Steer clear of investing in property
Home loan rates are down, property prices are stagnating and the new Real Estate (Regulation and Development) Act (RERA) promises to safeguard the buyer against delays and frauds. If you go by what real estate developers, housing finance companies and property agents say, this is the best time to invest in property.
Or is it? A recent research report by consultancy firm Knight Frank shows that home prices in eight major cities rose very tardily in the past three years.In some markets, including the National Capital Region (NCR) and Kolkata, property prices have actually come down since 2014.
Of course, this is not true for the entire real estate market. While prices have come down in some markets, some cities have witnessed a consistent rise.Within cities too, some pockets have done poorly, while others have flourished. This is why we assumed four different growth rates to see what investors can gain from real estate. We assumed that the buyer would put a downpayment of Rs 10 lakh and take a home loan of Rs 50 lakh (at 8.5%) to buy a property. Another Rs 6 lakh would be spent on legal costs and registration, taking the total cost of property to Rs 66 lakh.
We then looked at the situation after three years. If the property prices rose by 3%, the investor would be in Rs 7.86 lakh in the red. Even though he earns rent (Rs 10,000 a month increasing by Rs 1,000 every year) and claims tax deduction (Rs 2 lakh) on the home loan, he pays 8.5% on the loan while the asset grows at 3%. What would the investor have earned had he chosen to buy gold? Instead of the downpayment and legal costs incurred on buying the property, had he put Rs 16 lakh in gold and bought Rs 43,391 worth of the metal every month (the home loan EMI), his investment would be worth Rs 33.8 lakh in three years, assuming gold prices rose 3% every year.
Our calculation assumes an optimistic scenario where the buyer gets immediate possession of the property and starts earning rent and saving tax from day one. The reality on the ground is anything but that. It is not uncommon to hear of apartment projects getting delayed by 3-4 years. Under RERA, builders will have to compensate for delays in handing over possession. This would reduce, but not completely eliminate, this problem. For investors, a 9-12 month delay in getting possession will mean lower returns.
If property prices rise 6%, the investment would nearly break even in three years. But it would still be far less than Rs 36.2 lakh accumulated by investing Rs 16 lakh lump sum and a monthly investment of Rs 43,391 in a fixed income option that earns 6%. Similarly, if property prices rose 9-12%, the investor would make money but still have less than what he could have earned from hybrid funds or equity schemes.