A 'Golden myth' shattered: Real Estate crash may follow!

The inevitable has happened: Gold & Silver prices have recorded their biggest single day crash in world markets today. Interestingly, media has got something new on its platter as compared to the boring debates on Narendra Modi vs Rahul Gandhi, none of whom is capable enough to become a worthy PM candidate of world's largest democracy.

 

The events of the past 2-3 days have shattered one of the most common myths cherished by many investors: "Gold prices can never fall''. Many such investors who put forth an argument in favour of investment in gold at ridiculously high prices was its 'safe haven' appeal and the limited supply, suddenly have developed cold feet and are quitting their gold investment in a hurry. The entire metal sector is witnessing a free fall due to escalation of the Euro zone crisis to alarming proportions. Indian economy is also in the grip of a massive slowdown, even as liquidity becomes tighter. The events of the past few days have started the exodus from physical assets which are held by investors till a panic situation is created.

 

Is this a precursor to the larger crash to follow? I am pointing towards a real estate market meltdown. If history is to be believed there are enough reasons for creation of a bleak scenario for the real estate crash in the near future. In a panic situation investors liquidate the most liquid assets first and illiquid assets are retained till the last. Real estate being the most illiquid asset, investors are still holding on to it, on the belief that they still have not lost money on their investment. This illogical belief is based on the artificial prices created by the builder lobby. The recent entrants to the real estate market will be the first to panic once they are faced with a liquidity crunch. The reasons for this to happen are very strong as the new real estate stock sold recently is almost entirely owned by speculators. End users have been left far behind in the race for owning their 'dream home'. The liquidity crunch coupled with an unstable political scenario is a perfect situation to create a crisis in the real estate market. In such a scenario first time home owners are advised to wait a while to get better bargains to suit their budget. It may not be a bad idea to strike a bargain to rent a property of your choice as rentals are on a southward journey. Commercial rental market is also showing signs of a massive slowdown. Those in need for owning a house may opt for 'ready to move in' properties rather than new projects which are being launched at unrealistic premiums during the festive season. Resale properties are available at 10-12% lower price point.

An economic recovery will not be sustainable without a real estate crash, as economic growth depends upon an orderly real estate market: both for individual home owners and corporate sector. Real estate must be available at reasonable prices to the end users. The asset class that will revive the risk appetite will be 'Equity'. Investors are advised to enter equity markets on declines as they drift lower in sympathy with commodity and real estate markets.