This appeared under my byline in reuters india in their personal finance section 2-3 years ago…

I have a difficult time explaining to editors in their 20s why there is a gap between what I say in my columns, what I do and what others do.

The origins of this article can be traced to a meet with 5 television editors (to be fair, their boss was on my side) who were shocked when I mathematically proved it is better to hire, than to buy. This is true of cars, vacations, or homes! Here we are talking homes.

So let us see what I do which worries, surprises, shocks, my editor friends.

Even though I do write articles on portfolio planning, portfolio construction and occasionally even stock picking, my own money is with a portfolio manager – and he is urging me to index! It took me a long time to understand that ego of stock picking need not interfere in the more important task of wealth creation.

So the stock picking happens as a hobby and the money gets managed by an extremely competent and diligent portfolio manager – and to use today’s modern language he is “just a broker”. He has been handling our family portfolio for the past 30 years.

We attended each other’s wedding, and now his daughter is ready for marriage. No I do not call him my “relation-ship manager”.

I rent an apartment, despite having enough money to buy a house. I plan to keep renting for as long as I can. I’m not just holding out for better prices. Renting will make me richer. Businesses are great investments while houses are poor ones, so I’d rather rent the latter and own the former.

Shares of businesses return 7% a year over long time periods. I’m subtracting for inflation – gradual price increases for everything from a loaf of bread to a root canal surgery. (After-inflation or “real” returns are the only ones that matter.

The point of increasing wealth is to increase buying power, not numbers on an account statement. Shares have been remarkably consistent over the past two centuries in their 7% real returns.

In Jeremy Siegel’s book, “Stocks for the Long Term,” he finds that real returns averaged 7.0% over nearly seven decades ending 1870, then 6.6% through 1925 and then 6.9% through 2004.

The average real return for houses over long time periods might surprise you. It’s zero. Shares return 7% a year after inflation because that’s how fast companies tend to increase their profits. Houses have their own version of profits: rents.

Tenant-occupied houses generate actual rents while owner-occupied houses generate ones that are implied but no less real: the rents their owners don’t have to pay each year. House prices and rents have been closely linked throughout history – except for bouts of bull / bear runs- and related to inflation.

A house, after all, is an ordinary good. It can’t think up ways to drive profits like a company’s managers can. If land, cement, steel, and money are all commodities, how can a combination of all these not be a commodity?

Robert Shiller, a Yale economist and author of “Irrational Exuberance,” which predicted the stock price collapse in 2000, has recently turned his eye to house prices.

Between 1890 and 2004 he finds that real house returns would have been zero if not for two brief periods: one immediately following World War II and another since about 2000.

Even if we include these periods houses returned just 0.4% a year, he says.

The average pundit, planner, lender or broker making the case for ownership doesn’t look at returns over long periods of time – it is embarrassing to say the least! Sometimes they reduce the matter to maxims about “building equity” and “paying yourself” instead of “throwing money down the drain.” If they do look at returns they focus on recent ones. Those tell a different story!
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  1. this assumes that renting is easier in comes with the hassles of a)finding a good landlord b)worrying about changing your addresses frequently or whenever you are faced with the landlord’s diktat.c)the hassles of govt/police and other sarkari agencies who treat renters with disdain d)search costs -regular payments to brokers etc.
    however renting does do wonders to your ability to just up and leave -chasing the dream job in a different city becomes much easier. house ownership is about security rather than wealth creation.a liability than an asset.

  2. Hello Subra Sir, you have talked about stock picking and investing in equity. 7% post inflation returns sounds too good !
    However, most people keep on loosing their money in stocks, for lack of having right knowledge and having portfolio manager.
    Does SIP in good diversified equity MF does equally good returns ? I am not sure.

  3. I beg to differ to part extent. Though it might be true in long term but in short term buying a house has paid dividends to me. I had purchased a house 4 years ago and till date i have earned 15% returns p.a. and its still appreciating.


  4. Buying a house makes life more comfortable. You do not have to move constantly and can adapt your house to your needs.

    Apart from the monetary side of buying a house VS renting, please look at the overall quality of life it brings. It gives you security. Food,cloths& accomodation are basic needs of life. Owning a house is like an insurance. If anything happens to you, your family is not on the road. We all agree it is not the best investment avenue. Do not look at your house as a part of your portfolio.
    I have rented houses in NZ for many years till now and moved every few years when the landlord asked more money or sold the house. It is painful.
    I will verify the accounting behind this claim for more knowledge of the claim.

    Look at owning a house liike marrying a nice girl. There are many benefits over a xxx relationship outside marriage. Marriage brings happiness, just the way owning a good house does.

  5. Hi,
    No offence meant but… you obviously do not live in Mumbai where you HAVE to move every 11 months if you are renting

  6. This is the one of the few areas I disgree with you, Subra.

    The need to have “own” roof over your head is very compelling. Apart from the reasons mentioned by fellow readers, you need to have a permanent residence to build familiar & Supportive ecosystem of like-minded families around you. The quality of life, friends circle for spouse and kids, similar age groups company for parents etc cannot be judged by IRRs and other monetary parameters.

    Readers need to search extensively and settle for a reasonably priced apartments/house without taking too much EMI. They are available in all cities. That would be the only caveat.

  7. Many times decisions are based on reasons beyond numbers. Example:
    we were looking for clean water solution after our building started getting borewell water. I crunched the numbers and told my mother, that buying bisleri 20 litre bottles is better option that any water purifier since the cost/lit of water is the least.
    But even then a purifier was bought since she did not have guarantee that i would make efforts to order the bottle on time and the supplier would deliver on time.

  8. Big fan but disagree with you on this big time. The knowledge that is passed from 100 years or more cannot be wrong. One day all the paper assets will be worth paper itself so try to buy money generating REAL assets like offices/serviced apt etc.
    Inorder to diversify one can have balanced allocation between equity and realestate but avoiding realestate completely may prove foolish. Not sure why you are always against investment in realestate. You can continue to be against it for next 100 years and it will continue to prove you wrong for 100 years and more and more.
    Just a thought so no hard feelings.

  9. so nice to see so many people disagreeing. That will ensure that property prices are high (good for me as a Hdfc shareholder, NPA will be less than 0.5%) and rents will be low. Suits me both ways.

    Gaurav ‘100 years’ ‘knowledge’ LOL.

    will u please use an excel statement and SHOW returns over 15%p.a. real estate returns over 30 years? Will be amused. Santacruz and Defense colony are about 8% p.a. return over the past 30 years +.

    In real estate you need to DEAL, not invest. Big builders, lenders make money – there is no retail product which makes money.

    Yup I do transactions in real estate – with real estate as the underlying and with a 15-20%p.a. kinda returns.

  10. Is there any account for emotions on balance sheet/profit & loss accounts? If answer is NO then house is surely a waste of money as explained here. There are some intangible things exists in our life which cannot be simply measured by ROI/P&L/BL.
    One house is sufficient and for second one follow Subra and decide is it better option or not.

  11. Subra,

    I agree with you partly. I pay an EMI of 23,000 for a flat in outer Bangalore whereas my tenanted neighbours enjoys a rent of only rs. 7000 for the same. The ‘savings’ of 16,000, I could have invested in equity to get a good return of 7% as you say. Add to this, yearly property tax payments, annual maintenance expenses etc.

    One of my other neighbours (owner-residents) are seriously considering moving to a rented accomodation nearer to the workplace to avoid the energy-sapping and unhealthy traffic in Bangalore. For them: they pay the 23K EMI + plus whatever “notional” returns for the money they paid from their pocket for the flat + rent for the new flat. And the income is rs 7000.

    Renting is increasingly becoming the better options for YOUNG AND MOBILE Indians.

    However, start to own a flat when you are 50 (and your kids have gone to college/work) and pay both EMI (+ rent for current flat) till 60 may be a good option. Search a flat away from the city or in tier-2/3 cities(so it is affordable) and shift to that after retirement (so no commute). Changing accomodation after retirement is really painful.

  12. Not surprising, almost everywhere they seem to suggest it is better to BUY than rent.
    (Better for whom, I don’t know)
    makan has launched a real estate index…No data is shared though.(as to how they came to this conclusion)

  13. Hi

    My father used to say, if you have an inherited property, then its well and good. But if you are not able to buy a home with your limited salary, then don’t go for it or worry about it. Its not profitable, was of the same view of Subramani. See, if you purchase a home for 30 lakhs in Tamilnadu and if you rent it to somebody, you will get monthly income of 3000-6000 range, but if you put the same amount in a bank FD, you will get around Rs 28,000 which is far more. I do not understand why 99% of the financial advisors ask us for investing in real estate when there is no income from it. Moreover, in my opinion (leave out my father’s opinion), real estate business has done more harm to a common man by way of cheats than the other modes of investments. Most real estate business owners are in someway related to politics and want to make huge money. In India, for a common man, its difficult to find out if the property sale is genuine. Lots of documentation and hidden cheat kind of things even for an educated man. I have lost around 12,000 by way of advance payment to a real estate concern. They will show me the document copies only on payment of this amount and there is no way I can verify the property is genuinely documented, or sold already to somebody etc. He gave me a book of xerox copy of the documents. When I showed it to a DTP officer for opinion, he told some final body approval documentation have not been done and it was required without which it is not advisable to buy the land. Wherever we go, even for getting the encumberence certificate (EC) from the government office, we need to pay some “under the table money.” Around one subregistrar’s office, there are around 50 “type offices” which collect extra money 3 times worth, needed for EC and submit them on the feet of the government officials as if they are Gods. If a commoner enters the subregistrar’s office for the same, he will be sent out even by a low-graded peon who orders out with the tone and get-up of a district collector to contact the type office.

    On the whole: I feel, those who promote/encourage real estate investment should also think that there are also a great number of people who are without steady income. Planning advisors should take the responsibility not to advise for the well-to-do persons, but should have this category of common man in mind. Some sait businessman or old nut might have had a lot of money in his hand and not knowing what to do with it, so he might have advised to buy real estate, but what the growing up common man would do?

    So don’t go by the herd’s opinion. Also, its not easy to sell a property, takes long time and lot of talking etc., its not like selling share in your demat account. Dont lock your money in EMI. Improve your financial status, work more, improve your business….have lot of money. Then if you have lot of surplus money then only go for it that too in India, where its in 40 lakhs and 30 lakhs even in unworthy places in south tamil nadu. You can open 10 petty shops in 10 places of a city with one tenth money required for buying such a property and generate monthly income!

    Subramani anna naanum tamilan than, you are one among the 100s who thinks practically and differently, and my request is to continue posting your ideas for a commoner with”OUT” steady income. For eg. even an IT person earns 40-50 thousand for some 3-4 years. Suddenly he loses job and is forced to take up jobs for 8000 per month whichever is available to him.

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