pcpune

Mahesh,

, ofcourse, its your money, you have pledged your future salary & income on the house, and have paid 10-20% + the interest over the initial years -- the bank has it mortgaged. In economics, its a simply - a liabiaility which you have levereged.

Tommorrow, say if the property value goes down by 10%, will the bank/builder - reduce the interest or the price - ofcourse not !

Infact, if you fail to pay your EMIs after 5 years, the bank will keep all your paid EMIs+ intial 10-20% principal, and also sell off the property --

MOST consumers - need to learn WHAT IS LEVERGING ! Please read the below article -

A close look at Real Estate Returns in India

December 6th, 2009




by Manish Chauhan on December 6, 2009
“The current market value of my flat in Mumbai is close to 1 crore , I bought it at 28 lacs in year 2000. The returns have been Mind boggling 72 lacs in 9 years, i.e 8 lacs a year approx , more than my current salary and now I am planning to invest more in real estate instead of Equity, What do you think” . A not so close friend was discussing his Real Estate portfolio with me.
He belongs to first category of common sense deprived idiots, who do not understand mathematics well. 28 lacs flat became 1 crore in Value in 9 yrs, The returns are great ,but not exceptional enough to make someone eyes pop out . Simple maths will tell you that its 15.2% CAGR return over 9 yrs . Now whats so great return about this 15.2% Return ? 15.2% return over long term is desirable and great and whats normal return from Real estate in last decade in our Country , The only thing irritating is how people make fuss about it . Even has outperformed , was $300 per ounce in 2001 and now its close to $1100 ounce , that’s 15.5% return , 0.3% more . On the top of that Builders are not keeping their promises of Delivering Projects on Time and with same quality Promised.
Real estate investments has caught everyone’s attention in the past decade and every Tom , Dick and Harry with 5 lacs salary tries to grab a 40 lacs flat . I will try to throw some light on Average Real estate returns in past 8-9 yrs in India .
Coming back to my Friend, I told him that its been a very good return, and I appreciate his timing, Good job. But definitely he is bragging more than it deserves. A second person (his friend) suddenly comes to his rescue and challenges me . “But Manish , I bought a a flat in 2003 20 Lacs with 3 lacs of down payment and rest a home loan. I spent total of 7 lacs till date and the flat is already quoting around 60 lacs, that 40 lacs of profit in just 3 yrs through investment of 7 lacs, that’s 78% return on annual basis” , showing off his fast calculations skills and giving me a “anything-else-you-young-financial-planner” looks his face .
These people are from another category of “common sense deprived and mathematically challenged” people . It is worse than first category . The problem with these people is that they do not understand “leveraging” .A situation of sitting on huge profits by just investing a small amount as down-payment and rest with home loan is pure example of leverage and very common in India , This gives a feel to people that they are very smart. These people never consider the case when their house value drops by a big margin like say 15 lacs and they have just invested 5 lacs from their pocket, then they are in loss of -300% (absolute). But as you know , Investors like to consider a rosy picture, they somehow believe that it cant be the case with them . As US citizens who bought Real estate in the middle of the Bubble just because credit was cheap and they could have made a lot of money by taking a Home loan and almost nil Down payment, When Real Estate broke in US , people who has put $10,000 from their pockets for a $4 million house were in losses of $1 millions , because they had to pay $4 million a loan money for something which is now costing $3 million .That’s a unrealised loss of $1 million in a short time . That’s the problem of Leverage . Investors never think about this , India is a success story and housing is scarce , that’s enough for them to take a chance. With my amazing quality of self control , i kept all this in my mind and didn’t argue with him, some times your skills of explanation is limited to blogs only .

What is the mistake people do when they calculate Returns ?

The beautiful mistake which everyone does is that they calculate pure absolute returns from Real estate which is in many lacs of rupees obviously. So if a person invested 30 lacs in a flat and it becomes 60 lacs in 5 yrs. They are sitting on a 30 lacs profit. Thats a lot of money and people are excited to see that much money , but you also have to see that they invested damn 30 lacs !! for that, which is not every one’s cup of tea and the returns are normal 14-15% return/year on investment if you compare it with or Equity. You could have made more returns if you had invested in Equity (SIP in mutual funds in some top funds) . If you consider the risk taken for the return people have got in Real estate , personally I am not very much excited then , Investors forget the risk taken to get some return and only concentrate on Return part . See an Article on GFactor , A tool to find out if an investment suits you .

What you have to see is how much return you got from something after adjusting the risk taken for that . So given a time frame of 1 yr .

• If you do a FD and make 9% , its amazing !!
• If you invest in Real estate and make 10%, Its ok
• If you invest in Equity and make 11% , its just fine .. not a big deal
• If you speculate in Options for one year and make your money grow by 500% , I Would be personally disappointed a lot .

Some smart (second category people) people think that they can buy Real Estate on loan and make 30-40 lacs in 4-5 yrs from house value appreciation , While that is possible and has happened to a lot of them and definitely the return would be amazing . But this exposes them to a great amount of risk which they dont understand , its pure leveraging . There are better ways of leveraging than this . This kind of Leveraging is still nothing in front of Options trading in Nifty or some Stocks . Not that I discourage people from taking a home loan and invest in real estate , but dont over do it , and understand and accept the risk involved, be ready for it . “Risk happens when you have no idea what you are doing”
. If you precalculate it and consider it , then its called Speculation , which is my favorite . Options trading is something I would recommend who have great risk appetite and dream of millions in short span of time , Better than real estate .

puser

I don't think there will be many offers; but yet I am afraid bookings will happen enough to help builders sustain without price correction for 2 years

Murtaza_t

pcpune, I completely agree with you that RE investment at current level is not a great decision. But hey man, you cannot measure everything in your life from profit and loss point of view. For some people, owning a sweet little home is a matter of personal preference and comfort. Moreover an individual has to go for his own home at some stage of his/her life - so why not early? Moreover owned home gives you some peace of mind in many terms... But man I have become a great fan of your analysis in this blog...

pcpune

Agree with you, but that sweet little home today, is coming at a bitter price ! Our parents & grandparents use to purchase a home in their 40s and 50s, we are doing it in 30s, IT people want to do it in 20s.

The problem is - if you get you timing wrong - you will be the same middle class man (penny consious ) for all your life - you will DONATE all your earnings to banks/builders....

And, if in the process, the RE market comes down, you have really had it....

So, as advised earlier - the TIME now is to WAIT -- specially in Pune, save the money - and try to earn a good 15-20% by investing it wisely - let the RE euphoria end, and then decide.

puser

Diwali is in Nov. Which festival time is coming? Do builders offer for Ganeshotsava?

pcpune

, oh they are already celebrating Diwali -- Happy Diwali - homes. , Well for them, Rakhi is the starting point of the festival - ending at Bhau Bij/Diwali - its the 3 months - ALL OF BUSINESS community wants to make money!!!!!!!

realacres

Well, I think on following lines:-

If the price seems good to you & you can buy without compromising your current lifestyle & savings, go ahead & buy. Issue kicks in when people buy with loan for 20-25 yrs, with 85-90% loan without considering expenses post marriage, kids, retirement incomes, holidays etc. While buying a house, one needs to think bare minimum for 10 yrs.

My take:-

>> Loan should not be more than 40% of the property value (60% is bare min for downpayment),

>> Home loan EMIs should not be more than 30%, max 35% of your take home income based on 12-13% interest rates to be on safer side, no teaser rates here,

>> Loan duration should be max to max 10 yrs.

If these conditions are met, go ahead & buy irrespective of time. I am of the opinion that if one can but a Merc, one should buy one rather than buying a Laura & investing balance amount. If you can do something with ease, go ahead...if you want to buy a go_ld jewelry, buy one without thinking what the price of go_ld would be tomorrow. Not everything can be seen from the point of loss & profit.....there are some PLEASURES in life which can't be calculated based on money .

Enjoy life, without over-leveraging.....as simple as that .

__________________
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nitesh321

Rightly said real. This is what most of the forum members telling to WAIT forget. People have some personal goals, dreams about buying their homes. Profit-Loss consideration is applicable for investors in RE. For genuine buyers, who cares what will be the appreciation & price of their house after 3-5 years.

hitmady

Nitesh and Realacres what you are implying is theoretically true but not practical.
When making purchase decision we tend to do comparison, be it Merc/House.

Irrespective of the buyer is rich/middle-class, an item appears cheap/expensive based on its past price or price in comparison to similar items.

For e.g. I am really interested in I POD-Touch and can easily buy few for entire family. But found it expensive for features I need so bought .

pcpune

Real, how many people on this forum can BUY a 50 lac house WITHOUT compromising your lifestyle and savings/investments.

For me to do that, I really need 1-2 crores as my assets, and then maybe I would be able to afford 50 lacs home.

HENCE, ITS BEST to WAIT for one and all - but some other people on this forum want the consumers SUCKED IN.