Posted by:  Bhatt on ( 27-Jun-08 15:12 )
| | | Price : BSE: Rs 425.85 ( -5.34 % ), NSE: Rs. 426.50 ( -5.60 % ) | Just check Rental prices v/s. EMI of DLF constructed area read following article care fuly and you your self is the best Judge....
The first warning signs of the bursting housing bubble
First, remember that things get overheated when the general public begins to spend money on investment vehicles with the idea of quickly doubling their money. When enough people get into speculation, it is a sure sign of a bubble. When people aren't buying a house for a place to live or as a long-term investment vehicle to rent out, you know the market is overheated. When you hear a lot of people talking about "making money on their house", then you know there's a big bubble. So, that's one interesting sign. It's not very scientific, but there are far more scientific signs to be seen.
Normally, when you buy a house as a landlord, the rent that the renter pays you covers your mortgage costs, plus a little bit more. That's what happens in a normal, healthy economy. Let's say you go out and buy a home valued at $200,000 and you rent it out for $1,500 a month. That $1,500 a month should cover your mortgage payment, plus a little bit more for maintenance. This is what happens in a normal market. But in a bubble economy, or a bubble housing market, there are so many people buying houses for speculative purposes that this is an oversupply of houses available for rent. Therefore, the demand from renters stays the same, but the supply of houses available for renting expands. This glut of houses for rent becomes unusually large because all these investors have bought houses and condos with the expectation of making money on the speculation. It's not just houses, either; it could be condos or apartments as well. I'm just using "houses" in a generic sense.
How do you know when there is a glut of houses for rent on the market? You know because rent prices begin to fall relative to the price of buying a place to live. It's standard supply and demand economics. Prices begin to fall because there are too many houses available for rent and not enough renters. No landlord wants their house to go un-rented for five years, so they start lowering the rental price to get renters in. So, there's an artificial suppression, a lowering of the monthly rental prices on houses available for rent. This creates a gap between how much you get in monthly rent for a house (as an owner) and how much you have to pay the bank for the mortgage. Let me give you an example...
Let's say you bought a $200,000 house, a second home, because you intend to double your money as property prices go up. You're hoping to spend $200,000 today, pay the bank for a few years, and then sell that house for $400,000. This is what people are thinking. Well, unbeknownst to you, everybody else is doing the same thing, and all of a sudden, there are a whole lot of houses available for renters to rent. What does this do? It suppresses the monthly rent fee. The market is too competitive for you to get $1,500 for monthly rent. You can get only $1,200 or maybe you can only get $1,000.
Now you're only getting two-thirds of what you used to get, and what you're getting may not even cover your mortgage. When it crosses that line, it is a sure sign of a housing bubble. When the monthly fee you charge to rent your house drops below the monthly mortgage payment on that house, that's the sign of a housing bubble. That's the sign of a supply-side glut of housing, and that's what's happening today. In other words, you can go out and buy a home and you can rent it out, but you can't get enough from the rent to cover the mortgage payment. It's because there's a housing bubble.
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