Citizens' Issues
A Kingdom for a House
Real estate is a poor investment option, for multiple reasons
 
Real estate has its faithful believers. In the past 10 years or so, I doubt if we have seen any visible price change of properties in most cities where large developments were planned. Many projects planned before the 2008 crisis, still remain partly completed or unsold. In those areas, prices have not moved. If you invested during the boom time, there is also a high probability that you may not have got delivery of the apartment or got it very late. That has the twin effect of pushing up your costs and reducing your income (assuming you could rent out the apartment).
 
Check out this link: http://www.nhb.org.in/Residex/Data&Graphs.php. This is an index of residential real estate prices as compiled by the National Housing Bank (NHB). I do not know about other cities; but about Chennai, I can say, with confidence, that the NHB numbers are not in line with the ground situation. Between 2007 and now, outer Chennai, where the big developments are happening, prices are more or less the same as they were then. Projects launched during those times are still not fully sold. And, inside the old city, prices are a meaningless indicator, because the supply of apartments is abysmally low, given that most plots are 2,400sq ft to 7,200sq ft, and no fresh supply of land is available. So, if you had bought a flat in Mylapore, it is likely that you would have made a return as good as on your savings bank account. In 10 years, if NHB Residex has doubled, it just means a compounded annual rate of around 7.2% and that too pre-tax. Do not get carried away by money doubling over 10 years. That index shows the sorry returns on real estate. 
 
In relation to our per capita income, prices of land have gone up beyond reason. Which means that the per unit cost of a house has reached levels where fewer and fewer people can afford to buy a house. If jobs are in urban India, the person wants a house in urban India. If a crore of rupees is the price for a 1BHK (bedroom-hall-kitchen) apartment in Mumbai, how many can afford it? Even if we generously take five years’ current annual net earnings as an indicator of affordability, a Rs1 crore apartment-buyer should have an annual income of Rs20 lakh, that too take-home pay)! 
 
On the other hand, if an ‘affordable’ home in Mumbai costs a crore of rupees, the interest on a crore of rupees invested in a government bond can give you around Rs8 lakh per annum as pre-tax income. It could be Rs10 lakh in a corporate fixed deposit (FD). I wonder whether you need to spend so much on rent. Even if you were to spend Rs25,000 per month on rentals, you can afford to be on rental (with annual escalation of 5%) for at least 20 years, before the rentals will cross the interest earning on government bonds! And, for 19 years, you would have had a big surplus. 
Take out a calculator; do different permutations and combinations. You will be surprised.
 
Of course, you can say that real estate prices will only go up. That is true, up to the point of affordability. Beyond that, it will only be paper quotations and no transactions. Even if you assume per capita income to keep increasing at 10%—check out what kind of increments you got in the past 10 years of your job—not everyone will be able to afford it. More than half of the population will not get that kind of salary increase.
 
So, what should you do? If you want to be practical, you may like to stay on rent in the city where you work and buy a home in a city that is affordable, so that you can go there when you retire. Of course, our ambitions are without borders. We want an urban house so that we can ‘provide’ for our children. I have seen people buying three to four houses—one for my son; one for my daughter; one for me; and one for rental income. If the same amounts were to be put away in shares of any bank/company, the results, after 20 years, would tell you that the real estate investment is a loser.
 
Unfortunately, when it comes to choosing investments, the Indian middle-class psyche is so emotionally tilted towards owning a house that cold calculations never come into play. If you take all the money you have spent on a house, the interest cost of the house, the repairs & maintenance, brokerage, stamp duty, etc, you will realise your folly. But, no. We will not do it. 
 
My father bought the house for Rs12,000 and now it is quoting at Rs1 crore. After 40 years. Forty years? If you get the same return in the next 40 years, the house you buy today for Rs1 crore, should be worth Rs85 crore. And your salary, to be able to afford it, should be Rs17 crore per annum. 
 
One important thing to consider is that the final cost of our house includes the interest we pay to the finance company. Over a 15-year period, you will pay close to the price of one more house as interest alone! Even after some tax-breaks, the real cost of your house is not the list price, but much higher. So, if you take this as the total cost and then work out your ‘notional’ gains and losses, you might be a loser, actually. And, if you do make any nominal gains, you will also pay capital gains tax. And the ‘cost’ of your house for income-tax purpose will not include all the interest you paid on your home loan. So, the tax rules are the final nail on the coffin of miserable returns from property.
 
The fear we all have, that pushes us to destroying wealth by buying a house, is the fact that the rental markets are not very developed. A combination of poor legal framework (working in favour of tenants) and the absence of large-ticket financing, have restricted the supply of rental properties. Today, the legal framework has definitely improved and the rentals market has opened up. 
 
We also have large private equity funds and the impending arrival of real estate investment trusts (REITs) that will help money flow into this sector and create more supply. 
 
Looking back, we have seen the maximum escalation in real estate prices in two phases. The first time was between 1993 and 1996 and the second was between 2006 and 2009. If you think this will keep recurring, just do your numbers on affordability also. If affordability is not an issue, just look at the supply of unsold stocks around you. That should tell you something. 
 
We also do not put a number on the costs of owning a house. The maintenance, the property taxes, the repairs, etc can cost quite a packet. Even after all this, do you want to buy a house? Sure. Go ahead. It is a question of your heart versus your mind. And, in matters of the heart, logic can take a break!

User

COMMENTS

Prashant Prabhu

1 year ago

What happens when owner wants the Tenant to vacate every 2-3 years...The Tenant has to pay the broker..transportation..moving charges...all that counts and also when the furniture many times don't fit in when moving from place to place...so these costs come in play when staying on rent..and this cost is substantial..at least 20-30% of annual rent

manoharlalsharma

1 year ago

it is the only commodity what can not IMPORTED,STRESS or can manufacture and families r bound to increase in Numbers and consider your travel time from residence to workplace daily expenditure so rates will upward only.

Abhijit Joshi

1 year ago

Bala,

How does one reconcile real estate sector condition with Housing finance company stocks ? And that includes HDFC the gold standard of HF sector? If the flats become unaffordable, developers can't complete projects would it not ultimately come to doorsteps of HFCs? HDFC CEO once replied in interview that affordability issue is more in Tier -1 cities than Tier-2 & 3. That could explain divergence of performance of Real estate stocks v/s HFC stocks. WHat's your take ?

Regards

Abhijit

REPLY

R Balakrishnan

In Reply to Abhijit Joshi 1 year ago

Divergence is structural in nature. HFC has an income base. Incremental addition. Pace can be more or less. And tier two and 3 affordability seems better. And RE stocks balance sheets are Aesop's fables-Not a single line is what it states itself to be! So RE stocks -keep off.

webkitendfullscreen

In Reply to R Balakrishnan 1 year ago

Thanks. I had no intention of touching RE stocks even with long pole. My concern was with HFC stock holdings. I wanted to understand divergence. I saw HDFC report. Their average mortgage value is 23 lakhs. So it's clear majority of their mortgages are in affordable range. Their NPA provision is 0.71%, way below their equity. That's sufficient assurance.

Anand Vaidya

1 year ago

Is it correct to say that this line of reasoning applies only to apartments in Tier-1 Cities and not necessarily to T-2, T-3 cities and towns where prices are reasonable and a middle class person can even purchase a piece of land?

I have seen my own residential site value go up by 3x between 2009-2014.

Also land price (where I have put some money in) in Bangalore has appreciated by 23% annually...

DESMOND FERNANDES

1 year ago

It's very informative, but I would like to know what about land (both for commercial and agriculture purpose) inputs on this would provide a bigger picture.

REPLY

R Balakrishnan

In Reply to DESMOND FERNANDES 1 year ago

Land depends on location. Moreover, land in future 'upcoming' locations tend to be very illiquid for very long time.
I have personal experience in land which tells me that you have to be very lucky with timing also. A spurt happens in two years or so and then it kind of stagnates for very long time. Again, this is not universal. In prime residential areas of Chennai, I have seen constant upmoves . So, guess, location, location and location is the success factor in real estate. And dollops of luck

S A Narayan

1 year ago

I am not a financial expert, but anecdotal experience seems to indicate differently.In 2002 a flat in malad west in mumbai cost 31 lacs. On average since 2002 to 2015 it has earned net rental income of 15,000/-pm (nett of IT, society maint & prop tax). That works out to 5% of investment p.a.or 23.4 lacs upto 2015.Its capital worth today is estimated at between Rs.1.8-2cr.
If the same sum was invested in HLL in 2002 at then prevailing price of Rs. 150/- each, its current market value would be Rs.1.65 cr( at Rs. 798/- each) Dividends from 2003 upto 2015 would have been 21.6 lacs

REPLY

R Balakrishnan

In Reply to S A Narayan 1 year ago

Depends- Where you bought the flat. And you could have bought shares in Tata Steel or Crisil or Cummins . And let us try to think forward.

India may end coal imports by 2017, says minister
 India should be able to end coal import by 2017, thereby saving precious foreign exchange, Power and Coal Minister Piyush Goyal said on Monday.
 
"By 2017, India need not import coal, except for a few power plants on the coast where it is difficult to transport fuel," Goyal said at an energy conference organised here by international accounting firm KPMG.
 
"It will be the end of the era of shortages," he added.
 
Noting that India imported 215 million tonnes of coal last year, the minister said it was the "band-aid" kind of approach to energy problems in the past that led to this situation despite the country having the third largest coal reserves in the world.
 
Last week, Goyal said he visualised state miner Coal India's production doubling in the next five years.
 
"It (Coal India) will hopefully produce about 500 million tonnes this year. We'll do a billion tonnes in 2019," Goyal said.
 
On Monday, referring to Petroleum Minister Dharmendra Pradhan's remarks at KPMG's annual energy conclave here that agriculture in Odisha accounted for only two percent of electricity consumption in the state, Goyal said this was very poor compared to the national average of around 20-25 percent power use in agriculture.
 
"People of Odisha have been deprived of the fruits of coal in the state, as well as of development," Goyal said.
 
Later on Monday, addressing the CLSA India Forum in the national capital region, Goyal said that 250 million tonnes of coal washeries were in the pipeline.
 
Referring to the financial restructuring package for distressed state distribution companies - Uday - approved by the union cabinet earlier this month, the minister said it would be a game changer.
 
"Uday will also help the banking and manufacturing sectors by reducing NPAs (non performing assets) and lower power cost," he said.
 
"Uday will save $30 billion every year by 2018-19," he added.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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COMMENTS

Jyoti Dua

1 year ago

It appears that Energy sector is getting the due attention of Central Govt. Mr Goyal and Mr Pradhan are doing good job.

'Way forward is to get things done without legislation'
The recent change to the FDI policy regime by the Indian government is a welcome move. In spite of the huge setback to the political strategy of the NDA-led government at the center after the Bihar debacle, the government seems keen on reviving the investment cycle. That is the sure shot way to regain the growth momentum.
 
The most recent reforms are seen to impact as high as 15 distinct sectors of the economy. This will will certainly take India forward in its quest to achieve economic development for its citizens and global competitiveness among its peers. 
 
The slew of reforms pertain to different aspects of the Foreign Direct Investment regime. The core issue of these reforms is to further "ease, rationalise and simplify the process of foreign investments" in the country and to put a greater number of FDI proposals on the automatic instead of the government route that investors are never keen on taking. 
 
Thus, the impetus is clearly on easing the hassles investors and businesses face in investing in India's growth story. These changes can be seen in light of the government's push for bettering India's performance on the Ease of Doing Business Ranking of the World Bank where this country is placed a dismal 130 in spite of improving 12 places (4 places on the new methodology) in comparison to the previous year. 
 
Some of the reform measures include increasing the monetary limit for Foreign Investment Promotion Board (FIPB) from Rs.3000 ($455 million) to Rs.5000 crore. Proposals above Rs.5000 crore would go to the Cabinet Committee on Economic Affairs. The proposals also contain measures to correct the long-pending issues like limited liability partnerships as well as NRI-owned companies who seem keen to invest in India. Some proposals also seek to enhance the sectoral investment caps so that foreign investors don't have to face fragmented ownership issues and get motivated to deploy their resources and technology with full force.
 
Other sectors where the reforms have been initiated include establishment and transfer of ownership and control of Indian companies, agriculture and agricultural husbandry, plantation, mining and mineral separation of titanium bearing minerals and ores. Also, changes have been made in sectors like defense, broadcasting, civil aviation, construction development sectors, cash and carry wholesale trading/wholesale trading (including changes to time of sourcing from medium and small sector) enterprises. A boost has also been provided to single brand retail trading and duty-free shops that might see a proliferation of better equipment manufacturing in India. Also, some changes have been proposed in the banking in private sector and India's ailing manufacturing sector.
 
These changes are seen to be harbingers of the reform promise that had seen the coming to power of the Narendra Modi government in May 2014. The government's recent push in FDI is seen to a be a positive development both in the policy circles as well as in the business and investor community - both of which have expressed their satisfaction with the move. 
 
FDI constitutes the highest inflows to developing countries - even higher than the official development assistance (ODA) and the much talked about remittance flows to developing countries. The government's push to reform the FDI policy regime is likely to be seen in the light of the liberalization and calibration of the economy further to bring in capital and technology necessary for economic growth and development. 
 
Over the next year or so, the reform agenda, if pursued properly, can have a multiplier effect on the economy with investors, businessmen and most importantly consumers benefiting from better goods and services. The recent changes to the FDI regime only showcase that much can be achieved even without legislation. The way forward is to get things done without legislation that can benefit the people of the country.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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COMMENTS

Narendra Doshi

1 year ago

YES,this road has been forced upon & MUST be used extensively.

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