Real estate pricing and hearing issues!
‘My sister bought a bungalow for Rs. 1.8 crores 6 years ago and today it is worth Rs. 5 crores’
‘My friend bought a flat in 2002 for Rs. 40 Lakhs and it is now worth Rs. 9 crores’
My father…………………….
you heard these stories right?
It is not about hearing these stories it is how you interpret them that is important.
So for most people the next question is WHERE did they buy it?’
Then they hear Pune, Gwalior, Delhi, Mumbai, Panvel…………..
What then now actually hear is “if you buy a house now in Pune for Rs. 1 crore, it will go up 4 times in 5 years time’ …..then they go and buy a house….
Why? because History repeats is what a teacher told them…and they hope that the teacher was right! What they forget to hear is ‘You cannot look at the rear view mirror and drive’ – like Peter Lynch told us.
I heard one father tell his daughter ‘look at the poor return that your SIP has given and the fantastic appreciation in the real estate that we have got…so let us redeem all your mutual funds and put it in the real estate – let us buy another flat in Panvel’…..
well I also read this
http://www.nytimes.com/2010/08/23/business/economy/23decline.html?_r=2&
karthik
Dear Subra sir,
There are many cases where properties(flats/land) purchased in Chennai after 2008 or even 2010 have doubled and even tripled as of today.This is purely due to the fact that most businessmen do not pay their share of taxes and the only safe haven for the unaccounted money is real estate followed by gold and thus creating a bubble.
Hence what is applicable to the western world with strict income tax norms may not be applicable in India.I feel that as long as there is black money in the system the bubble shall not burst.Hence I strongly feel that real estate should also be a part of investment portfolio for the average person who does not have the capability to invest directly in stocks.Your views please…
Pandu - NPR
People who know more than just recent history, know much better about Real estate. Mumbai RE market crashed from 1997 till 2003 by appx 40 to 50%. I know a colleague of mine, who bought an apartment there in 1999 and sold out in 2002 at a discount of 2002.
Similarly, for Gold. Gold is also a volatile asset. See its history dating back 35 to 40 years. Between 1987 till 2001, it had crashed 50% in-between & remained at the same value for almost 15 years (in US$ terms).
Pandu - NPR
People who know more than just recent history, know much better about Real estate. Mumbai RE market crashed from 1997 till 2003 by appx 40 to 50%. I know a colleague of mine, who bought an apartment there in 1999 and sold out in 2002 at a discount of 35%.
Similarly, for Gold. Gold is also a volatile asset. See its history dating back 35 to 40 years. Between 1987 till 2001, it had crashed 50% in-between & remained at the same value for almost 15 years (in US$ terms).
Pandu - NPR
Sorry for the repeat post. My keyboard mistake.
karthik
Dear Mr.Pandu,
The reason why I had mention 2008 or 2010 is because all asset classes went up during 2003-2007 during the boom period and hence considering the real estate returns over the past ten years(2003-13) would not give a fair picture.There are also several cases of land purchased in 1992-1996 which have multiplied more than 30 times as on date(CAGR of >20%).Now that is a long period of around 20 years and not the recent past.Am not pro RE or pro equity but neutral to all asset classes.
If we are talking about volatility – there is nothing as volatile as the stock markets.There is no need to be scared about volatile asset classes when you invest for the long run.Volatile asset classes beat inflation.
Hence for the average person real estate should also be a part of the portfolio (through lumpsum investments); equity through SIP’s; gold 5-10% of total portfolio and FD’s to ensure liquidity..
subra
Ok Karthik take a fair view and take 4 year views. So if your money doubles every 3-4 years you are getting between 18% to 24% returns. So all your investment should be ONLY in real estate. Right?
Why should u look at other boring asset classes?
Only like Pandu says if prices go down you know whom to blame, right? Not me, not this blog, just your decision.
If it goes up, enjoy.
karthik
Dear Subra sir,
I was mentioning about CAGR from 1992-2013;1993-2013;..upto 1996-2013 where CAGR has been greater than 18% to 20% in many cases and was not taking 4 year views. I am considering 15-20 year periods.This is not a short period.This may or may not happen from 2013-33..All am saying is RE must also be a part of the total investment portfolio.
Besides to answer your question on all money in RE- No. Definitely not suggesting to invest all money in RE due to poor liquidity/not very tax efficient/risks involved.
Some food for thought – which other asset class can all unaccounted money go to apart from RE?
Balaji
In Chennai, I know several instances where people bought half and one ground plots along OMR and GST roads and sitting on decent profits.
But, for that one has to wait for 10-20 years to get decent appreciation.
Gunda
Equity advisors advocate against Real Estate and Real Estate agents/developers advocate against Equity. Well, who has seen future? Anticipating is as good as one can…
Krish
Want to buy 1 cr worth of equities through bank loan to be payable as EMIs for next 20 years. The interest rate should be at par with home loan and am ready to bear the 10-20% down payment as like home loan. Every financial adviser in India suggesting me that in 20 yr period, the equity returns would exceed FD rate, Inflation and even beat home loan interest rate. Their refusal confuses me and wonder why this common sense is missed by the banks. Would compare “RE Vs Equity” only when lenders provide loans on equal terms for both of these asset classes.
atiker
@krish are u serious about what you have written or is it a joke/sarcasm ?
Have u considered on what parameters a loan interest depends ?
Seriously if you cant fathom flaw in your reasoning not even Subra Sir can help.
Pandu - NPR
@Gunda
Equity advisors are not against RE. As against the popular version of (glory of) RE, we are aware of what it is. RE is illiquid, not-regulated & there is no efficient price-finding mechanism (i.e. price does not drop based on actual demand scenario – only commercial RE does). We know RE for what it is. We just don’t glorify it – saying RE is THE best investment. RE has had disastrous results in USA / Japan / UK recently – where there is some amount of efficiency in RE market. RE also has had bad days in India, just not recently, but not many are aware.
As against that Equity has efficient market, fairly liquid & well regulated (still scandals happen there too). Everybody knows Equity is volatile, but what people don’t know is — Stock Market is the REAL barometer for India’s progress. If you BELIEVE in India’s growth, Stock Market is the place to be. Equity, atleast for now, is tax efficient too for Long term investors (no LT capital gains tax, in RE it is 20%).
vgh
Hello Atiker, Please elaborate, I am with Krish and did not understand the flaw. This is how I understand … banks lend loans for 20 years because RE for sure will appreciate but will not lend us loans because there is not guarantee of returns in stock market? So any day it is good to invest in RE as per bank standards? What am I missing? Please educate.