That may not be the right argument.

It is a person’s migration from one level of strata to the other one which is marked by ‘buying’ a house. He is under tremendous pressure from his own parents, in laws, friends, Hdfc (as a shareholder collecting the recent 1:5 split, I am happy), his employer (an employee committed to an EMI cannot leave, can he?), …so he buys.

It is easy to have a sense of regret…”Oh, only if my father had bought one more flat…” It was available for Rs. 2 lakhs, now it is Rs. 80 lakhs…..” normally you hear this quite often.

My take is if you must feel s…#$%..ed about your dad not buying something it should be equity shares. Your regret should be…”If my dad had just invested Rs. 10,000 (forget Rs. 200,000 maybe he did not have it in 1980) in Wipro (it would have appreciated to Rs. 300 crores), Ranbaxy, Cipla, Larsen And Toubro, Infosys (1992 listing), Sensex, .literally anything..it would have been worth at least about Rs. 2 crores – apart from the dividend with which one could have paid rent….

So first in life, do not regret.

However if you want to regret, regret big! Regret about your dad not understanding the impact of inflation on fixed income securities. Regret that your dad bought land. Or a bank FD. Or put 70,000 in ppf without fail for the past 20 years. Or 40 years. Regret about the ‘gold’ in which they invested – and the Jewelery that will never be sold immaterial of whether gold is in a bull run, bubble run or a bear run. Do not regret that he did not buy some steel, cement, paint, wood, …these are commodities. Instead if he had bought Tisco, Acc, Asian Paints and Hdfc (btw did you notice that a Rs. 50 lakhs house bought with a Rs. 50 lakhs loan costs Rs. 1.1 crore when you multiply the emi * no. of installments?) So Hdfc is also a good proxy for the home that your dad could have bought.

Luckily whenever a friend / cousin / customer asked me for advise re buying a house I made them buy 100 shares of Hdfc. Those who kept the shares (literally most of them) have about 300-400 shares of Hdfc, and 200 shares of the bank.  Not bad considering the interest rates may have been 12-14% p.a. but the share has yielded greater than that…

Ha ha ha….LOL If you get to rent a place @ Rs. 1 Lakh a year, you should buy the place only if it is available at about Rs. 15-17 lakhs according to some researchers in the US. No such no. is available for India…Mumbai is atrociously expensive to buy – it is almost a renter’s paradise in terms of rent: own ratios go. However Mumbai real estate has nothing to do with the kind of income that you can earn @ Mumbai….so read on.

http://online.wsj.com/article/SB10001424052748703561604575282910161870380.html?mod=WSJASIA_newsreel_personalFinance

Well I am not against gold, and neither against real estate. However what do you call a market which is completely dependent on new investors bringing their fresh money. Well some people call it a Ponzi scheme. I would call it a Madoff scheme.

What drives the gold market is difficult to say – insecurity? Spain? Korean war? – and periods of extremely long price stagnation are scary. Similarly for gold to come down – just shrinking of demand (which is driven by prosperity?) can spook prices.

Real estate again has many myths. ‘Prices in Mumbai do not come down’. Look at the lucky people whose parents bought flats in Santacruz, Ghatkopar, Bandra, Khar…..the list is endless. However this is just 8% return !!

I still insist that you should have gold and real estate in your portfolio – but stop thinking of them as growth assets. They are not. They are Savings assets. You will see some steady appreciation – or a spike – but on a 10 year rolling basis you would have got about 1-2 % of real return.

FOR MOST PEOPLE I KNOW, THIS IS A FANTASTIC RETURN – they let a few million sleep in their savings bank account. So on a comparative basis they are better off doing a SIP in a gold etf – but stop expecting to get 24% return. Just not possible – the market has enough people who will buy put options soon…and there will be enough WRITERS.

http://www.subramoney.com/book-written-by-me/

Then the myth of ‘you must own your house’ was beautifully spread – and the great middle class dream of being a house owner was started. Over the past few years property prices adjusted to inflation (and interest) have done well. However it could be just part of the asset boom of 2002-7, then the fall in 08, and the rise in09. The Americans (also under the same sales pressure from cement, steel and housing finance companies) have not been so lucky. Most of them have had their pants taken off in the recent crisis. However the learning is not much. Most people anchor to their price, do not know how to calculate the cost of the house, do not know SIP returns (as a benchmark)…this is not my lament, The economist says so…read on

http://www.economist.com/blogs/freeexchange/2010/04/housing_markets_0

and while on the topic, there might be some of you who believe that real estate cannot fail. Or even worse ‘You can NEVER lose money on real estate..well for such people, here is a note

http://money.cnn.com/galleries/2010/real_estate/1004/gallery.commercial_real_estate/index.html

Even for a professional who has a nice starting salary of say Rs. 500,000 gross income (per annum) the cost of a flat is about 20 years’ pay! that too at the gross. If you include the interest amount (housing loans do not come cheap, do they?) it just doubles to 40 years’ pay. Now if you assume that the IT sector and the Financial services sector will keep creating jobs at the entry level for the next ‘n’ no. of years…this boom can continue. Such jobs will not get created for more than a few years.

Mumbai’s famous infrastructure is almost a joke. Trains are over crowded – people are packed like sardines. Traffic moves ever so slowly and one party can decide which movie should be released. Power is available in the city @ Rs. 9 a unit and the suburbs have a 3-4 hour power cut. The idiotic real estate prices have skewed the price of school education – no school can hope to come up in the city. New shops find it difficult to make money paying such high prices.

Now if Mr. Thackrey decides that north Indians are not wanted (in 1967 he did not want south Indians), and in 2013 decides that everybody named Khan should not be in Mumbai (not sure what he can do next – he might ban women for all you know!!). If lower end jobs can be created far away from Mumbai, people will.

Now unconnected to all this Mr. Narendra Modi is creating something called ‘GIFT’ – which makes power available at say Rs. 3 a unit (gas based power can be cheaper for wholesale users for sure), create infrastructure at Rs. 2000 a sq. ft. (buying not renting!!) 40 kms from Ahmedabad will people go? Look at the financial services sector – Mr. Parekh (Hdfc), Mr. Hemendra Kothari (Dsp), Mr. Kampani (JM Financial), Mr. Uday Kotak (Kotak Group), Mr. Rashesh Shah (Edelweiss) – if all these people decide to shift the back office from Malad /Goregaon to Ahmedabad what happens? Suddenly you will see a million jobs being created in Gujarat.

If all these things happen successfully (to me it is a given that it will happen) why should Mumbai prices be held high. Funnily Mumbai prices are held high by doing a comparison.

Why are prices in Panvel at Rs. 3500 psf? Because Vashi is at 7000. Why is Vashi at Rs. 7000? Because Ghatkopar is at Rs. 11,000. Ghatkopar is at Rs. 11k because Santacruz is at Rs. 17000!! The whole thing is laughable – but there is money to be made . So all builders, financers, investors, traders are all playing the market. Make no mistake if you bought Panvel at Rs. 2200 just 4 months back and currently are seeing it at Rs. 3000 YOU HAVE MADE MONey..no doubt. Stop thinking of it as NEVER ending game.

When the music stops, if you are holding the parcel, you get the punishment. Remember passing the parcel you played in school?

http://giftgujarat.in/faq.aspx

Let us put things in perspective. If 70% of people in a shop are coming in to buy because there is a gun on their head, it does not say much for ‘customer satisfaction’ right?
That is a figure you like to hide, is it not?
Ok it gets worse. The Mortgage Bankers Association said that the number of homeowners behind on their mortgage payments is pretty high. More than one in eight homeowners are delinquent or are in the foreclosure process! That means sales will go up for sure, but the prices are likely to head South, not North.  With all my efforts I could not find what percentage of home owners owe more than the actual worth of their houses. However frankly in certain geographies in the USA prices have fallen as much as 50%! That should be mouth watering even to skeptics like me. However I hate averages especially when it comes to a mass of data. One builder in a Mumbai suburb made me an offer at 50% of his peak contracted price – that is attractive. Averages numb me, so will not comment on the American situation.
Ok that is in the USA. What about India?
In the Indian conditions withdrawal of tax benefits by the Direct Tax code will perhaps act as a dampener. Bankers too have sobered. Many of my friends who bought with 99% financing are getting calls from their bankers more frequently – and interest is not being reset – to make them pay faster! Sober bankers (remember they were also 22 pegs high!) tougher credit standards, higher interest rates (discounted rates are only for loans up to Rs. 20 L)  and big down payments are set to hit the high end of the market. Add in the death of home-trading, new tax regime, shrinking bonuses, and people questioning ‘God does not make it anymore’ philosophy, I think prices are headed South here also. Rents are still a very small fraction of the cost of the house. In a Mumbai suburb where you can buy a house for Rs. 55 lakhs (read EMI Rs. 55,000 a month for 20 years) can be rented for Rs. 8000 a month. (20 year cash flow for buying is Rs. 1.32 crores + maintenance + tax + term insurance risk cover costs) and for renting is less than Rs. 20 lakhs. Of course ignoring taxation and inflation! Obviously something is wrong and may not remain so for a long time. Till then have fun.

However if you take a trading outlook – there are many opportunities – available. Do a deal close to the cost of construction + cost of land. Go with a good builder, enter the project at the start – and be the ‘early bird’. Leverage sensibly. On a salary of Rs. 30 lakhs – it is all right to borrow Rs. 30 lakhs and buy a flat for Rs. 35 lakhs. Complete the payment in a maximum of 30 months – your borrowing should be for say 5 years. Hopefully because you are starting at the prices could double in 3-4 years. If you get money at 12% and your property appreciates @ 20% p.a. – the whole deal is attractive FROM AN NETWORTH accretion angle – even if not from an equity vs. real estate angle!

Like always “Save in a house, invest in equities”.

What to do: Your home will not appreciate. It is not a wealth creating asset. It will not make you rich. Remember it is an important savings tool. It might just protect you against inflation.

If you met a real estate broker in 2007 he would have shown you a never ending spiral of rising real estate prices. From the year 2002 to 2007 the world went into an asset bubble. Unfortunately if you borrowed and bought a house in 2007 you have got into an asset which may take 10 years to touch those numbers again. You heard a lot near the top about how the market would have to “cool off” or “get back to normal” – the implication being that slow but steady appreciation was the future.

But the long-run data always told a different story. Yale University economist Robert Shiller’s research of home prices since 1890 he found that real estate appreciation has been unimpressive after figuring in inflation. Likewise, land has never been in short supply in most of the U.S. The Indian situation may be different – Indians are not as mobile as Americans and land is at a premium in most locations. However, technology may ensure that buildings last longer than the earlier construction.

Even while there is a boom going on, gains on real estate aren’t as dazzling as they look, once you account for expenses. Maintenance costs, Interest, insurance, and taxes are all ignored by most of the buyers. Also the ‘returns’ look good in a boom because of the leverage that is normally available. However if you price in the risk of the mortgage, returns just match inflation at best especially over long periods of time like 30 years.

Action plan: Renting is a good option only if you know to manage your money aggressively. This doesn’t mean you have to rent, just that you should have modest expectations for your house as a wealth creator. For many people who do not know how to invest and refuse to learn, housing is a good option. In a growing city it is a great option. Owning is a hedge against increasing rent. Second, a 25-year mortgage acts as what economists call a “commitment device,” or a tool that forces you to save. Note the usage of the word ‘save’ not invest. Instead of writing a cheque to a landlord, you gradually pay off the principal. You get deduction under section 80 C for the principal that you pay (reasonably attractive proposition) and section 24 for the interest paid (stupid deduction). So if you are planning to keep money in public provident fund, nsc, kisan vikas patra etc. you might as well buy a house.

At the end, you own a house.

Other than your Provident Fund there is no better discipline inducing asset!

Who can become a builder, who can become a broker, how much brokerage to charge, should prices be quoted for built up, super built up….NOTHING is even documented forget being regulated. You could go and look for a flat for Rs. 1.3 crores. On finalizing the flat you realize that the ‘other charges’ – loading, brokerage, stamp duty, parking charges, etc. etc. add upto Rs. 15 lakhs – about 12% of the so called ‘price’ of the house.

At least some of these costs are available upfront, while some of the costs is just a guess – like loading. Sometimes the neigbhouring building also seems to be in the loading – at least in big Indian villages like Mumbai.

The other real cost is the interest cost – let us say you borrowed the full Rs. 1.3 crores + the stamp duty + the life insurance charges – after all you want your wife to inherit only the home, not the home loan as the SBI life advertisement tells you! If you repay this as an EMI – for 20 years, the true cost of your house is Rs. 2.6 crores (without considering the regular maintenance and tear and wear that would have happened).

However if a person sells this house after 27 years, he will tell his friends “I bought this house for Rs. 1.3 crores (remembering the brokers words) and now I have sold this house for Rs. 4 crores – it is a 3 bagger in 27 years. I wish I had bought one more flat”. Mathematically I leave it to you to calculate the profits, and find out the IRR.

Amar Pandit has written a nice article in rediff.com about the list of ‘charges’ while doing a real estate deal. It is worth reading while finalising your house purchase.

However the common man – or most of the people whom I meet are so poorly equipped to deal with the real estate market that they are just shooting in the dark. Most of them do no research, have no idea about the builder, leverage themselves like ‘good times are permanently mine by right’ , – this combination is scary.

If you are a ordinary common person it is only mutual funds that let you invest on a monthly basis with amounts as small as Rs. 1k or even lesser. So an index fund (if you are not sure how to select a fund) is perhaps the best risk reward ratio for most of these investors. If you are inclined to take lesser volatility than an index fund, a balanced fund with about 65% in equity is a better bet (cap gains are still tax free).

I have friends who bought a property in prime Mumbai at the bottom of the real estate market – 1999 -2000 at a price of X. One of them who gave it on rent to a multinational is getting about X/2 as rent! Imagine a 2 year payback for a south mumbai flat! Now the price of the flat even conservatively is about 10X – not bad even in a so called ‘low’ market!

So to make money in the equity markets you need the following:

• learn about money
• find a good fund house
• choose a good portfolio
• invest regularly (invest, not trade)
• over a long period of time.

if you do all this you will make money in equities.

To make money in real estate you need to do the following:

• find a good guy with real estate knowledge (my advisor knows the real estate market very well)
• take bets in multiples of 15 lakhs
• leverage cautiously – instalment buying is a form of leveraging
• trade (every 4-5 years my advisor shuffles our portfolio, some times in 2 years)
• do not invest in real estate if you want rental income (commercial is far superior)
• have a name like Deepak Parekh, Hiranandani, Raheja…if you cannot do that Pray!

Did you know that unfortunately you cannot set the clock back? Which means even though this information about a flat in Santacruz is accurate, it is completely (well almost) useless information!

And since you cannot cry over spilt milk, let us at least cry over Vodka or Champagne.

Instead of buying a flat in Santacruz if your friend’s father had invested this amount in equity shares of Wipro it would have been worth, hold your breath Rs. 2500 crores (apart from the dividends that you consumed for your lavish lifestyle).
I am not sure about prices in Santacruz, but surely for Rs. 2500 crores (now tax free, viola!) you could have bought a sizeable chunk of Santacruz – or so I think!

And Wipro is not alone. Bajaj Auto, Hindustan Lever (Oh yes inspite of not participating in the ’02 to ’07 boom), Reliance, Cipla, Nestle, Ranbaxy….would have all done that.

If you had done a SIP in the equity index (sensex assuming you could from 1977) on a dividend consumed basis your returns should be in excess of 20% per annum. Not bad even considering that during some of those years inflation was at 12-15% p.a. It is still far ahead of Santacruz. Approximately 2 times as much.

Lesson number 1: Do not cry

Lesson number 2: If you insist on crying, cry for Champagne not milk.