Property Prices

I am sure you guys must have read at least 1000 articles on property prices right now. So consider this article as a musing/ or notes to myself.

Being 28 years old with a stable job and a family’s future to secure, I am under tremendous peer pressure to invest in real estate. However I have second thoughts in investing 40L (about $100,000/- USD) for a small 1000 square feet big apartment or 1,200 square feet plot.

If I look at the affordability metrics, then I believe anybody earning 6L p.a. should be able to afford a 2 BHK house by paying no more than 40% of basic (or about 30% of his post tax take-home). So that is about 150,000/- INR per annum or 12,500/- per month. The rental for a decent 2bhk is around that value (this includes maintenance), but the opportunity cost on the house value is not of this level. Because by this calculation a 2BHK should not cost more than 15,00,000/- which is about 40% of the current valuation.

The primary reason for this mismatch is inflation/property appreciation. Rental in India is about 3% of the property value (i.e. a 10,00,000/- property would be rented out for 30,000/- p.a. or 2,500/- per month) and the owner expects that the rent and property value should increase for 7% per year (for an apartment).

But these days I have beginning to doubt this very hypothesis.

Firstly being a firm believer in the affordability pricing theory of assets, I would say that an antique, an autographed book, or even a stamp is worth what an collector can afford to pay. Land has become so expensive that no longer it is possible for someone to buy it unless they are ready to commit 60-70% of their income in housing. That includes lost interest on your own money; bank EMIs, maintenance of the property etc. So unless the salaries continue to grow at 15-20% per year for eternity, I don’t see housing expenses going down to 30-40% of take home, which to me is the worldwide average (and also the comfort zone for most individuals).

Secondly, I have beginning to doubt the very notion that an apartment is an asset. A land might be an asset which appreciates over time, but I know for sure the concrete structure crumbles over time. Periodically one has to pay to keep it from crumbling down and yet it will not last forever. Any civil engineer will corroborate, but no-one designs the structure to last for more than 60 years. With the quality of construction that our contractors do in order to meet their schedules and cut coroners, I would be surprised if they lasted for more than 40 years. After 20 years the apartment is labeled as old-fashioned, not too much attractive etc. and its value goes down. So after 20-40 years what is left is part ownership in a tiny piece of land. Surely that is not what you would intend to leave for your kids as your legacy and their inheritance.

Thirdly, the notion that the land prices will increase and the city will keep on expanding indefinitely forever is not what I am comfortable with. Pick any city and you would see the most coveted areas shifting over time. Old areas become too crowded for the rich and affluent people to live in. New malls/commercial centers/offices cause a shift in people’s commuting habits. Metro/ring roads/flyover encourage people to locate near them etc. Hence if I buy a prime property today, it might not be so much valued after 10-20 years. Buying land in the outskirts and hoping it to appreciate become the city would move in its direction is akin to speculation. My parents bought a house in Greater Greater Greater Greater Noida… So even though he calls it in Delhi, it took me 3 hours from the Railway Station (Connaught Place) to reach the spot. I if soon builders would be quoting land in Jaipur by saying just 6 hours away from Delhi… would be recognized as part of Delhi in another 5 years.

Remember whenever you buy a house look at the average occupant. If he/she cannot afford to pay the interest on the property price, then probably the property is overvalued.

It might be return of the saying “Fool make houses for the smart to rent into” but then I have not seen the future and I might be wrong. Comments/directions/guidance are more than welcome.

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5 thoughts on “Property Prices

  1. If you are looking for a long term investment then apartments are not a good deal. Apartments are like short term investments. Buy, wait for a few years and then sell. In Pune the prices of apartments are increasing by 20-30% a year. That to me looks like a good investment.

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  2. Two types of people need houses
    one who need houses to live in, toiling 20 years for the same,
    two speculators, and asset investors

    The supply does not distinguish between the two

    The second type have messed up economics for the first type.

    Also the fact that Banks give out loans to buy houses(for lack of other avenues for banks to invest due to general decline of manufacturing), forces the loanee to treat house accusation as an investment (even if he is of the first kind)

    May-be time to go back to fiscally conservative land policies 🙂

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  3. @amit… well maybe in the short run i agree that real estate is giving good returns… but ultimately its a question of passing the hot potato.. i wonder who would ultimately have it.

    @khalilsawant….
    i totally agree with you… speculators have driven property prices beyond the means for most of us. (luckily they have only resulted in plenty of affordable housing for rental.. hence causing a decline in the rental prices.
    and banks are funding this volatile bubble

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  4. Agreed we may be at the tipping point on the valuation scale but it will be a longer time before actual severe crises hits ..
    why? because of population explosion and govt intervention,,,
    see the govt gets big funding/ is involved in real estate business … it in turn pushes banks to lend to real estate..
    during the last recession dlf unitech etc were close to loan/ interest pmt default and take down axis icici and other banks with it … but it got bailed out thanks to nudge push politics

    look at usa – the govt and big finance propped the market for almost half a decade , and things went bad when the whole ponzy like scheme where a person could buy a house with bank committing a 97% of loan couldn’t sustain further… have you seen the inside job?

    here we have a black component which is diminishing thanks to salary income and kyc , once that is almost zero we can see the true effect of predatory loans and inflated prices

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