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If one wants to avoid getting entangled in the emotional aspects of real estate investing & make financially sound decisions , it is imperative that these real estate myths be recognised & dismissed. In this info-bite, we will debunk a fondly held myth in respect of property investment.
This is the biggest myth of all. Property market is prone to long up & down cycles. We are currently (2019) in the middle of a down cycle. Property prices are down, across the country. In many places today, one is not able to sell property at all, even if offered at low prices – there are no buyers!
The built-up stocks are high & the stock under construction is still substantial. The offtake of property is low that the entire real estate sector is stressed.
Real estate had given very high returns between 2003-2008. Those returns were a one-off aberration & probably not going to be replicated for a long time to come. The typical return in property ( capital appreciation + rent ) is between 4-9%. That looks very low. That’s because, we seldom add up the cost of interest we pay on a home loan over time, to the cost of the property. In most cases, the interest paid overtime would be as much, or higher than the loan amount itself.
Let’s take an example. Let us say that one acquires a Rs.2 Crore property (Rs.1.8 Crore is the cost & Rs.20 Lakhs is Registration, Stamp duty & incidentals, which cannot be recovered while selling ) with a Rs.50 Lakh down payment & a loan of Rs.1.5 Crores. If the interest rate is 8.5%, which is one of the lowest seen in India on home loan rates, the interest amount paid over time would be Rs.1.62 Crores, during the loan tenure. If the interest rates were 10%, the interest paid on the loan overtime would be Rs.1.94 Crores. This is a substantial cost, which most ignore and calculate returns based on just the quoted cost of the property.
Also, people spend good amounts in doing-up the home, which cannot be recovered while selling. Repairs and maintenance of property also takes up a good sum, over time. All these costs need to be factored.
Even after factoring all the costs, there are some properties which give double digit returns, over long periods – but they are exceptions.
Property should just be seen as another asset class. People fall in love with it instead. The fact that it has a tactile feel to it and gives a sense of ownership is a false lure, which makes people fall for property. Actually properties have several negatives – it is illiquid, cannot be partially liquidated if one requires some money, has huge concentration risk ( huge amount of money is stuck in just one property; if for some reason that locality is out of favour, then the property price will not move up ).