I will go out on a limb here and make a prediction regarding home and land prices in India.
Take prices when this boom started (say 2001/2002). Add inflation plus maybe 0.5% or 1% on an annual basis to it. Thats where the prices will eventually revert to. It might not happen this year or in the next 5 years, but it will some day (more likely sooner than later).
Folks may disagree sharply with this, but I stand by it. Time and again history has shown this to happen. Time and again people get caught up in the mania and say this time is different.
The question then arises as to what should one consider as inflation. Should we take commodity inflation (running in double digits over the last few years) or a broader inflation measure. I think can use the equity markets as a reference.
Historically, across the world, equities have returned around 5% above inflation in the long term. Indian equities since 1991 have returned about 12% nominally. Which seems to be roughly inline with what history predicts (ie. 5% real + 7 or 8% indian inflation).
We can use the same for housing. No reason for housing to to track higher inflation when equities (which also track consumption and inflation ) are indicating an inflation of 8%. This might come as a shocker for those who have bought homes and seen 20%+ annual appreciation over the last few years, but the truth is often bitter.
Ok. Lets say prices revert to mean. How long should I wait? What if it takes decades?
By all means, buy the house that you can afford. A house is a place to protect, to grow a family, build ties with the community around you, to live a life. Treat it like that. It is not some magical wealth multiplier. Never has, never will be. The whole of India was caught up in this party over the last few years, and now I suspect all of us will suffer the hangover.
Do not treat real estate as a passport to wealth. It is at best a store of value. It will keep pace with inflation and leave you with zero real gains. That too is difficult if you get the timing wrong. Ask the Japanese who bought in between 1986 and 1990. Home prices there are nowhere hear their peak values for almost 20 years now. Unlike equity (where you can have a SIP), real estate investment is a single concentrated bet at one point in time. That's what makes timing important. But then no one can time the market :)
I think the last line is the most significant.
ReplyDeleteFrom the way I see it, there is still a lot of active interest in acquiring properties and those that are priced slightly below market are quickly being snapped up.
Gone are the days when you could search a month and find something that could generate 5-8% returns in rentals or at least held the promise of getting there in a year or two.
I do not believe we are in bubble territory in markets where the supply is used up for either moving in or long term needs. Loads of NRIs still moving money here as they do not see any sensible avenue abroad.
Speculative markets are out. Those areas where there is abundant land or fresh supply could get in a bind soon. But prime locations will continue to have a market and those who are able to spot the niches where sensible investments exist will continue to prosper.
Its a difficult uphill task ahead now... when there are so many looking for that one elusive deal!
I agree that Indian RE looks like an extended bubble, but dont agree that Mumbai prices or Indian RE prices will go back to 2001-2003 levels.
ReplyDelete15-30% correction could be a reality, but talking of 50% and more might be only due to Black Swan event.
If prices of food, energy, every thing comes down drastically, Salaries get reduced by 70%, Jobs vanish. Negative growth for next decade, then it is possible that RE prices will come down to that level.
I didn't get how come Real estate cannot be a source of wealth.
E.g Two apartment bought at 20L each during 2001-2002 in Mumbai are worth half a million USD. Is this not wealth. You may buy Three properties in US midwest cities and get rental for life time, is this not wealth, please explain.
yes, RE prices will contract but when and how no body knows. If if happens say after 3-4 year of after 10 years... what about lost opportunity.
I meant in correction in real not nominal prices. As the post says (2001 prices + inflation + 1%). So nominally you will get inflation+1%, but in real terms you are getting only 1%.
Delete"E.g Two apartment bought at 20L each during 2001-2002 in Mumbai are worth half a million USD. Is this not wealth. "
This is a bubble, where inflated asset values make people feel rich. Same thing happened in other countries. We are not different.
RE is a store not a source of wealth. The rental yield of say 3% that you get is to a great extent negated by the increasing cost of maintaining the home and taxes. As the house gets older, things need more and more repair (Just like the human body:). Renovating a 40 or 50 year old house in the US will be hugely expensive. Most people were so caught up in the big leveraged capital gains they got over the last decade, they forgot long term trends and assumed prices will rise forever.
Historically, equities have always returned more than real estate. Yes, you might strike it lucky and your house could turn out to be in a city which houses the next silicon valley. But your city could also turn out to be the next Detroit (where people are leaving in droves and prices have collapsed).
Countries like China/Australia did not see a correction in 2008, they are seeing it now. The bubble will burst or deflate slowly here too. Home prices rose much faster than incomes over the last decade. (which is why rental growth did not match price growth). Now prices will either fall or stay stagnant till incomes catch up. (i.e correction in real terms).