Inflation & real estate

What is more expensive property under construction on ready to move in property? Ideally under construction property will have the risk of construction, getting all the approvals, plus interest (capital cost) for advance payments, plus it takes 6-12 months from construction to get the property fit for occupation with all stabilized amenities & no noise/nuisance due to construction/repairs/woodwork/modification. As a firm believer of bird in hand is better than two in the bush, I would believe that people should be paying a premium for ready to move in flats. Unfortunately it is opposite in Bangalore.

What has dawned on me that Inflation is actually a bigger driving factor in these property purchases. Call it speculation, but high inflation and low interest yield (post-tax deduction on interest income) has created borrow now and pay later economy.

Essentially a builder will come up with a scheme: Pay 10-20% now and nothing till possession. Some builder even offer to reimburse the EMI/interest expense during construction. People believe that in 3 years their salary would have jumped by 35% (10% p.a.)  so by going for an under construction property they are essentially locking in a good rate early one. Also the milestone based payment ensures that on a 100Lakh property, you only need to pay 10L or so upfront/on each milestone. Allowing you to leverage high & hence reap more profits.

With rental yield ~3% of apartment value, and maintenance in tune of 6-7k per flat, living in a 1cr flat is worth paying 35k in rental/accommodation. 0.25% of the value of the property + maintenance + 1/12 property taxes (etc.). However people with multiple EMIs often face issues in servicing them esp. when market is down which makes liquidation difficult. Also often it induces an undue pressure to postpone family planning or taking time off to raise them.

There is an English proverb “Fools buy property for and wise men live in them.” In the quest for getting rich soon, a lot of people often take in too much debt with the hope that the prices will increase faster than the EMI. However if the rising prices dries the liquidity, people have to end up selling these assets at a distress incurring losses.

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One thought on “Inflation & real estate

  1. Pingback: House vs Car: Resale price | e-Nagar

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