Will Real Estate Crash, and does it matter?

There is  a strong buzz that real estate prices are going to crash. I can count three types of people who are contributing to this buzz:

1) Presstitute-portals - they don't know need a rhyme or reason. All they want is traffic.

2) Those who sell equity products - what better chance to remind their clients that equity is a much better asset class.

3) Equity investors - driven by a delectable sense of 'I told you so', they would like to share articles that portend a real estate crash among their friends and relatives.

Assuming that real estate is indeed heading for a crash, do you really think anything will change in terms of how people approach asset classes?

Gold prices hit a peak in late in late 2011, moved sideways for over an year and then crashed.  Has the demand for physical gold come down because people realized that gold like any other asset class will go through price cycles? It has only gone up (barring export restrictions).

Gold ETF AUM has fallen sharply over the last 3 years, because the negative returns scared people who thought (along with their financial advisors) that gold price 'will only increase'! Do you think such people will be comfortable with staying the course with equity?

The gold crash has not really changed anything in terms of how people perceive the productivity of an asset class.  I don't think a real estate crash will be any different.

Will real estate crash? Well, thanks to such publicity, it might! Remember that the best way to crash a bank is to spread the rumor that you cannot take out your money!

The truth is, real estate has been moving sideways for quite a while now.  It has been difficult to sell property in many parts of the country, simply because the owners have priced themselves out of contention.

It has been difficult to get good rental income that is steady because, people preferred to buy their own house, driven by emotional and societal needs.  They did not mind the fact such houses were in areas which lacked basic amenities and that the EMIs will have a telling impact on their retirement plans.

This did not prevent the purchase of property for investment. When you buy supplies without demand, the supply will remain unused.   Rental yields have been abysmally low for several years now, much lower than home loan rates. So unless a person had sold the property at a considerable profit, the rental income was irrelevant.

Truth is, most of us do not understand the concept of a risk premium. If I want returns higher than say, a bank FD, I must take risks. Thankfully in equity the risk (well, volatility) can be perceived on a day to day basis. So I understand that I need to stay put in order to ensure the risk is only volatility.

In real estate the risk is not so perceptible. There is no index and everyone around is claiming that they made high returns. It only when we actually try and sell do we understand the reality (as one of my relatives found out recently).

I have a real estate returns calculator User returns over past years have varied from 10% to 3%! (so far)

So if black money is reduced, will property prices crash?

Subra points out that the banks exposure to RE business is probably twice the RE black money.  He says regulation or no regulation, the banks might find a way to keep prices up.

http://www.subramoney.com/2015/07/a-different-take-on-real-estate/

To me, that is a compelling argument.  I don't think one can be so certain that prices will correctly sharply soon.

Do you expect current landlords to sell if prices correct and aid the correction? Or do you expect them to hold on to their vacant properties in the hope of aache din to 'return'.

While equity investors are filled with a sense of schadenfreude, many real estate lovers who cannot enter at current prices are looking forward to such a 'crash'.

So if prices do 'crash', a new group of investors will be terribly pleased at having purchased at 'cheap' rates and proudly enjoy their low rental yields (assuming they get some).

What do you think?

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24 thoughts on “Will Real Estate Crash, and does it matter?

  1. Ashal Jauhari

    Apart from the Bank loan, the another major contributor to the RE price hike is the income tax benefit on these same bank loans to individuals. Innumeracy in dear PV Subramanyam's words but who cares.

    As you rightly pointed out, prices are in sideway movement and factoring in the inflation, there is a negative return for people but don't we know, India has limited land, so My house can not go down in value. 😛

    Thanks

    Ashal

    Reply
  2. Ashal Jauhari

    Apart from the Bank loan, the another major contributor to the RE price hike is the income tax benefit on these same bank loans to individuals. Innumeracy in dear PV Subramanyam's words but who cares.

    As you rightly pointed out, prices are in sideway movement and factoring in the inflation, there is a negative return for people but don't we know, India has limited land, so My house can not go down in value. 😛

    Thanks

    Ashal

    Reply
  3. lakshminarasimman

    remove the income tax benefit for home loan...
    i will bet you will see banks driving flies and
    roads will be cleaner without cutouts and banners advertising plots in kaanadu kaathan village (only 10mins from chennai airport by jet plane)

    Reply
  4. lakshminarasimman

    remove the income tax benefit for home loan...
    i will bet you will see banks driving flies and
    roads will be cleaner without cutouts and banners advertising plots in kaanadu kaathan village (only 10mins from chennai airport by jet plane)

    Reply
  5. AK Anand

    Fully agree with everything in the post!! Schadenfreude!! Very Correct!! There are numerous things in the world which defy logic. RE is another one of those. Will the government allow RE to crash, and many (almost all) banks to capitulate, or get badly affected. Will the US ever allow the USD to crash?? 😀 😀

    Reply
  6. AK Anand

    Fully agree with everything in the post!! Schadenfreude!! Very Correct!! There are numerous things in the world which defy logic. RE is another one of those. Will the government allow RE to crash, and many (almost all) banks to capitulate, or get badly affected. Will the US ever allow the USD to crash?? 😀 😀

    Reply
  7. Bharath Sri

    Govt will try to keep RE going so as to keep up the economy. Ambit recently shared an article that states that RE occupies almost 50% of a commoner's investment which in turn creates a good amount of employment and cash flow across various sectors from Realty companies/Paints/Adhesives/Cements/Housing lenders and indirectly on Consumer goods and FMCG goods.. Possibly that's why Govt encourages housing by giving income tax benefit for a commoner who takes housing loan.

    My thoughts on RE is that, it will keep going on sidelines until exports (Auto,IT,Pharma) sector picks up. For IT/Auto sectors to improve, USD/Euro has to appreciate against INR to keep up in competitive world markets. Yes there will be backlash if it happens, but I think that is one of the best ways to keep up the exports.

    For example around 2007-2008 large parcel of land were acquired at Rs 36 to Rs 45 per sq.feet to create Chennai Siruseri SIPCOT (where now TCS is having a huge development center and can have 25k ppl employed in one place). Try guessing the price of a sq.ft for an apartment around there now ? Hold your breath its around Rs 6000 ( and a ground of land i.e 2400sq ft costs 60-70 lakhs) L&T advertised its layout in 2012 for Rs 5500 sq/ft. Not sure how much is the cost now.

    My gut feel says that RE prices are decided by overall economy and exports which employees huge human capital in particular.

    P.S : I was studying in SJCE college there between 2001-2005 that so called IT highway, Chennai and I used to write letters to my dad out of frustration that I was living in village having a Chennai pincode. At that time there were land acquisitions happening. I remember a article around 2001-2002 that came in Hindu that farmers are going for a strike blocking the road asking the Govt to increase the acquisition rate from Rs 5 to Rs 7 sq/ft !!!! I am now just thinking what if have invested the money that I spent 4 yrs in a college (4 lakhs) into a land parcel there , I would be sitting now at 12 Cr. I was then paying a rent of Rs 550 and then increase to Rs 700 later for a terrace with 2 rooms+bath. By 2005 a IT guy came to my landlord and asking them the same rooms but he will pay Rs 2000 ..This was the condition then.

    Infosys lost the RE game even though they were having huge infrastructure there since 2001, they came up with their report stating that this OMR(IT Highway) stretch cannot support much development as there were water scarcity and its a kind of swamp land during rains and cannot support huge building. Then they moved their plans to Mahindra City which did not develop as expected. My learning is this now, if there is Govt push to promote that area, then no matter what problems there and every problem shall be overpowered.

    Sorry for the long story out my frustration.

    Reply
  8. Bharath Sri

    Govt will try to keep RE going so as to keep up the economy. Ambit recently shared an article that states that RE occupies almost 50% of a commoner's investment which in turn creates a good amount of employment and cash flow across various sectors from Realty companies/Paints/Adhesives/Cements/Housing lenders and indirectly on Consumer goods and FMCG goods.. Possibly that's why Govt encourages housing by giving income tax benefit for a commoner who takes housing loan.

    My thoughts on RE is that, it will keep going on sidelines until exports (Auto,IT,Pharma) sector picks up. For IT/Auto sectors to improve, USD/Euro has to appreciate against INR to keep up in competitive world markets. Yes there will be backlash if it happens, but I think that is one of the best ways to keep up the exports.

    For example around 2007-2008 large parcel of land were acquired at Rs 36 to Rs 45 per sq.feet to create Chennai Siruseri SIPCOT (where now TCS is having a huge development center and can have 25k ppl employed in one place). Try guessing the price of a sq.ft for an apartment around there now ? Hold your breath its around Rs 6000 ( and a ground of land i.e 2400sq ft costs 60-70 lakhs) L&T advertised its layout in 2012 for Rs 5500 sq/ft. Not sure how much is the cost now.

    My gut feel says that RE prices are decided by overall economy and exports which employees huge human capital in particular.

    P.S : I was studying in SJCE college there between 2001-2005 that so called IT highway, Chennai and I used to write letters to my dad out of frustration that I was living in village having a Chennai pincode. At that time there were land acquisitions happening. I remember a article around 2001-2002 that came in Hindu that farmers are going for a strike blocking the road asking the Govt to increase the acquisition rate from Rs 5 to Rs 7 sq/ft !!!! I am now just thinking what if have invested the money that I spent 4 yrs in a college (4 lakhs) into a land parcel there , I would be sitting now at 12 Cr. I was then paying a rent of Rs 550 and then increase to Rs 700 later for a terrace with 2 rooms+bath. By 2005 a IT guy came to my landlord and asking them the same rooms but he will pay Rs 2000 ..This was the condition then.

    Infosys lost the RE game even though they were having huge infrastructure there since 2001, they came up with their report stating that this OMR(IT Highway) stretch cannot support much development as there were water scarcity and its a kind of swamp land during rains and cannot support huge building. Then they moved their plans to Mahindra City which did not develop as expected. My learning is this now, if there is Govt push to promote that area, then no matter what problems there and every problem shall be overpowered.

    Sorry for the long story out my frustration.

    Reply
    1. Ramamurthy

      What has happened is OK.But what in your opinion will be the position in say 2026 ?
      Can you expect a similar kind of growth? I doubt.I feel the days of awesome returns from RE investments are over.Any comments please?

      Reply
  9. Puneet

    Roti, Kapada and Makaan are supposed to be basic necessities for a human being (Now we can include Internet Access too 😉 ).

    If Roti and Kapada can not be investments, Makaan SHOULD NOT be too.

    Reply
  10. Puneet

    Roti, Kapada and Makaan are supposed to be basic necessities for a human being (Now we can include Internet Access too 😉 ).

    If Roti and Kapada can not be investments, Makaan SHOULD NOT be too.

    Reply
  11. Nikhil

    I have read many articles regarding Crash in RE but this one comes with different perspective.
    A worth read article.

    Reply
  12. Nikhil

    I have read many articles regarding Crash in RE but this one comes with different perspective.
    A worth read article.

    Reply
  13. Sarathy Venkat

    Recently I wanted to sell my flat and tried for six months but not in a desperate mode. There were enquiries but nothing concrete to enable me to finalize. If we shapeup on growth story may be we can surive otherwise my expectation is a rate drop but not the crash.

    Reply
  14. sundararajan

    This is for 'What do you think about a financial planning camp?' since comments were closed for that. This may even help DIY (not very experienced) who can pay a fee to check where their DIY stands with what a professional says. He/She can make a decision after that.

    I know that you area of expertise and interest is mutual funds. But what about stocks? I would be interested in one such camp where direct mutual funds and stocks are involved.

    But yes you are right. Even if you put a big disclaimer, if anyone followed the planner's advice and don't get the returns as expected, they may blame you for no reasons. So beware about this.
    But I really appreciate your intentions. As usual thanks for such an initiatives.

    Reply
  15. Prasad`

    To answer your question - no for me it does not matter if RE crashes. From my perspective it's a good thing as more people can afford homes. I see RE purely for what it is - shelter. I don't see it as a vehicle for investment at all. Although I have a big EMI burden, that is a product of my need for a big home for I need to accommodate a big family. It's worth is actually immaterial from a short to mid-term perspective.

    Reply
  16. Neerav

    Real estate is another asset class like equity, debt etc. and it comes with its set of properties like lack of liquidity etc.

    Question is probably not whether that is the right asset class for investment - questions should be whether you are the right person to be investing in RE.

    A salaried professional faces many hurdles to be a canny RE investor. Lack of insider knowledge, ability to do thorough due diligence, negotiating power, ability to uncover dirty tactics, ability to hold on and move in fast at the right time and price are all big barriers for people like us.

    Old adage is invest what you know well and it is probably more fruitful to spend time to learn in other areas like equity etc. where things are more suited to people like us.

    for a different profile of person - large landowner, commercial developer, politically connected individuals - RE could be the thing they know best and where they make their money.

    Reply

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