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.
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?
Get GameChanger (my second book) + Pranav's Travel Training Kit GameChanger (hardcopy is now available for ₹279 (249 +30 for shipping) and the Travel Training Kit is available for immediate download for ₹150.
Get free, yet comprehensive calculators, tools and analysis delivered to your mailbox! Subscribe to get posts via email
Buy our New Book!You Can Be Rich With Goal-based Investing A book by P V Subramanyam (subramoney.com) & M Pattabiraman. Read more about the book and pre-order now!