Prior to World War II most people in the world were happy living in rented houses. This gave rise to concepts like ‘pagdi’ where you paid a sizeable deposit and a small rent. Mumbai used to be full of such properties . In fact this gave rise to sayings like ‘Fools build (buy?) houses, Wise men live in them’ … but I am not sure of the context …

Then the myth of ‘you must own your house’ was beautifully spread – and the great middle class dream of being a house owner was started. Over the past few years property prices adjusted to inflation (and interest) have done well. However it could be just part of the asset boom of 2002-7, then the fall in 08, and the rise in09. The Americans (also under the same sales pressure from cement, steel and housing finance companies) have not been so lucky. Most of them have had their pants taken off in the recent crisis. However the learning is not much. Most people anchor to their price, do not know how to calculate the cost of the house, do not know SIP returns (as a benchmark)…this is not my lament, The economist says so…read on

and while on the topic, there might be some of you who believe that real estate cannot fail. Or even worse ‘You can NEVER lose money on real estate..well for such people, here is a note

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  1. agree.however,the same mentality applies to those who peddle equities. they like to disparage gold as a barbarous relic.
    SIP or no SIP, the US investor would still be in negative territory if he started investing in 1999 in the S&P or NASDAQ.

    So it finally comes down what phase of the bull/bear run you buy or sell an asset. different assets perform well at different times.its upto you to see the big picture than be hung up one particular asset class.

  2. If this hypothesis is extended , no body would build houses and like to be wise people – so where does one stay. You cannot measure all assets in return metric ( real estate v/s SIP), in all cases. The first generation home acquirer ( parents have not gifted a house!) will certianly benefit in long run in terms of security. Over long term the younger generation of landlords have gained multiples on family properties and in recent past the same generation also.

  3. From when did investments happen logically? It is pure sentiment. Why buy L&T? It is a good company. Why buy real estate in Mumbai? Prices do not fall in Mumbai. Why buy a LIC policy? It is owned by the government.

    The issue is “Is real estate a good saving product or an investment product? It is a SAVING product. Just like PPF. A renter getting thrown out of the house is because he cannot pay rent. Going from one landlord to another is not painful except logistically. I have no reason to be an advocate for renting. The social need to own a house keeps rents low :). So God bless the guy who preaches house ownership…and the caveman way of judging richness – size of cave, speed of horse, …Today the yardstick is no. of bedrooms, speed / size of car, tags on baggage..we have not come a long way, have we?

  4. Subra,

    I have done a fair bit of analysis on the buy vs. rent metric and here is the sum of my learnings…..

    Ultimately the decision boils down to the rate of appreciation of the asset (house). I’ll quote hard numbers here…..If the rate of appreciation of the asset is over 9% p.a., it makes better sense to own the house. Bringing the cost of maintenance of the property into play here, this rate of appreciation should be 10% p.a. If real estate/property is appreciating at any rate less than 10%, it makes better sense to live in a rented accommodation. This is because, you can invest your savings relatively safely in instruments that generate returns in excess of the returns that the property is generating (think equity!).

    It has to be kept in mind that all this analysis applies over the long term, which in my definition is at least 10yrs.


  5. An investment is good or bad purely on the price/value equation at a point of time. However investments in art, antiques and gold if I may add, have to be classified as assets which do not create cashflows while you own them. This dimension alone has to qualify them as a relatively higher risk asset. The contrasting investor attitudes to art and gold adequately underline the lack of clarity so far as understanding investments go. My personal opinion is – gold is the best example of investing that can be attributed to the ‘greater fool theory’.

  6. I agree with subra on the same
    always better to rent rather than buy , have multiple flexibilities

    Neighbourr is not good , change
    job chnages , other reasons , chnage the location ,rather than stuck & commute 4 hours daily in metros
    difference (66% -example 30lakh flat -10K rent , 30k emi) of rent & emi judiciously invest in market & sky is the limit ( else SIP can assure 15% without brain)
    above difference -growth amount -retire & can live in small peacefull places ( there is not a shortage of hill statioons – shimla , manali , nainitaol ,ok pantnagar will also do )

    lot of peace things not work out as per planned future (tenure of 20 years of loans ) can have bettr options rather than stuck in bought flat which after purchas I am not sure whether will get even 15 lakhs also:)

  7. I would advocate for owning a house. I did a fair analysis of the returns percentage, where it indicates that in a long run ownership is much better than being in a rented house. Now a says the rent also goes up every year by at least 5-10%. However i will agree that the appreciation of the house has to be somewhere near 10% p.a. But it most cases its always above 10% in a long run

  8. Venkat can you show me properties with > 10%p.a increase in any part of India over a 30 year term please?

    I can show you one equity share which grew at 57% over 30 years. Avg sensex is 19% + compounding growth of dividends. Rest my case.

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