What do you do if people disagree with you? Get angry, resign to fate, fight, ignore them…well look up the Cognitive disonance….but first read on..

There are some deep beliefs that you cannot question. Let us say the scientists in the world believed that the world is flat. It means many years of research including greats like Aristotle who had not said anything to the contrary.

So if I were a scientist in that era and a few guys like Galileo and Bruno came with the theory that the world is well, er round – sphere. Typically Galileo was lucky – both G and B were arrested – but Bruno was burnt at the stake. Well, do not dare to disagree.

Why am I bringing it up here? Cognitive Dissonance is what happens when you hear something that is contrary to your thinking. It increases your blood pressure, you may sweat, you display nervousness, irritability….and hatred for the messenger. So when I say ‘Real estate is not a good investment…’ I hope I do not get lynched. Or if I can prove to people that they have underperformed PPF over a 10 year period.

Complete denial is “How can I underperform ppf – I have invested in good companies – Colgate, HUL, L&T, SBI, Hdfc…..Well I do not know, but excel is a cruel tool  – it tells me you have got 7%, is a HATED answer.

Asset allocation is a must – you must have debt, equity, cash and real estate in your portfolio – is again met with “Debt gives lousy returns…’ However Hdfc Prudence fund has outperformed many equity funds on an SIP basis – maybe thanks to the 2008 and 2009 ‘V’ shaped market movement.

So if you hear that I got lynched you know one / a few readers of subramoney who had cognitive dissonance. Or ask Galileo. His family would have been happy that he was only arrested and imprisoned and not burnt like Bruno. So the most important lesson is when I am hearing something which I do not LIKE to believe or goes against the model of my thought, I should keep cool. If I am telling somebody what he DOES NOT WANT to believe….I should be cool and do it in small doses.

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  1. Dear Subra

    Would like to know your view on investing in land, especially commercially important land in comparision to other investments. I do agree the logic of flats and houses as not a good investment compared to stocks or funds or even ppf. but felt actually “real estate” is something else which is worth “investing”.


  2. Dear Subra Sir,

    Good post. But unfortunately i got occupied in thoughts after reading one of your sentence. – “So when I say ‘Real estate is not a good investment…’ …..PPF over a 10 year period.”.

    I must admit i have heard the lines few times before but have never been able to think through them logically. So, obviously few things have remained as question in my mind.

    Here goes the lengthy question.

    Let’s first draw few logical conclusion from your statement.
    1. If someone had bought real estate say 10 years back and would be selling it today. His returns on investment would be less than PPF return. Say 9% compounded annually.
    2. Now if we consider the income(rent received or rent saved on self occupation) & expenses (like maintenance, tax etc) on the property and add & subtract them respectively from the sum we get from point 1 after compounding these individual sums too at the rate of 9%. Also for the time being lets exclude the tax implications of this transaction.

    For the sake of this discussion/simplicity we can keep the returns in point 1 as our benchmark.

    From theabove, we can hopefully conclude that a property which was costing X in a locality 10 years back is NOW costing X + (9% interest compounded).
    In other words the cost of property in the area has risen roughly at the rate of 9% compounded for the last 10 years.


    Is 9% compounded growth for last 10 years too high for a property?
    Or is it that we started with very high base price (bubble price) 10 years back and hence it’s difficult that it has still continued to risen at 9% compounded growth.

    How can both the below statement’s be true together ?
    1. Property prices have risen too fast in last 10 years.
    2. The rate of return from property in last 10 years is below PPF rate.

    Please enlighten!!

    Disclaimer – Quite possible that i am having some sort of Cognitive Dissonance here. Because i am just a new kid on the block who wasn’t
    wise enough 10 years back to track property prices and now just old enough, who has bought a property 2 years back during 2008 crash 🙂

    Regular reader of your blog and keen to learn more about personal finance if i might add.


  3. More dissonance here.
    I am taking @Raja example to explain. By no means, it is personal.
    How can both the below statement’s be true together ?
    1. Property prices have risen too fast in last 10 years.
    2. The rate of return from property in last 10 years is below PPF rate.
    RE pries have always been high(er) in India i.e. it has always been a case of investing almost one’s lifetime earnings in it. For the salaried type.
    — This is due to Huge Demand for Homes (everyone wants a rooftop).
    — People think, it is a safe investment.
    — It’s good from emotional perspective. Your father-in-law feels suddenly happy for you 🙂
    RE price will continue to be beyond one’s reach due to the above.
    That’s the catch. I dont think all people complain. Only the informed complains (i.e. those who visit this site for e.g.)
    Why should one invest one’s lifetime earnings for a 8-9% returns (remember, last 10 years were the best for RE), when one can get better @ 12-15% in Stock Markets? The catch here is — one’s Lifetime earnings. It is investment which does not merit one’s lifetime earnings. Investment FIRST in Stock Markets and get better returs. AFTER one has earned enough money, consider RE investment also.
    Answer: It’s not a complaint. Since RE prices is and have always been higher, don’t INVEST in RE for your whole lifetime’s earnings.
    — RE is illiquid investment. You can’t sell easily OVERNIGHT.
    — There is no regulator for RE industry. Due to that, Cheating is rampant (plinth area, carpet etc) by builders
    — RE industry is manipulated by Builders, Politicians and Brokers
    — You are emotionally in debt, if you pay EMI at > 60% of your Takehome salary. Your health etc suffers

  4. Sorry, my wordings got mixed up a bit.
    What I wanted to convey — People complain about Higher RE prices because, typically for the prices you buy RE, a normal salaried person invests one’s lifetime earnings in it. — Specifically 2 complaints.
    1) Since RE is higher (complaint), dont INVEST lifetime earnings in it. Especially borrowing 15-year mortagages at 10-11% interest. And paying > 60% Takehome salary
    2) There are better INVESTments around other THAN RE. Which are more liquid, better regulated, better returns (long term). Earn enough first and invest in RE, if you have money to spare. It may not be a GOOD INVESTMENT decision, but a LIFESTYLE and EMPTIONALLY satisfying , but lesser yielding, illiquid investment.

  5. hi

    some clarification in place! I did not say ‘real estate underperformed ppf in the last 10 years’. I said there are 10 year periods when it underperformed. Secondly if real estate sector SURELY goes up by 12% year on year, we would have had many, many, many real estate companies renting our properties. Instead we have companies happily giving you money at 9% to buy property.

  6. Hi Subra Sir and NPR,

    Thanks for your responses. Sorry for the delay in my reply. But I sure have few things to say.

    Let me start with a quote – “Not everything that can be counted counts, and not everything that counts can be counted” – Albert Einstein

    I think the logical,mathematical explanation that PF people are explaining about RE is surely falling into deaf ears. Just looking around and observing people tells me that.

    So, why exactly are we talking about ‘a place to stay’ and ‘RE investment’ in same breath is really beyond my understanding.

    At the same time let me tell i totally and whole heartedly agree with the statement that it’s not wise to pay >60% of take on EMI’s.
    I would rather go with a comfortable 1/3 division of EMI,expense and saving. And with time keep reducing EMI and increasing saving %tage is what i prefer.

    Also another thing i observe is, people who bought houses say within 45% of their take home as EMI 4-5 years are in very comfortable position today when salaries have increased by say 10% YoY but the EMI has remained around same and is now say around 25-30% of their take home.
    The same has happened with me too. Although i bought 3 years back with close to 45% of my take home as EMI, in 3 years the EMI has fallen to below 36% of my take home. And with time i expect it will further reduce as %tage of my take home except any major hiccups. And then am not wondering how much the house has appreciated. I am more than satisfied in not trying to count what doesn’t count.


  7. I agree with Raja. As someone who is thinking of a getting an EMI, I think his advice is very helpful. An EMI > 60% of take-home salary will surely be a mental torture.

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