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Planning to ‘invest’ in real estate? Think again

By commonsensical valuation methods followed globally, Indian real estate sports nosebleed valuations. It is important to be aware of this if you want to ‘invest’ in real estate

Property prices across India have run up a lot between 2003 to 2008, appreciating as much as even 400%+ during the said period.
Some places have now cooled down, like Hyderabad due to the Telangana agitation and Bengaluru. Meaningful correction is yet to be seen in metros like Mumbai and Chennai, etc.
Recently, a prospective buyer wanted to purchase a second-hand flat in Chennai for Rs1.2 crore. This flat was purchased for Rs30 lakh by the original buyer in 2005.
The buyer's line of thinking is as the value has multiplied by 4 times in the past 5 years, he would buy now and sell it in 2016 for Rs4.8 crore! He is assuming an absolute return of 400% in the next five years, a CAGR (compounded annual growth rate) of around 32%.
The annual rental yield for his Rs1.2 crore investment is only Rs.2.4 lakh or a mere 2% per annum.
Recently, a client of mine wanted to purchase a property she is residing at for Rs65 lakh. The rent she is paying is only Rs9,000 a month. Even by investing in fixed deposits, she may get around 9.5% p.a. whereas by investing in this
20-year-old flat, her yield (or saving) would only be 1.67% p.a.
The 'House price to (annual) Rent' ratio in her case works out to 60 times. Going by international standards, if this ratio is above 20, then the cost of owning is considered higher than cost of renting.
The generally accepted range is around 15. This was the ratio prevalent in the US, before the great housing bubble began. Considering the crash in the US housing market during the last three years, this ratio may even be lower now.
This means, the rental yield in case of the above client should be at least 5% p.a and preferably 6.7% p.a. Again, this implies that the Rs65 lakh flat's fair price is actually between Rs16.2 lakh and Rs21.6 lakh.
You can use this back-of-the-envelope calculation for arriving at the fair value of the property you are looking at.
Though no ratio can be blindly applied, this is a good point to start with.
Another pointer worth looking at is that the value of the property you are planning to buy on a loan should not be more than 3 years of your annual income.
I feel that your home loan EMI as a part of your income (debt to income ratio) should not exceed 35% to 40% (maximum). Anything beyond this may put a huge strain on you especially in a rising interest rate scenario or any other contingency in life.
Teaser loan rates at lower EMIs in initial years would do more harm than good. The debt to income ratio would get skewed after the euphoria of owning the house has evaporated.
Applying the above three-rental yield, loan to annual income and debt to income ratio, the current real estate market looks very unreal to me.
Home ownership is becoming beyond a dream of the common man. I'm not even referring to the poor or lower middle class. Even for the middle class or higher middle class, it is not about a dream home but dreaming about a home.
The strange thing about the real estate market is that many a times the prices do not come down but markets simply become illiquid. No transaction happens but still the price on paper remains high.
I can only hope that the real estate prices correct significantly. I believe that there is a powerful vested interest lobby which keeps the price artificially high.

Robert Shiller, by tracking the US home prices data from 1890, has mentioned that in the longer run, property prices grew at an annualised return of around 3%, just keeping pace with inflation.
This means the real rate of return in real estate, after adjusting for inflation, is nothing.

Out of curiosity, I browsed to find out how much the S&P 500 index (equity) has given since 1890. It works out to 9.24%.
This again means the real rate of return in stocks, after adjusting for inflation, is 6%+.

This further strengthens my conviction; in the long run (even after I'm dead and gone) equities are capable of providing superior return than any other asset class and investing in equity is the best way to beat inflation.
In India there are no broadly accepted transparent indices across various locations for real estate. The real estate market is not well regulated, like, say, the securities market.
Black money, goondas and political clout play a significant role in this market.
Maybe that's why the regulator has not so far allowed REITS (Real Estate Investment Trusts) in India, which would make it easier for even a common man to participate in the real estate market.
You may not be able to buy a house but at least be able to own a portion of it, doors or roof or wall through REITS!
In the current scenario, the only way to bring down the abnormal real estate prices is to opt for renting rather than owning a house.
Though this idea may not sound pleasant to your ears, try giving it a serious thought.
Maybe you can consider starting a movement against ownership. I would be glad to join the same, if you don't disqualify me for already owning a house!
In a poorer country like Bangladesh, 90% of the houses are owner occupied. Whereas in a richer country like Switzerland, only 33% of the houses are owner occupied. This is not the latest data but at least should serve as a good pointer.
Follow the Swiss!

As I'm in the profession of reviewing people's financial health, I find that once I remove the value of self-occupied property, which is usually a loan under 20 years, loan, and gold jewellery, the net worth is very meagre even for high income people.

People who talk about appreciation in property over a 20-year period do not take into account the interest they are paying on their long-term housing loan and other costs like taxes, periodical maintenance and repairs etc.

Also the focus is on absolute returns and there is no clue about annualised returns.

Once these are pointed out, I'm able to see a surprise on their face.

As leverage (borrowing) is freely available, the next move is to start planning to buy another house!

Housing bursts always lead to banking bursts, who are the providers of the much required leverage, both to home builders and buyers, which is also responsible for keeping the home prices high.  

Bankers are one tribe who can actually help in bringing down home prices.

Is it in their interest to do it?




4 years ago

The Author is totally wrong. Equity returns are a result of speculative activity whereas real estate price increase is a result of local development. That is why real estate prices are not the same all over the place. History is not a good guide for a simple reason that shares are not issued at face value but by book building process. How many times in history before 1999 have shares been issued by book building. Another aberration is the 2004 boom. Excluding this period which saw major shift of index from 4000 to 20000 the returns will be different.

Also when you see returns it is imperative to see the risks. You can lose your share value to thin air if the company closes for no reason of yours. But rental income, even if less will keep coming. Dont misguide people to by toxic assets and waste their lifetime earning.

If you are so sure of the bubble, i challenge you to a simple deal. Sell your house at this bubble and invest in stocks. See the value in just 5 years. Of course you can also check up the same after 100 years, but both of us may not be around. But our children will still be able to learn from our mistakes.


5 years ago

excellent piece of information, I had come to know about your website from my friend kishore, pune,i have read atleast 8 posts of yours by now, and let me tell you, your site gives the best and the most interesting information. This is just the kind of information that i had been looking for, i\'m already your rss reader now and i would regularly watch out for the new posts, once again hats off to you! Thanx a lot once again, Regards,

meera siva

5 years ago

1. When the cost of owning goes up way over the rent one gets, what happens is that rents go up and there is certainly a bubble. comparing chennai to Bangalore, the rent received for a property is pitiable in chennai for the same price. I have seen rents going up in chennai ever since..

2. House prices have to keep up with inflation simply because rents have to. Add to it the population growth and migration to certain metros. The statistic nation-wide is not meaningful since one owns a house in a neighborhood which may have done quite well compared to any national average.
3. Real estate must be regulated and REITs allowed since the illegal money floating there is shamefully high. This will also help the equity market since most companies own some real estate and its value is unknown and they can acquire more without under-the-table transactions.
4. Real estate, if it returns low, is because it is less risky than equity. If one has a huge sum, managing that in the equity market is harder than handling a property.

K B Patil

6 years ago

More than anything, what I hate about this sector is that it has more than it's fair share of crooks, the govt. has too much say and "Right to Property" is not yet a fundamental right. Any small goonda can create trouble, particularly regarding vacant land and if you do not have "connections", you will have to struggle. The movie "Khosla Ka Ghosla" is a fine example of how bad things are.


6 years ago

i carry a different opinion from you regarding "regulation of stocks and indices showing stock returns or index returns"which is not in the case of real estate-
i have already pointed out that "thank god that real estates are not listed in exchanges-because stock exchanges are regulated -i agree-but not by some authority but it is regulated by "operators and syndicates and company promoters-very few cos like wipro or infosys or cipla have shared their profits with investors -otherwise 99.99% promoters are CHORS who tie up with operators when their company health is not good-and then operators push up stock price to unbelievable prices and then it is sold to retail investor and promoters get out of that stock-on the contrary when company is in good financial health the stock prices are kept artificially low to facilitate promoters to accumulate maximum holdings-
i have so many times tried to invest in fundamentally strong and profit making stocks and good dividend yield stocks but never got the right price -
the best of mid and small cap cos i found through my research but failed to get enough returns-because operator lobby has bigger money power then a retail investor-
but in case of real estate-things are more transparent-you can get all information locally the prices prevaling or new developments taking around in some location-so you can judge about furture returns-
regarding your my disbelief in stock market though i am a IFA-my answer is that the way markets are regulated -it is better to go to casino then tto invest in stock market-oil was 148 dollors at peak in summer 3 yrs back and then fell to 38 dollors in severe winter same year-is this fundamental driven market or casino?same story with stocks and now gold-
friend i have switched to some FMCG distribution business and doing quite better now then my IFA carrier-and i believe the essential commodities will never loose markets-so i plan to expand my business with more range of product distribution-i dont go now to canvass new business to my investors though i am giving all kinds of services to them as far as my responsibilities carry-but i dont advice them to make blind investments becaus ei am my self not convinced now looking to negative returns funds have been giving even after 4 yrs.thanks and regards



In Reply to Roopsingh 6 years ago

Dear Mr.Roopsingh,

Currently reading the book ‘The double life of Ramalinga Raju’ by Kingshuk Nag.

I hope you might have had chance to read ‘The Scam’ and ‘Face Value’ by Ms.Sucheta and Mr.Debashis.

So nobody is ruling out corruption in corporates and manipulations in stock market.

As I mentioned in my previous article in Moneylife, eliminating the selling is not the way to prevent mis-selling.

Likewise avoiding equity investment is no smart solution either.

Accidents happen. That doesn’t prevent you from getting into the street.

Experiences vary. My success in stock market is more than failure. Having adopted a long term strategy, through a diversified portfolio of stocks (via mutual funds), I’ve now minimised the chances of failure.

Stock markets are a casino- if you are a trader, because you are looking only at the price swings. For an investor, who is looking at the underlying asset, it is a best investment option.

Even the last 3 year returns of many good funds are decent (considering 2008 crash), though not great.

As far as funds giving negative returns after 4 years, I don’t know regarding the fund selection you’ve made.

I encourage people to invest in equity only if they can have investment tenure of minimum 10 years, preferably through SIP route.

I’ve never sold closed ended products offering higher commissions when it was a rage. Also I’ve refused to pay pass back in the entry load era and have lost clients because of it too.

Added to that the whims and fancy of the regulator in the past, lack of direction as to how the industry would evolve in future for individual advisors given some unfair advantage other channels have and lack of any regulatory support and direction for survival of individual advisors – I’m keeping my fingers crossed.

Personal finance is close to my heart and that is why I chose that as profession, even though I may be earning many times more if I continued in my earlier career.

I would try to hang on as much as possible with a hope that market would not let you down if you’ve some value to offer. Ofcourse I also realise that hope is not a strategy.

As far as current real estate scenario, I’ve already said what needed to be said.

I come across many people who have already quit their profession as advisor. When speaking to AMCs, I get a feeling that there are hardly around 5000 IFAs active across PAN India.

It is sad to note that when we require more advisors to take up products to the end customers, we are loosing more numbers.

Just felt like sharing these thoughts – from an advisor to a former advisor.

Wish you good luck in your FMCG business.


6 years ago


Nice article and concurs my views on real estate investment and ownership.

I have some observations to make; I have been a resident of Hyderabad for 25 years before moving to Europe in 2004. My father bought a land for Rs.30/sq. yard in 1984 to build our home, and the land price was Rs. 1000/sq. yard in 1996, and it was Rs. 3000/sq. yard in 2004. When i visited them in 2008, the prices were exponentially shot up to Rs. 18000/sq. yard. If you observe the rate of increase from 1984-2004 (20 Years), it was between 8-13% annually, but from 2004-2008 (4 years) the rise was 25 % annually.

This incomprehensible appreciation of price in just 4 years made me to abort all my plans to own a land to build my home there, then came the Telangana Agitation, and the downward trend but superficial prices are still trumpeting the market. I feel since the formation of Telangana is inevitable, the land prices will become value based and more affordable to the general public.



In Reply to Vijay 6 years ago

Dear Vijay,

The annual rate of appreciation from Rs. 30 sq/yard to 3000 Rs sq/yard in 20 years is around 26%.

Your father's decision to buy land then was a very wise one.

It would be interesting if you could tell us the rentals of your property in 2004.If your father had decided to rent the property in 2004 (hypothetically) how much could he have got?Need this to know the House Price to Rent ratio


In Reply to Raoji 6 years ago

I got the rates (compound rate) is
1984 - 2004 (20 Y) = 26%
2004 - 2008 ( 4 Y) = 61%
Last 4 years rise is pretty bad to the common man, and you can see in Andhra Pradesh state of affairs now.


In Reply to Vijay 6 years ago


I hope now you are convinced that Shiller's finding about real estate barely beating inflation is not applicable to India !

While I recognize your desire to safeguard investors from making real estate purchases at silly prices,it is important to understand that the Indian realty mkt is v v different from the West.Blindly quoting the western papers and applying western metrics wont do !

All the best for your future articles...look forward to reading them !:)


In Reply to Raoji 6 years ago

‘House price to rent’ ratio assumes significance only when someone looks for buying a property.

For someone who owns a property for decades, especially due to the steep rise in prices during the last few years, the ratio would look extremely good and also extremely misleading.

The flat we live in would give me a rental yield (at acquisition cost) of 12%. This is because we live in a prime locality in Chennai and prices have run extremely high during last 7 years, since the time of purchase. But at current prices the yield would be less than 3%.

Unless someone has enough surplus or strong repaying capacity, it may not be worth considering our property for buying.

He may be better off renting it.


6 years ago

Most Indian financial advisors read US books and spout it like it is accepted financial wisdom without applying their own minds.

For instance, take the House Price to Rent ratio.In theory, it appears very reasonable.In practice,if you had followed this ratio, you would not had bought any property in Mumbai for the last 50 years.

Mr.Muthu speaks of US S&P 500.Sir, why don't you speak of Indian real estate and Indian inflation.Land prices have beaten inflation handily all over India for the last 30+ years.In places as diverse like Ludhiana,Bhubaneshwar,Ranchi,Mangalore, people are much much better off holding land as opposed to stocks.

Is real estate in a bubble?Well,the CEO of HDFC says it is NOT.Acc to him, real estate prices are still in the affordable range as compared to household income.

Can real estate prices correct?Sure, it is a market and like any other market it can correct.In some places like Blore,Hyd etc it has corrected.In some other places-Panvel,Kalamboli etc, the bull market is on.It is very difficult to brush the entire the real estate market in India with the same pen

I am amused by the fact that this author is touting rental over ownership despite he himself being an owner.If he thinks that real estate prices are going to crash, he should logically and rationally sell his home and move into a rented apartment.It would be interesting to know his wife's reaction to this idea !!:)

Also,Peter Lynch in his famous book "One Up on Wall Street" recommends that people have their own home before dabbling in stocks.Since the author is so fond of American authors, he should take this advice and pass it on to his clients.



In Reply to Raoji 6 years ago

We are paradoxical. One hand advisors are mimicked as simply reading U.S. books without applying their minds and at the same time another U.S author, Peter lynch is quoted for merits of home ownership.

Everything needs to be seen in a context.

When Peter Lynch suggested, do you know what is the value of a home in terms of number of years of one’s income?

Can one buy a home where he can reside and commute to work, with 3 or even 5 years of annual income? If the price is something like 10 years or more of annual income, how one can afford to repay with all other life commitments and goals?

There should also be provision for unexpected contingency.

I’m all for owning a house if you can afford it.

I own a house with zero debt.

I may even go in for a bigger accommodation if there is a need subject to my affordability or repaying capability (if I go for loan). As of now, I’m fine with where I stay.

For significant part of my life I’ve stayed in a rented accommodation and I never felt bad about it.

I would definitely be considering your option of letting out if I own more than one house.

I don’t consider self occupied house as an asset and so there is no need for me to sell my home. In my above article, I’ve not advised people to sell the homes in which they reside.

I maintain my opinion that owning a house at any cost would put anyone under terrible financial and mental turmoil. I’m seeing this happening in number of cases.

I’ve heard / read many a times in the past Mr.Parekh warning about real estate prices heating up. As a head of housing finance institution, I don’t know if he can warn beyond a point.

I would appreciate if you can provide me reliable data on housing prices for the last 30 or 50 years viz-a-viz inflation. I’m looking for one.

Atleast for stock markets, data is available since 1980. So I can say with confidence the index has beaten inflation significantly in the last 3

v subramanian

6 years ago

The article appears very rational and beautiful if looked at isolation. Two things are to be taken into account in real estate investment. All our netas and bureaucrats have heavily invested in real estate. They will ensure that by twisting policies the real estate prices do not come down. Regarding renting a house, please keep in mind that you have to hunt for a house every 22 months in Mumbai due to the leave and licence system and also pay brokerage to the agents.



In Reply to v subramanian 6 years ago

Valid point. Black money finds it way first into real estate market. The only to way to fight these netas and bureaucrats is refusing to play their game, stop buying property at any cost.

When buyers continue to be absent for significant duration, liquidity starts getting drying up forcing the seller to reduce the prices, atleast out of sheer desperation.

I’m able to empathise with the problem of shifting houses frequently and paying brokerages. But the sad fact is that in a city like Mumbai, how a middle class person can imagine owning a home at today’s prices.


6 years ago

I don't agree fully to Mr Muthu-due to following points-
1- we are one of highest populated country-and rapid urbanisation -lot of people moving from villages to cities-the cities are already facing too much shortage of land and houses-so here demand and supply rule comes into act-
2-banks are major contributors to the prices risen in past 5 yrs-easy loans have made builders to keep on pushing prices to higher levels-but we are surely one way different from usa-the usa property bubble was purely on speculation-but in india investors and real occupiers ratio is not huge-i mean real users are still in big nos-lot of people waiting to own a house-the other fact is that our banks charge quite high interest rate compared to cheap loans available in developed economies-
but this high interest has not stopped from queing from trying to own a house of their own-
3-the other major reason as pointed by a comment is that RENTED is Rented-and ownership gives different level of satisfaction altogather-so even at higher rent to cost ratio-people will go for owning rather then renting-
4-stock prices move without any fundamentals most of times due to operators game-thank god that real estates are not listed in stock exchanges-so prices have not come down-
last Diwali i sold out my entire stocks after my stock broker India infoline cheated me-and invested my money in a flat to give on rent-in last 6 months price has gone up 30%.
i have been real estate investor since last 15 yrs-and always gained substantially then any other asset class-owning 3 properties -thanks to advice of my clients who are business man heavily investing in properties-none of them has ever made any loss-
i think searching a property at reasonable rates takes less pains then searching about a stock or a company-
i have more trust in real estate then gold or stocks -even though i am a IFA-



In Reply to Roopsingh 6 years ago

Perspectives and opinions can vary and that only leads to meaningful and interesting discussion.

However the last sentence ‘even though I am a IFA’ caught my attention.

As you rightly pointed out, stock prices can move without fundamentals too. That explains the daily volatility. Atleast there is a transparency to it.

Real estate prices are opaque and are likely to be ‘operated’ much more due to absence of any meaningful monitoring and regulations.

Your negative opinion and lack of trust on equity does not go well with the profession of an IFA.

It would be better if we can sell what are we convinced about. It would help both us and our customers. Selling something with negative conviction may likely to yield negative results for customers as well.

Just a thought – Since you believe in real estate and not equity, you may consider becoming a real estate advisor instead of being an IFA. Selling with conviction is the key.

R Balakrishnan

6 years ago

Very well articulated. Cheers.

Ruble Chandy

6 years ago

The article is very practical observation.It is not negativity but realism.

India is growing aggressively, so these corrections may not reflect so fast, but it will definitely will.Nice observation though.

One correction: shiller started his index on 1987 not 1890.

But lot facts you said are correct to the best of my knowledge.



In Reply to Ruble Chandy 6 years ago

I’ve not referred to the year in which the Shiller initiated the index but the back date from which he constructed the same. The year is 1890 only, with base as 100.

Hope this clarifies.


In Reply to Muthu 6 years ago

You are right and I was wrong.
I did not know this info.

I live in US and I get "Wow!" from Americans when I tell them the price for land in India.Obviously it is more expensive than a comparable location in US!

But don't you think the rental market is going to pick-up in India? (Which has already happened in some Tier I Cities)

By the way I like your point of view very much.

Hope you are familiar with Prof.Roubini's work (Crisis Economics)

Good Job,



In Reply to Ruble 6 years ago

In the last one decade, real estate price raise has not been restricted to Tier I cities. It has been wide spread.

I hear many cases where farmers have sold agricultural land to corporates at good prices and have blown away their fortune.

Now they neither have any money nor occupation.

Getting money alone is not important. Managing it too. I wish people go to a good advisor once they make ‘dream money’ like this.

This would ensure that both they and we survive!

To some extent, I’m familiar with Prof.Roubini’s work.

One thing I enjoy most about my profession is the continuous learning opportunity it provides.


6 years ago

Property bubbles in India 5 times more considering present reality prices. IT, DRI and other enforcement only focussed on smaller people while they left political, bureaucracy, judiciary, real estate developers, big criminals who are investors and beneficiaries and manipulators. UPA's policy decision also added the fuel to fire like opening up real estate to market manipulators which is one of the prime decision we are witnessing housing bubbles in India. The corrupt money coming to India from tax heaven in the name of fake companies created by Indian entities like the above class. Affordable housing in India is a distant dream. Similar thing is happening in commodity prices. Witnessing commodity bubbles in India.

K Narayanan

6 years ago

Excellent.He reflects my thoughts.But we project future based on facts of today.I have been telling my relatives and friends about this but nobody wants to listen to me and brand me as idiot.It will not be possible to change people especially on financial matters.In spite of looting by many financial cos still people flock to such cos if they offer 18% on fixed deposit and a gold coin free and later regret for their life.Common sense tells that it is not sustainable ie 5times increase in property prices in 5 years.But till things happen as in USA nobody will realise.Better follow ourselves what we believe is right

Yash Jain

6 years ago

Superb article. I think educating real estate investor is exptermely important. People put a large sum of there hard earned money in buying a house. Its important for them to understand the true value of there purchase decision.

Thanks to D Muthukrishnan putting across such a comprehensive artile together.


6 years ago

This article is Negative in approach - discourages by introducing wiseness but does not take everything into count

Everything can not be translated to Money and Return. Amount of satisfaction for owning a house can not be measured in the form of returns. If you are in rental property everything looks great but, still you have feeling that, you have to vacate when owner Wants or that feeling can not be bundled factor in Finance.

Wise investment is alway suggested and stitching dress according to cloth - as per income level one has to plan.

But as suburbs are merging and villages are joining in big cities, and connectivity ( physical-Roads as well as telecom ) is exploding - people should start looking for real estate in small towns and 2nd , 3rd , 4th tier towns.

I am not realtor



In Reply to Raghu 6 years ago

I agree that a home means more than money. Even Warren Buffett in his latest annual letter mentions the two wedding rings and the home he purchased in 1958 as his memorable investments.

I’m not sure whether the same Buffett would have considered purchasing a home in 2007.

Unfortunately the realtors are exploiting us based on the emotional, social and cultural value we place for our ‘own’ home.

I’m all for owning a house at affordable cost and strong repaying capacity.

Smaller towns may be considered if one can migrate there. Then there are questions of proper employment, livelihood etc. If someone buys a home in a small town and still resides and work in a city, it defeats the very purpose of staying in own home.

I’m a personal financial advisor!

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