Property is seen as a safe asset. Most people have the following arguments for investing in property:

– price can never go down

– see prices in the last 10 years, my brother’s property has gone up 3 times !! Vow!!

– God does not make more of it anymore, so prices can only go up

– My house interiors is well done up, so I can get Rs. 1 million at least for my flat compared to my neighbor

– So what if the prices have gone down, I have bought to live in it.

– Of course it has not gone down, my neighbor was a distress seller….so he sold at that price.

So most people consider houses as a safe asset – the Chinese bachelor needs it to get married. The Indian MBA is egged on by his parents to buy a house, so that he can live in that house from the day he gets married, etc.

However real estate prices are not always on a one way ride. I am convinced that one day people will buy only what they can manage. So if renting were available in an organised manner or even buying selling can happen on the net …that would be a great favor!!

http://www.economist.com/node/18250385?fsrc=scn/tw/te/ar/bricksandslaughter

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  1. Subra, real estate as an investment is a mind-set issue. No amount of logic can bring reasoning. It is passed down generations: from grandfather to father to son to grandson. It is difficult to change mind-sets and attitudes.

  2. Dr Mohammed Ali Khan

    In India the real estate market is rigged..
    There is a nexus between the builders, politicians and the top bureaucrats to keep the prices artificially high..There is no land shortage in India.. We a Sub-continent for heaven’s sake , not a puny country like Israel or Singapore!

    Poor infrastructure is also a reason..

    Black money is another reason, there is no better place to hide black money in India than in real estate..

  3. Subra,

    Nice article. Thanks!!

    However, I would like to read an India-specific article on property. There are,in my opinion, three macro-economic condititions in India which does this article does not address:

    1. Black money – As Dr. Mohammed Ali Khan writes above, there is no other place in India than real estate where large amounts of money can be “invested” in. These “investors” are not in for returns or for living in their but only for hiding their black money.

    2. NRIs and expats – There is a significant amount of investments done by expats in Indian real estate in the hope of good returns. They are not highly leveraged investors and these guys will not fire-sell property even if the rerturns turn negative. There are 3 NRI owners (out of 12) in my small apartment block, who have not even let out their flats for rent (costing around 35-40 Lakhs). They are getting zero/negative returns from their “investments” but who cares ?

    3. Urbanization of India – Examples of New York and Los Angeles are all fine, but did they have the same rate of urbanization/migration as Mumbai or Bangalore is facing? There is bound to be a supply problem here atleast in urban areas, isn’t it? I don’t know the answer to this.

  4. To add to Ashok. Comparison with west is not correct.
    Whatever happens now in India happened in US cities in 60’s,70’s. Urbanization and consumption/GDP growth, automobiles. Munger made lot of money during that period.

    In India, it is in the gene. We have millions of aspiring population who likes to own bit of land somewhere; they are all moving to nearby towns and cities. It will work for long time in India.They are really doing any financial calculation and they are happy by owning a property.

    I am saying, don’t buy them now – instead sell.Why do make some money out of it?

  5. One correction to the above comment.

    They are really not doing any financial calculation and they are happy by owning a property.

  6. Dr Khan,

    I agree.except for the insinuation that black money is causing the prices to be high. The black market exists because the white market is not allowed to flourish because of sarkari limitations on FSI and zoning regulations.
    we have an overcrowding problem not an overpopulation problem

  7. inefficient markets are a great way to earn money. However there are no instruments which allow you to short real estate even for short periods of time. This ensures that price discovery is not efficient. A great example is the Coal India share – it is still not in Futures n Options. So there cannot be a serious seller…only buyers can be big.

    Why? Simple if the biggest player in the market (future IPOs and the biggest debt player) is also allowed to make the rules of the game…chances are the contrarians will be crushed.

  8. You have one convert, in thought and hopefully before long in deed as well!

    Prices are artificially kept high – lets examine this. The construction cost per square feet is between INR 700-INR 2000 for the most luxurious apartments. (for confirmation try getting an insurance claim for the market value of a property damaged by say, fire). The rest is land value. Now in a place like Mumbai if MHADA is given historically held land at say INR 2000 per square feet (acquisition cost INR 50/100) then at INR 6000 it can build livable apartments in the heart of the city and still make a decent profit. But this will bring down real estate to reasonable prices. Hence the politicians never allow MHADA to build apartments anywhere in the city by systematically dereserving plots.
    This also what Singapore does efficiently, HDB flats are usually 60% of private developers and the loos flush too! Black money or no black money, the market will set itself if the artificial scarcity is released.

  9. funnily Indians love banks! So they keep money in banks. Banks cannot lend to a retail business, a hotel, a restaurant, a bar, a shopping mall, …etc. However they can lend to a builder. Builders borrow from the same bank and buy (and hold) lots of land and built property. So the builder leverages and buys, then the ‘depositor’ borrows and buys a ‘house’. If prices come down banker, builder and depositor will lose. So there is a vested interest in not allowing prices to come down. However like Humpty Dumpty when there is a fall..all the kings horses and kings men will not be able to hold Humpty dumpty together again 🙂

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