What’s happening in residential real estate and Why? An Insights
‘See Sanjeev, I have the money since I’m recently retired, property is actually very cheap now and I don’t have too many liabilities. Then why the fxxx are you not letting me buy a good property?’
‘But Sir, why real estate of all the things!’
‘Everybody knows that property only goes up, you get good rentals and you can even take a home loan and save so much of tax!’
‘Sir, the property has only moved downwards in the past 4½ years, rental returns are traditionally only 1½ – 2% of capital value, and you save 30% tax on the home loan interest paid but you pay the balance 70% more too to save this 30%. How is it a good investment?’
And after this conversation and more, the senior officer went ahead and invested in a residential property with most of his retirement corpus!!
As far as I know, most of the people with some liberal amount of money are only biding their time by investing in financial assets (FDs, mutual funds, Govt bonds, savings account etc) till they think property prices are likely to resume their upward journey and then would jump on that bandwagon.
So, is it the right time to buy property again, since the prices are at their one of the lowest in recent times?
Before we answer this question, it may be worth its while to analyse why the real estate prices are so down and seem to continue their southward journey to a bottomless pit:
- It all started as a regular cyclic real estate downtrend in 2013 or so but got a further kick with the current Govt’s war on black money – the colored part of the money which was opium to real estate, started feeling the heat.
- The systematic raising of circle rates across the country in line with the market rates further limited the playground for the black money. And then there was demonetization…
- To top it, the current huge inventory – those concrete jungles of rows after rows of unoccupied houses in metro cities around the country reminding one of the similar ghost towns in China, with many more adding up each month – has created huge Demand-Supply imbalances which will take years to be absorbed by buyers.
- Lastly, regulations like 1% TDS on real estate transactions beyond Rs 50 Lakhs transaction, close monitoring of real estate deals by the Income Tax Dept, implementation of RERA by many states, etc have added to real estate woes.
Do you think even one of the above four reasons is going to go weak in times to come? We think there are no signs of this so far. In fact, the regulatory interventions seem to be only intensifying. Consequently, the arbitrariness of the builders is going out, the sacksful of money used in deals is getting much thinner, there is some semblance of state control coming into this sector, common man (‘the customer’) is getting some say in the state of affairs and many large, loud builders have started going belly up.
So, is real estate dead as an investment? It would be too naïve to write an obituary for a sector which is one of the biggest informal employment generators in India, though it seems to be a long haul ahead for it. Spring shoots are around but only for a small ticket (the ‘affordable’) residential properties, due to the sops being given by the Govt in home loans and in tax exemption to builders for such properties. They don’t interest most people due to the small profit potential.
However, if you still wish to try your hand at the residential real estate, look for genuinely distressed sale properties – there are few around now with prices having been down for such a long time. You may also plan to invest in areas where a real estate trigger is likely to come in a short while – metro being announced, an important highway or road coming in, a flyover facilitating connectivity, IT park or big mall or even an unauthorised colony being declared authorised etc, with good research to establish authenticity. Or you may get really lucky and be able to identify a new property available to you at great prices even with the facility to pay in installments…. who knows!
But for other potential real estate investors, it may still be a long haul.
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