Real(i)ty Check

Old timers said what goes up, comes down. Only that they didn't know why?

This was until Isaac Newton was hit by an apple, and discovered gravity which became the part of our text books.

Still people do ignore gravity at their peril. What happens then? They fall with a thud!

Didn't that happen with the stock market? Didn't that happen with the commodities? And its gonna happen to Real Estate too - sooner or later.

For the first two, gravity has already prevailed well over greed. Investors are down on the ground with a huge thud! For the Real Estate, its just the beginning of the end.

The economists say - the whole equation is of demand and supply. Prices are function of that. There is huge demand of houses in India, and hence the gravity defying soar in the prices.

Logic is too simplistic, and as Albert Einstein famously said - It Takes A Genius To See The Obvious, the people here are missing the obvious.

Demand, for houses in the country has always been. Just that now highly-paid-loan-happy techies are in the rush to buy house(s). But one would say that techies haven't come out of thin air, since they are the part of country's populace so where is so called extra "demand"?

I agree and disagree. The demand is there, but way too artificial.

Usually, people buy a house and stay in that.But now days people also buy a house to "invest". Why this in double quotes? This is because you invest when you have money.

In today's scenario people borrow from the bank for twenty years, and then they invest in Real Estate. Would any sane fellow call this investment? Not me, if you consider me one.

Ok, with some argument I still would call it an investment if the net inflow is positive. That is you are earning money at the end of the day. How would that happen?

This would happen when you would rent your property and earn some money. But that money would be guzzled up by the Equated Monthly Installments. Even then it is fine when the rent is greater than equal to EMI. But that usually doesn't happen.

So people just stay put in the hope that though rent may be less, property rates are increasing day by day, and one is also saving income tax(maximum up to 83000/per annum). But here lies the catch. This supply-demand-price equation is a vicious circle.

Any asset class should yield returns over the investment. Usually, when these returns are good, price of that asset remains firm. But if returns start diminishing, there is a fall in the prices of that asset.

But why would return start diminishing? Answer would be affordability. The tenants who live in these houses can't afford these rates(and their hikes) for ever. Inflation would eventually catch up, and therefore there could be a collective drop in rent market.

This would mean return on the yield to the property owner crashes. That means the market of that asset is no longer lucrative. Hence crash in the price of that asset class would also get triggered.

That's what happened with metals recently. Demand was keeping the prices firm. But at a point industry could no longer afford such prices as profit margins shrunk, inflation shot up. Then came the cruel crash, which also triggered the crash in share markets across the glob.

One should remember that these asset markets are largely linked to sentiments, and unlike good sentiments, bad ones translate faster across other.

The other negative factor is the norms issued by RBI. Loan for properties have become tougher. Moreover, both floating and fixed rates have also shot through the roof. A twenty year loan four years back has virtually become 26 year loan. RBI fears defaulting of such loans.

One would do well to remember the 1994 property crash, which lead to a bear market in Real Estate for eight long years.

Time is ripe for Real Estate. There are already tell-tale signs. Property prices in the suburbs of Chandigarh, Mohali and Panchkula have decreased by 15% during last month. For Jaipur and Surat drop is even more at 25%.

So beware guys. Those of who own one house for self residence rest easy, but those who have recently invested in a second house, might be in a for a shock.