Real estate broker: Your house is the best asset that you can expect to create in your life. You can expect it to appreciate well over the long run.

What to do: Your home will not appreciate. It is not a wealth creating asset. It will not make you rich. Remember it is an important savings tool. It might just protect you against inflation.

If you met a real estate broker in 2007 he would have shown you a never ending spiral of rising real estate prices. From the year 2002 to 2007 the world went into an asset bubble. Unfortunately if you borrowed and bought a house in 2007 you have got into an asset which may take 10 years to touch those numbers again. You heard a lot near the top about how the market would have to “cool off” or “get back to normal” – the implication being that slow but steady appreciation was the future.

But the long-run data always told a different story. Yale University economist Robert Shiller’s research of home prices since 1890 he found that real estate appreciation has been unimpressive after figuring in inflation. Likewise, land has never been in short supply in most of the U.S. The Indian situation may be different – Indians are not as mobile as Americans and land is at a premium in most locations. However, technology may ensure that buildings last longer than the earlier construction.

Even while there is a boom going on, gains on real estate aren’t as dazzling as they look, once you account for expenses. Maintenance costs, Interest, insurance, and taxes are all ignored by most of the buyers. Also the ‘returns’ look good in a boom because of the leverage that is normally available. However if you price in the risk of the mortgage, returns just match inflation at best especially over long periods of time like 30 years.

Action plan: Renting is a good option only if you know to manage your money aggressively. This doesn’t mean you have to rent, just that you should have modest expectations for your house as a wealth creator. For many people who do not know how to invest and refuse to learn, housing is a good option. In a growing city it is a great option. Owning is a hedge against increasing rent. Second, a 25-year mortgage acts as what economists call a “commitment device,” or a tool that forces you to save. Note the usage of the word ‘save’ not invest. Instead of writing a cheque to a landlord, you gradually pay off the principal. You get deduction under section 80 C for the principal that you pay (reasonably attractive proposition) and section 24 for the interest paid (stupid deduction). So if you are planning to keep money in public provident fund, nsc, kisan vikas patra etc. you might as well buy a house.

At the end, you own a house.

Other than your Provident Fund there is no better discipline inducing asset!

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  1. I liked your post. For a normal person, it would have been tough to buy this idea a year back.

    I am thinking of land as an investment. Seems like I am bit later, coz the land prices got appreciated like anything in the last couple of years. Do you think the prices will “cool” there as well?


  2. i saw the business pandit article. Risk comes from not knowing what you are doing. Read the 3 pigs story. The risk did not come from choosing the wrong material for the house, it came from the wolf. I know people who have made ‘000 crores in equities and ’00 crores from real estate. If you refuse to learn you can lose money in both. Overconfidence, excessive trading, Mental accounting, not having a good adviser, not knowing the impact of compounding – are the causes of people failing. Largely equities are a far superior asset class for creating wealth compared to real estate. However please do not tell this to Raheja, Hiranandani, Mittal, Dlf, etc. they do not know it.

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