The wheels of fortune for real estate, especially the residential property market, have turned since the stock market crash in January. The sector—which was already battling high interest rates and high cost of property that were, to an extent, keeping homebuyers away from the market—received a death blow in terms of the negative sentiment. The global economic turmoil in the later months only increased its intensity. While homebuyers are deferring purchases to catch the bottom, real estate speculators, who invested in property purely for gain, are finding it hard to pull out at their desired price points.
Whether you’re a homebuyer or an investor, the present scenario is the perfect setting for inducing wrong calls. We list the commonest ones—and ways to avoid them.
1. With prices likely to cool off in the short term, there is no point in holding on. I should pull out of the investment
This is the first thing most of us do when we get bad news about any asset class. When it comes to real estate, the worry is aggravated if there’s a home loan involved. With home loan interest rates climbing steadily since 2004, your tenure is now longer (or EMIs heftier). Capital values, too, are down, especially since January. As a result, you are paying more (in terms of interest payout) for an asset whose value is decreasing. Experts believe that the prices of residential units will go down by another 15-20% in the short term.
But is that reason enough to pull out? No. If you can hold on to your investment, do so. The reason is simple: In the long run, returns from real estate are second only to those from equities. Further, with the large gap between demand and supply for residential units in the country, long-term prospects still look good.
Pull out of your investment only if you find it difficult to hold on. But be ready for three major hurdles: finding a buyer when most of them are trying to catch the bottom; clearing paperwork if there’s a mortgage; and minimizing the tax impact on sale proceeds.
2. While selling the property, I should stick to the price at which the neighbouring flat was sold six months ago
While real estate as an asset delivers good returns in the long run, exits are not easy, compared with some other asset classes. In the present scenario, your problems will be further compounded because, even if you find a buyer, he will know fully well that you are making a distress sale and, hence, will drive a hard bargain. To get an idea of the price you may realistically expect, investigate the sale of similar properties in the area over the past month or so. Property portals will also give a fair idea of the going rates.
3.I have surplus funds. I should go ahead and increase the EMI on my existing home loan