| Realty--a house of cards |
 |
 |
 |
| Written by Our Staff Writer |
|
March 2, 2010: In the grip of irrational exuberance people tend to ignore several warnings, leading to catastrophic investment losses. And euphoria seems to building in the realty sector even though the warning signs are already visible. Turn the pages of real estate classifieds or look at the realty message boards and one sees people anticipating rising home and commercial property prices. In many major metros, prices of homes have reached new highs, turning people into real estate bulls. There is, however, a clear divergence between the property prices and the lagging realty sector index.Real estate prices have hit new highs, so logically so should the realty index, which has not happened. A comparison to NIFTY clearly shows extreme relative weakness in the realty sector, which is not reflected in the booming home and commercial property prices. Since the stock markets discount the future, the lag in the realty index is bearish for the sector. In the US too, the realty sector stocks began declining before the property prices crashed. Let us look at the charts of the NIFTY and the Realty index to see the divergence and relative weakness of real estate. NIFTY's most recent rally took it to the April 2008 highs, but the realty index is way below its April 2008 high. The NIFTY hit its bottom in third quarter of 2009 and then began making higher lows before the rally that began in March. The realty index in a clear sign of weakness, continued to make lower lows till it began the March 2009 rally. The realty index peaked in October 2009 and has been falling since then. However, the NIFTY continued to rally and only peaked in January 2010. Then finally take a look at the 30-week moving average that is used by institutions for long term investing. In the case of the realty index the moving average has flattened and may to turning lower, which is bearish. The NIFTY's moving average on the other hand is still sloping upwards. Now let us step back and look at the facts objectively. The prices of residential and commercial properties are rallying, but the realty index is falling. The realty index is weaker than the broad market index--NIFTY. Residential properties are acquired largely by novice buyers and commercial properties are bought by businessmen who may not be as well versed in economic trends as the institutional investors. In the US the real estate stocks sold off before residential and commercial property prices fell. Given all these facts, we would stay away from the real estate hype. Chart Analysis NIFTY--Realty index divergence
|
