Caveat Emptor. I do not understand interest rates. To be more precise, do not understand interest rates at all.

Many people in the floating rate model of interest for housing may not know that they are already paying north of 14.5% p.a. interest on their loans. Ouch. It hurts.

For new buyers of big houses at big EMIs there is a real threat of a 5% REAL INTEREST RATE – a stunningly high figure to fund ANY ASSET PURCHASE, leave alone a NON EARNING asset like real estate.

So if you have a housing loan, get rid of it. At 14.5% p.a. the hurdle rate is too high for keeping your SIP on and your EMI payments on. If you have 2-3 year horizon, I daresay you may be better off paying off the loan. Having said that the Great Humiliator that the market is, it may stun all of us.

However, I think the following  broad price ranges will work.

at Price Earning < 15 Buy or accumulate

at P E > 25 sell, sell and sell rapidly. 🙂

Sorry this is not some magic wand, that it will also make money for you….

However w.r.t interest rates I think in India the following table my work

0-8% p.a. : take a home loan and buy in an upcoming location

8-10%p.a. : take a loan depending on the amount needed

10-12%: pay the loan instalments

north of 12 or 13%: repay part of the loan instead of investing – even in pf.

caveat emptor….once again..

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  1. On the subject of interest rates, I’ve a query on real estate. I hear from my friends and clients in others about fall in real estate prices.

    Chennai has so far defied this trend. Since you know this city very well, let me give an example. In SIPCOT industrial area, which is 25 kms travel in OMR from Adyar, with a two way commuting time of up to 3 or 4 hours (less said is better about OMR traffic in peak hours) from various parts of Chennai, people are buying flats at the price of Rs.80 lakhs at the interest rate mentioned by you.

    When there are no takers for properties in Bangalore at the higher prices; either the transaction does not happen or the price is significantly slashed to enable the transaction- what is preventing any meaningful correction in Chennai real estate prices?

    The area I live in, the rate per sq.ft is around Rs.14,000/-. Rental yield at these prices works out to 2%. I’m unable to understand the logic of market forces.

    Since we spoke about Bangalore, my friend has been trying to dispose his land there (near K.R.Puram) for last 2 years and there are no takers.

  2. Very well said Subra..
    Many known economist has said this.. start investing only when you dont have any laibilities.. Then only one can hold investments for long term..

    There is no point earning 8-10% return while you paying back 12-14%.

  3. @Muthu

    my friend says, RE prices in Chennai didn’t fell because most properties were ‘built’ by black money and not loans/lending.. may be 2G money

    Frankly I don’t know. Lots of RE projects getting launched every week. smaller ones are certainly selling out, at least other than top floor. Not sure about bigger ones. Going by phone calls and advertisement, they might not have sold out.

    I’m no real estate expert, juz another guy looking to buy an house in decent location in Chennai

  4. What if interest rates come to 8 % after two years? Then it would feel like a mistake to not to invest in PPF/EPF, right?

  5. @sanjay

    I think that is the reason Subra is starting and ending this particular blog with the words ‘Caveat Emptor’!!

  6. I think its better to invest than repay homeloan as long as the FD interests are not less than 30% than your homeloan interest.

    Say your homeloan interest is 12% and if an investment in FD earns 10%, then better go with FD. Note that we get a tax benefit of 30% on interest paid on homeloans (if you are in the highest tax bracket).

  7. @sheetal FD interest is taxable.

    What I would like to know is whether this is just a gut-feel of Subra sir or is it because estimation of long term borrowing of indian corporates/government that Subra sir is coming up with conclusion of repaying the home loan.
    I have read that government borrowing will increase in years to come. But goverment is already inviting FII for infra bonds. So is there chance of interest rate hardening even more?

  8. @sheetal I am not sure what you meant to be “managing”, but I feel as per law you have to declare FD interest as income from other sources.
    I would be very happy to be proven wrong 🙂
    As I have been told, even tax-saving FD (with 5 years lock-in) offer taxable interest.
    Let me know if you see more tax efficient debt instrument.

  9. @sanjay you are right that it is taxable, however I think if it were invested in parent’s or wife’s names and if they are not employed it is still within legal limits to save on the interest…

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