Not surprisingly, builders are trying all tricks in the book (and some more) to get you to commit resources to buying their expensive wares. From 10:80:10 schemes to others that merely want you to plonk a few lakhs to "book" your "dream home" (why call four walls a “dream home”, one wonders), builders are trying to sweeten their offers.
Don’t fall for it. These are essentially schemes to give the builder some liquidity at your expense. And, since they are all stuck with unsold stocks, the chances are they will use your money as working capital and delay delivering your project. You will be stuck.
Not only is this not a good time to buy property, but most times property is not really an investment. This statement may fly in the face of the anecdotal stories we constantly hear about how a flat bought for lakhs years ago is now worth crores. The truth is we are all mathematically challenged. We do not understand the impact of compounding and end up overestimating our gains.
Let me illustrate with my own case. I bought a property in Thane, a satellite city of Mumbai, for a total cost of around Rs 14.5 lakh in end-1997. Today, brokers tell me, I can get Rs 1.1 crore for it if I sell – provided I am prepared to live in a tent somewhere or move to a more distant suburb or a cheaper city.
Wow, you got more than a six-fold return, you will say. This notional gain thrilled me too till I took out my compound interest calculator and did the math. The rise in property value from Rs 14.5 lakh to Rs 1.1 crore means I got a compound annual growth rate (CAGR) of 12.66 percent. Nothing earth-shattering.
Remember, through most of this time you could have received risk-free fixed deposit returns of 9 percent-plus with banks. Or more with company fixed deposits.
I checked out the Sensex for the same time period - from when I bought the flat to 1 January 2015. Guess what? It gave me the same CAGR of 12.6 percent. The stock market and real estate gave me the same returns.
Put another way, I would say that real estate is not meant to be an investment. It is something you buy to live in – nothing more – unless you happen to be a property speculator or someone with a very sharp understanding of real estate market trends. For most ordinary folks, real estate is meant only for shelter.
Now, consider the cons of real estate investing, especially when you borrow to buy expensive property.
When I bought my property, the interest rate was upwards of 14 percent. The CAGR the property gave me was 12.66 percent. Though interest rates started falling a few years later, I would probably have paid close to the rates or return the property gave me during those 17 years. An investment that does not give you more than the cost of money is not an investment at all.
Second, what appreciates is the value of the land, not the property built on it. Property is actually a depreciating asset if one excludes the land on which it is built. In fact, unlike stocks or even fixed deposits, property needs constant upkeep – painting, repairs, society dues, municipal taxes, etc. And land too is not always in limited supply.
When the government increases the floor space index, the same plot suddenly can give you more square feet of property. In short, increased supply of land can send even land prices down, or keep it flat. One reason why the Maharashtra Chief Minister had to scrap his new development plan for Mumbai was the proposal to increase land supplies.
This scared the daylights out of the realtors who are sitting on millions of square feet on unsold inventory. Delhi has nearly three years worth of unsold property, and Mumbai two-and-a-half years’ worth. Buying now will only help builders and land sharks.
Third, the past is no guide to the future. The 12.66 percent gains happened because I lucked out and bought the property during one of those periodic slump periods. If you buy now, I doubt if you will get the same CAGR. Just look at the numbers. If you need a 12.66 percent CAGR, it means your property will have to appreciate to over Rs 8 crore by 2032 – 17 years from now.
Only multi-crorepatis will be able to afford an 880-sq-ft flat in 2032, assuming that happens. Is that likely to happen? I wouldn’t bet on it. However, I can see the Sensex possibly giving me those kinds of returns as the Indian economy’s growth revives.
Fourth, I can buy shares or mutual funds bit by bit. I can’t buy property square feet by square feet. Moreover, the holding period for shares to ensure zero long-term gains tax is one year. For property, it is three years, and that too only if I invest the gains again in property. Plus, shares can be sold in a jiffy’ property can take months to sell.
The broad point is simple: don’t buy property as investment. It is a mugs’ game. You will end up serving the interests of builders and speculators at your expense. In any case, the market is yet to bottom out. According to Feroze Azeez, executive director and head, investment products, at Anand Rathi Private Wealth Management, the correction in property prices can take upto five years.
For buyers scalded by huge, unaffordable price increases in the last few years, it is best to let the industry stew in its own juice for now.
No comments:
Post a Comment