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Will Mumbai Real Estate Prices Double in Future?

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Will Mumbai Real Estate Prices Double in Future?

Last updated: September 5 2013
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  • Will Mumbai Real Estate Prices Double in Future?

    Why are some people still buying?

    - A 1BHK is out of range of educated aam admi ( couple making 10L before taxes), who works on salary and has saved for 5 years.

    - Prices are higher than many developed cities across the globe

    - Builders are facing liquidity issues

    - Banks will not refinance

    - In FD like instruments, you can double your money in 7-8 years. Will real estate double from here?

    Prices have gone up 6-10X in the last six years!
  • #2

    #2

    Re : Will Mumbai Real Estate Prices Double in Future?

    aam admi with black money is buying the real estate...wait for another year or 2..IT sector is going down pretty hard and real estate regulations, global economy is expecting another recession soon. it would be good to see how many builders survive after that.

    Comment

    • #3

      #3

      Re : Will Mumbai Real Estate Prices Double in Future?

      Most People buying are selling one property and buying another, some people are selling property/land in other cities/towns and buying in Mumbai (as they work here), and businessmen are always there, all the money black/white they make they put in real estate and will continue until they stop getting returns, for example many diamond merchants have more than 15-20 properties in Mumbai (exlcuding the joint ventures they have with builders), similarly businessmen in other industries, they just keep on buying property. Thats indian culture of buying gold and property.

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      • #4

        #4

        Re : Will Mumbai Real Estate Prices Double in Future?

        why are some people still buyin petrol when its 75 bucks a litre? Same is the reason that mango people like me are still buying property, no other option, rent is there but i dont fancy renting due to sentiments.

        Comment

        • #5

          #5

          Re : Will Mumbai Real Estate Prices Double in Future?

          I can think think of these many reasons. Please feel free to add or even delete from it.

          1. Greed: They expect the exponential growth in prices to go on forever and want to make quick profits in this levered investment.
          2. Fear: They expect the exponential growth in prices to go on forever and fear that they will miss the bus.
          3. Lack of awareness: Most real estate investors don't know much about other asset classes or the concept of diversification or financial literacy. Many EMI-holders in my firms can't even calculate their income tax properly or submit their investment proofs properly.
          4. Lack of alternatives: Most real estate investors cannot invest their unaccounted income in any other asset class.
          5. Herd mentality: speculator do as speculator see
          6. Peer and parental pressure: abhi tak ghar nahi kharida....beechara!
          7. Specious reasoning: My favorite one is - Rent is a waste of money and an EMI creates assets! The moment someone says this, loses all intellectual credibility in my eyes.
          8. Easy availability of mortgages: loan mil raha he toh le lo!
          9. Myopic over-optimism: Most people extrapolate recents events and are over-optimisitc about their capabilities, future prospects and india's growth potential. One is definitely not entertaining the possibility of losing his/her job and falling into financial difficulty when signing on a 20yr loan.
          10. Tax efficiency
          11. Long corruption strategy: It is the best asset class, if you believe that the country will remain corrupt forever.
          12. They can afford it: I mean why do some people still buy diamonds or an Audi or an expensive trip to the most exotic locale or a Breitling or a Dom Perignon or a.....the list goes on.....
          13. They get a good deal: Mostly insiders, institutional investors and HNIs

          Disclosure: I don't own a single property and most probably never would. I am just an innocent bystander.

          Comment

          • #6

            #6

            Re : Will Mumbai Real Estate Prices Double in Future?

            The comparison with FD is not the correct one. Real estate is a game of leverage especially for people who can get loans. So with 40 lakh in pocket you can buy a 2 cr property and then the appreciation is on entire 2 cr not on 40 lakh. With FD, u wud only be able to double 40 lakh to 80 lakh. But with real estate even a 20% increase on 2 crwould be the same as your gain in FD. thats point no.1.

            Point no. 2 is yes offcourse you pay 10% ineterest on the loan so taken. But it effectively works out for you at 5% if you have bought the property for investment purpose. The calculation is simple:

            Rent : 2% ( after adjustment of maintenance charges)
            Net interest outgo: 7 % ( assuming negative income due to rent adjusted with salary income and 30% tax bracket)

            so net outflow is : 5% of property price. So you would pay about 10 lakh every year. In 5 years you pay about 50 lakh and the potential of property to go up by 25% in 5 years is not a bad assumption. also remember rents will go up or interest rate may come down over a period of time. whereas your outflow remains the same in terms of EMI.

            so thats the investor mathematcis. The challenge starts when an end user has to buy. So how many people will have income 5 yrs hence who would buy for their end us is the calculation you have to do.

            Unless something changes drastically. property is a safe bet for investors who can leverage.



            Originally posted by new2RE View Post
            Why are some people still buying?

            - A 1BHK is out of range of educated aam admi ( couple making 10L before taxes), who works on salary and has saved for 5 years.

            - Prices are higher than many developed cities across the globe

            - Builders are facing liquidity issues

            - Banks will not refinance

            - In FD like instruments, you can double your money in 7-8 years. Will real estate double from here?

            Prices have gone up 6-10X in the last six years!

            Comment

            • #7

              #7

              Re : Will Mumbai Real Estate Prices Double in Future?

              Originally posted by vibes28 View Post
              The comparison with FD is not the correct one. Real estate is a game of leverage especially for people who can get loans. So with 40 lakh in pocket you can buy a 2 cr property and then the appreciation is on entire 2 cr not on 40 lakh. With FD, u wud only be able to double 40 lakh to 80 lakh. But with real estate even a 20% increase on 2 crwould be the same as your gain in FD. thats point no.1.

              Point no. 2 is yes offcourse you pay 10% ineterest on the loan so taken. But it effectively works out for you at 5% if you have bought the property for investment purpose. The calculation is simple:

              Rent : 2% ( after adjustment of maintenance charges)
              Net interest outgo: 7 % ( assuming negative income due to rent adjusted with salary income and 30% tax bracket)

              so net outflow is : 5% of property price. So you would pay about 10 lakh every year. In 5 years you pay about 50 lakh and the potential of property to go up by 25% in 5 years is not a bad assumption. also remember rents will go up or interest rate may come down over a period of time. whereas your outflow remains the same in terms of EMI.

              so thats the investor mathematcis. The challenge starts when an end user has to buy. So how many people will have income 5 yrs hence who would buy for their end us is the calculation you have to do.

              Unless something changes drastically. property is a safe bet for investors who can leverage.
              Leverage is a double edged sword. I agree if the asset appreciates you can make returns but if the assets class stays flat and worst case depreciates, the losses are are huge. A 10 % drop in home value will wipe out over 50% of your down payment and the money you have payed towards EMI. So a 10% drop can equate to a 100% loss!

              Comment

              • #8

                #8

                Re : Will Mumbai Real Estate Prices Double in Future?

                Originally posted by vibes28 View Post
                The comparison with FD is not the correct one. Real estate is a game of leverage especially for people who can get loans. So with 40 lakh in pocket you can buy a 2 cr property and then the appreciation is on entire 2 cr not on 40 lakh. With FD, u wud only be able to double 40 lakh to 80 lakh. But with real estate even a 20% increase on 2 crwould be the same as your gain in FD. thats point no.1.

                Point no. 2 is yes offcourse you pay 10% ineterest on the loan so taken. But it effectively works out for you at 5% if you have bought the property for investment purpose. The calculation is simple:

                Rent : 2% ( after adjustment of maintenance charges)
                Net interest outgo: 7 % ( assuming negative income due to rent adjusted with salary income and 30% tax bracket)

                so net outflow is : 5% of property price. So you would pay about 10 lakh every year. In 5 years you pay about 50 lakh and the potential of property to go up by 25% in 5 years is not a bad assumption. also remember rents will go up or interest rate may come down over a period of time. whereas your outflow remains the same in terms of EMI.

                so thats the investor mathematcis. The challenge starts when an end user has to buy. So how many people will have income 5 yrs hence who would buy for their end us is the calculation you have to do.

                Unless something changes drastically. property is a safe bet for investors who can leverage.
                You are right but not many service class people are buying property thinking on above lines. Concentration of good jobs in few cities is leading to lot of migration which is building up demand in big cities.

                If one claims interest rebate then one has to hold that property for minimum five years.

                Comment

                • #9

                  #9

                  Re : Will Mumbai Real Estate Prices Double in Future?

                  Originally posted by new2RE View Post
                  Leverage is a double edged sword. I agree if the asset appreciates you can make returns but if the assets class stays flat and worst case depreciates, the losses are are huge. A 10 % drop in home value will wipe out over 50% of your down payment and the money you have payed towards EMI. So a 10% drop can equate to a 100% loss!
                  Main success In proprty investment comes from forced monthly commitment towards assets(EMI).its no secret that if you put same amount as EMI compulsorily into mutual funds you will have more returns after 10 years.But nobody puts that big amount with discipline into SIP.

                  Comment

                  • #10

                    #10

                    Re : Will Mumbai Real Estate Prices Double in Future?

                    Why people still buying properties ? interesting question..

                    Let me try to decode it..
                    Very first there is nothing like lack of money or vanishing of money. In this world MONEY never disappears, it only changes the hands. Same principle applied majority are buying ready property to actually live (previously they used to invest for investments, very few play the game).
                    THose who have invested, their investment is not selling. There is more supply than demand.
                    From the start Indian people are not easy going with other financial tools, so what we listen from childhood, gold and home is safe bet. So everyone is conditioned to buy atleast one self home in his life time.
                    In Todays trend there is movement in Luxury homes and below 40 lac homes.

                    And its very interesting that why mumbai real estate rates are higher than other major cities because there is cycle of 25 years in real estate, where investment yields grows and drop. About mumbai the cycle is at around 11-12 year point of cycle.. means the prices are gonna increase more and then one point when returns start to fall the RE market will go towards end of cycle.

                    And lastly as stated indian economy is increasing, purchasing power is increasing, money will keep changing hands. But sad thing those who really needs home their homes these investors buys off

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