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Photo: Mint

Investing in real estate is hardly a lucrative bet now

The Reserve Bank of India’s House Price Index, which tracks home prices in 10 Indian cities, shows that return from owning housing real estate has plunged dramatically. The average return from owning real estate over the last decade has been 11.6% per year. Mint explores.

The Reserve Bank of India’s House Price Index, which tracks home prices in 10 Indian cities, shows that return from owning housing real estate has plunged dramatically. The average return from owning real estate over the last decade has been 11.6% per year. Mint explores.

What are the decadal returns in real estate?

We have data pertaining to a full decade for the House Price Index for the first time, from June 2010 to June 2020. The average per year return during this period stands at 11.6% per year. It is important to note that this is the average all India return and the return varies across cities.

The best performing city among the 10 cities covered under the data is Lucknow with a return of 16.1% per year. Kolkata comes in next at 13.3% per year. Homes in Mumbai and Delhi delivered returns of 11.2% and 12.2%, respectively. Jaipur was at the bottom with a return of 6.1% per year.

How have the returns been since 2015?

A bulk of the returns from owning homes over the last decade was earned between June 2010 and June 2015. Subsequently, the returns between June 2015 and June 2020 have been subdued at 5.5% per year. Delhi has been the worst performing city during this period with a return of 1.5% per year. Kolkata was the second worst performing city with a return of 3.2% per year. This is a clear indication that the returns from investing in real estate in these cities were front-loaded during the last decade. However, the Index only captures the formal aspect of returns on housing real estate.

Skewed trend
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Skewed trend

How is the overall trend over the last 10 years?

In June 2011, the one-year returns stood at 23.1%. They peaked at 26.3% in December 2011 and have steadily dropped since then. In June 2020, the one-year return was 2.8%, the lowest ever according to the index. Indubitably, the disruption of activity following the pandemic-induced lockdown and slowdown in country’s growth are responsible for this.

What are the costs of owning real estate?

Owning real estate always comes with its share of costs. This starts with the buyer having to pay a stamp duty to state government while purchasing the real estate. There is also the maintenance charge that needs to be paid to the society. There is also the regular cost of maintaining a home and the annual property tax. Of course, homes can and often are rented out but the rental yield is not high and lies somewhere between 1.5% and 2%. It should be considered that loans taken for purchasing home also provide some tax relief.

What are real returns of owning real estate?

On top all the costs that have to be borne by the person investing in real estate, there is inflation. Once you take into account the costs of owning real estate, even with a few benefits, the overall return in most cases hasn’t been great over the last decade. This is without taking into account that many builders are either not delivering homes on time or are simply disappearing. Of course, all of this varies from person to person, from city to city, and also from locality to locality.

Vivek Kaul is the author of Bad Money.

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