Ask any Indian family what their single largest financial decision was and a majority would put buying a house on top of the list. At a time when India is in the early stages of a few decades-long housing boom, it is important that we take the utmost care in making the right purchase.
Real estate prices in India witnessed a phenomenal upward trend for much of the last few years, and started slowing only towards the end of 2008. With a stable government at the centre and the recent measures to improve liquidity in the economy, the housing market is once again experiencing some buoyancy. But it is not yet time to celebrate and lose sight of important considerations when buying a house. We take a closer look at the experiences of other world markets.
Real estate is a cyclical asset class, with its own boom and bust cycle. In the US, the late 1980s saw a big real estate crisis which resulted in the collapse of dozens of savings and loan associations. There were numerous examples of regional markets right through the 1990s that experienced booms and busts. Today, the subprime crisis and the resulting foreclosure of homes in the US is just another manifestation of such cycles. Sometimes these come and go quickly. At others, a trough cycle might take decades to recover. Additionally, as reported in The Wall Street Journal recently, there is substantive evidence to suggest that residential real estate is not a great long-term investment. Again, let’s use the example of the US, referring to the Case-Shiller index that tracks residential real estate across different US markets. Since 1987, when this index began tracking prices in 10 major markets, the index has risen only 4.1% a year whereas consumer prices rose 3% during this period. This is a real return of just 1.1%, which just about covers the annual amount that we might spend on property taxes, maintenance and repairs. Whether this return is good enough to create long-term wealth for a family is debatable. Still, a home is certainly a good store of value.
India is no different
Analysts often say “India is different and that a property crash will not happen here”. But isn’t that what one heard about the stock market too? We are not suggesting that a countrywide residential real estate crash is imminent. In fact, the following points suggest that India’s housing boom will endure for a while:
• Given the lack of good quality housing stock, low home ownership and the splintering of nuclear families, there is going to be very strong underlying demand for homes.
• Home affordability has gone up manifold from a few decades ago and continues to improve. Be it the impact of rising wages or wage inflation in the private sector, today we have higher salaries than our parents’ generation did.
• Today’s lending institutions are willing to lend on rational terms to willing homeowners. Indian banks are in very good shape as compared to their international counterparts, so there is no reason why the housing loan market will not continue to grow in India.
However, just because the long-term trend and potential of the sector is great does not mean we are immune to mistakes. India will also face a bust at some point. But if you keep the following tips in mind, you can ensure that you get your house purchase decision right.
1. Location: Always choose your location with care. Better located neighbourhoods and properties hold up in value a lot more and experience better long-term appreciation.
2. Reputed builders: It’s often worth paying a premium for a reputed builder who not only develops better quality houses but also has a track record of delivering projects on time and within budget.
3. Buy only when you are ready: Don’t stretch yourself just because everyone around you is buying a house. Buy when you are ready and use assumptions that have a realistic chance of being true.
Dhruv Agarwala and Kartik Varma graduated from Harvard Business School and are co-founders of the New Delhi-based iTrust Financial Advisors.
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