 75 crore cash they can inflate some other bubble lets say gold. but they are not understanding it this concept. Rotation of wealth is very important for the existence of any economy. For now the money is stuck in Bricks and clay in the form of house. Although Gov is printing money and making it even worse for common person the prices are still not going up as people know that its not true price of the land. I know some investors in USA who wanted to invest and they are very discouraged now. they start buying back in USA as they said price is same there and here then why buy there where no opportunity, no security, no justice and JUST US! so when we compare prices between 3rd world country like Pakistan and USA it make no sense that prices are equal for same size of land.

Its duty of real estate people to give common people right advise that they have to take a loss or keep sitting on it and wait for more decline in property values. Further deteriorating conditions in Pakistan will only add fuel to fire. Honestly speaking i spoke to people living in USA if they planning to buying in Islamabad the answer was same its too expensive there so we are buying here in USA as its cheap here. Which is shocking to me.

#7

I was trying to say that you are right that the real estate bubble should burst like in all developed countries however the economic, political and cultural situation is different in Pakistan. Therefore this bubble may not burst until one or more of the above stated factors change.

#8

Secondly for a dual national its optional to invest in Pakistan whereas for Pakistanis there is no room to manouvre.

#9

the dynamics over here are different. for example the prices in peshawar (hayatabad) are more than e-11 in islamabad. the reason is that due to operation all the ppl from FATA have brought their investments to peshawar. i am 33 years old and since the inception of hayatabad i havent seen even a single time the prices coming down. they do halt for a short period though

#10

very good analysis.

#11

@Faisal

I agree with you. I myself have been saying just this on this forum but what I think the values of properties are already going down automatically since the last 5 years as they are not increasing and are remaining almost constant while the USD has increased more than 50% as compared to the rupee and inflation has increased at the same rate. Anyway you are right the properties are still too expensive and have to come down more 1Ct, 2 Cr , 3 Cr , 4 Cr ++ for a poor country like Pakistan is just too much!

#12

AOA everyone,

Khalid and Salman. I like your analysis also. But here is the thing. As you mention Peshawar prices went up as people/investor moved in. But that caused artificial price hike. That house that they bought is not worth that they paid. Of course people who have extra money and don't know how to invest they invest in real estate. but then its a bad investment technically speaking. Here is why and that's make me nuts.

House is for living "not business". I noticed back in 2004 when i was in Pakistan that every one i asked what you do he said I am contractor we buy house and sell and make profit. Okay this is not productive business. you are not producing anything. you just sitting like a middle man and buy cheap and then sell it. where is production stuff that mess up whole concept of good investment. now the last person who bought such hyped is messed up and we technically kill a generation of investment.

True investment is what country produce . buy sell house not productive. even building guns is true investment then this true investment increase buying power of people and people buy. Here in Pakistan since people are feudal they always think that buy land . If I would be investor i would buy dollar /Swiss franc at this time and hedge it with gold and real estate. Definitely if i have more money I would start some thing productive. Let's say small weaponry shop to build sophisticated weapons.

Okay sorry I move so much away from original topic. But Houses prices definitely have to come down. Best way to do it is "stop government to print money" they print and devalue rupee and thus purchasing power go down. If there is be less money in print they will have more value and house will go even cheaper.

Let's hear from anyone how can we bring houses prices down. Or maybe cool them further down.

#13

To keep prices down the supply of houses need to increase.

#14

I have to agree with Arshad here. We have not been able to meet half the demand. No wonder prices are skyrocketing.

#15

Hm, I don’t agree with Arshad and Nafees here, population wise I agree the demand is more but cash wise the demand is less I mean although people need to buy houses but they don’t have the money for it so they are living in combined families or with their parents it’s because of the unrealistic house prices in Islamabad e.g. 1Cr, 2Cr , 3Cr +++ people even after their kids are growing up are living with their parents or combined families very crowded homes meant only for one family actually.

#16

And how can demand be more? All of the honest working class and even mid level business men can not afford to buy a 1 Cr or 2 Cr ++ houses in Pakistan, overseas Pakistani can but these days they are hopeless about Pakistan and only buying when they really really need too if they can they try to avoid in the current situation in Pakistan…

#17

Faisal asked the question, "How can we bring house prices down?"

The answer is to increase the SUPPLY of houses. Increased supply will be a constraint against house prices rising. I did not say that demand should be more.

#18

AOA,

Arshad and Khalid. Main thing is if you build more it turn into GHOST TOWN. look at china Ghost towns and America ghost town on you tube. I went to MICHIGAN few months back there are lines of towns but no buyer. So its not more construction that will bring prices down. Its strong currency which bring prices down. Its not like we were short of houses here in USA and China which brought house prices. There were too many houses before and now but cost of building house went up which made it difficult to buy house for consumer. Again to deal with this inflation "expansion of money supply" we have to stop GOVT to print more money. They are flooding market with cheap money. Cheap money means loosing buying power.

Okay To make my point i put simple question in front of you guys.
Q: Lets say you have 1 Karoor in your pocket. Government want 50 lac from you. You have all security for your 1 crore. How can GOVT steam 50 lac out of you without you loosing any money from your 1 crore. ah tricky right. This is 101 of Finance in USA.

Here is what they will do.

Let's say there are 100 people like you who have 1 crore. And there are 10,000 people who don't have 1 crore. You and other 99 people can probably buy 6 bedroom house with your 1 crore. Now think about it. I am GOVT. I have printing machine. I will print 1 crore so fast that that instead of 100 people having hundred crore now all 10,000 people have 1 crore. Now the house which only 100 you could have bought not 10,000 people can buy. Tell me what will happen now. Of course price will shoot up. Just like in bidding. Where bid start for diamond. only 2 people have 100 million other have lets say 20 million. if i give all people 100 million now all can buy that. but no diamond will say why give it to them find higher buyer. so price jump up. Actually more money the Pakistani GOVT prints the more value it looses.

This is wrong but this is sneaky way of taxing people in Pakistan without their awareness. Since , almost no one pay tax. GOVT says we need to take money from these people one way or another. so they do it opposite way. They take away you buying power buy printing money . so although you did not give tax but GOVT got it by printing it. and that print of more money caused your money to loose its value.

To understand this concept you have to understand concepts of "what is money?" Its shocking to me that even Financial people in Pakistan don't know what money is? even person who make Pakistani budget don't know what money is. If they don't know what money is how can they even handle it. Okay by no means i am saying I am financial GURU but that is what we learn in High School in USA.

To grasp concept of money people need to understand " Modern Money Mechanics" Just knowing that rupee has pic of Jinnah and it says in god we trust does not make it money.

I am ope n to question though. Let me know how else we can drop house prices.

#19

I just want to add this point that housing prices in USA did not come because we build more house. there were tons of houses here. It came down mainly because " US dollar got way stronger than we expected" now you can ask me how the hell that is possible cause US is printing money also. So yes US is printing money but Investor who are jumping in from Europe/Asia/Africa to US are way more than US is printing money. So more buyer of dollar. More buyer means price shoot up and dollar shoot up and got stronger that brought houses prices down.

Again, we want to bring housing prices down in Islamabad / Pakistan. how can we do it there?

#20

W/S Mr. Faisal.

To some extent I am agreed with your analysis about what money is, and its mechanics. But I am not agreed with your comments about financial experts/students in Pakistan. I think every “student of money and finance here knows very well what is money, how it works and its impacts on the economy. Discussions on such basic things are worthless on this forum.

I can assure u that financial people in Pakistan are more experts in their field as of USA. For example tax system (in practical) is more complex than USA, because these experts can find many loopholes in taxation policies, which yields in tax reduction (or u can say that tax concealment). In USA there may be set policies which to be followed and that's it.

Here in Pakistan, SKILLED people are NOT those who do things in rite direction step by step, but SKILLED people are those who make wrong things rite or vice versa.

Does u have vehicles of 1965 and 1970’s running on the road? Surely no, but we do have. These are because of our skilled labour behind it.

Now coming to your point of discussion that why all this is happening in Pakistan. You may know that there are two major types of management. Top to bottom approach and another one is bottom to top approach. In Pakistan we have top to bottom approach. Where Govt is more powerful than people. If u want change, it will become from top. Govt has deprived people here to the extent that they even forgot their rights. Till dawn to dusk they run after basic physiological needs, kabhi paani naheen, kabhee bijle naheen, kabhee cheenee naheen, kabhi aata naheen, kabhee gas naheen, kabhee petrol naheen, bla bla bla. We cannot stop govt. from printing new currency notes but what we can do is to convert our hard earning into some solid investments, like foreign currency, gold, real estate etc.

I am again not agreed with your notion that Pakistanis do not pay taxes, in fact majority of them do. For example salaried class, pay tax before taking out his monthly salary. Every consumer of edible and non- edible commodity pay tax, which are built-in in price. This is again only the elite classes who have no money to pay taxes for this poor county.

You cannot compare life of a common man of two different nations. A man in USA may not be worried about tomorrow, but in Pakistan we do, because of many reasons explained above.

Lastly coming to answer your question. If we talk about price hike of real estate in general, you may agree that Pakistanis DO NOT have many options to invest SAFELY. While you are comparing businesses and businesses conditions between Pakistan and USA, hah. Basically there is no business in Pakistan. All they are doing the same thing to save their money from devaluation. The only business is politics and that's it. So the common man left only with one option and which is dealing in property. You may know that having own home is a dream of majority of people here. For which they spent their lives and at the age of 50+ they get their dreams true. (in very rare cases)

If we talk about the property market in Islamabad then I will blame CDA for this price hike.They are just here to fulfill their lavishness and squeeze money out of ppl. For example they offered a plot of 500 sq yrds in park enclave at the base price of 1 crore 20 lac. And offered the same size in E sector (I think) which is worth of 1 crore 80 lac, what else they are offering except land. So it is again the govt which take unlawful and un-ethical benefit from the poor people of Pakistan. Only we need DANDA to get things in right direction.

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