Real estate returns have been negative over the last decade

The song of the season, apna time aayega, was blasting out from her fancy phone.

“Hope is what people buy the most,” I said.

“As in?” she asked.

“I mean how many people actually end up with what they want, and finally arrive in life.”

“But it's the hope that keeps them going?”

“Yes. The idea that apna time aayega.”

“Interesting,” she said. “If I may ask, why are we in such a philosophical mood today.”

“Oh. I just finished having a conversation about real estate with a friend, who continues to sit on a bad investment.”

“Tell me more.”

“The usual story. Got carried away and bought when real estate prices were at their peak and continues to hold on, in the belief that one day he will get the right price for it.”

“Aah. Like apna time aayega.”

“Yeah.”

“What did you tell him?” she asked.

“As usual, I tried explaining things to him using numbers.”

“Like how? Given that when it comes to real estate, there are barely any numbers going around.”

“You see, recently, Liases Foras, a real estate research company, released a report, which had a few numbers. I did my own calculations on top of that to try and explain things to my friend.”

“And what did you tell him?”

“As per the report in 2009, builders in the top eight cities of the country, sold 2,17,253 homes and earned Rs 1,31,495 crore, in the process. This means an average home was sold at Rs 60.5 lakh.”

“Okay.”

“Now the same report tells us that the builders sold 2,78,989 units in 2018, nine years later, and earned Rs 2,05,792 crore. Hence, an average home was sold for Rs 73.8 lakh.”

“So what does this mean?”

“Over a period of 9 years, an absolute return of 21.9% has been earned,” I said.

“Which isn't much?”

“It's pathetic. The return works out to 2.22% per year on an average.”

“Which is peanuts.”

“Yes. Also, we are considering 2009 as the year of buying here. Real estate prices continued going up until 2011 and 2012. Hence, for those who bought a flat after 2009, the return will be lower than even 2.22%, on an average.”

“That makes sense.”

“There are other points. If you take inflation into account, the returns are actually in negative territory.”

“Hmmm.”

“Those who have taken home loans to buy a home have had to pay an interest on the loan, all these years. Once you factor that account, the actual return goes further in negative territory.”

“Yes. But they also get the benefit of using the interest paid on their home loan to lower their taxable income and in the process pay less tax.”

“That's true. That helps to some extent. But over and above that, there are maintenance charges to the society to be paid every month. There is also property tax to be paid every year. Money is also required for the general upkeep of the home. And above all this there is the general risk of owning a property in India.”

“Yes.”

“All this doesn't matter much if someone bought a home and is living in it. The benefits that come with it, cannot be measured in monetary terms,” I said.

“But what about those who bought homes as an investment?” she asked.

“Well, if they gave out the home on rent they could have earned some money as rent. The rental yield would be around 2-3% (annual rent divided by the market price of the home).”

“That wouldn't have helped much.”

“Yes. Once you take all these factors into account, real estate has been a terrible investment over the last decade. Unless…”

“Unless what?” she interrupted.

“Unless you have had black money to park around. For that, real estate continues to remain the best investment.”

The example is hypothetical

(Vivek Kaul is the author of the Easy Money trilogy)