Anish writes: Real Estate - Investment or Consumption

Nithin Kamath of Zerodha tweeted this factoid from The Ken which caused quite a bit of stir on Fintwit.

?

Upfront disclaimer:?I may be suffering from a full blown case of confirmation bias and I may be looking only for information that suits my beliefs, so bear with me.

?

Rent hai paraya, aur EMI hai hamara. That’s how homes are sold in India and world over. Playing on our primal instincts for shelter, this social construct is now an industry so large that the global economy can be bought down with it. 2008 is still fresh in our minds.

?

Germany is perhaps the only developed country where home ownership is not encouraged. Germany’s home ownership rate remains quite low at 43% in 2013 vs 66% for Britain in the same year and much higher in most other EU nations. The only populace that rents more than the Germans is the Swiss populace. And we all know that the Swiss and Germans are quite logical and rational albeit boring maybe.

You can read more here.?Most Germans don’t buy their homes, they rent. Here’s why

?

The only reason one can perhaps buy a home if it is available at a reasonable price (as a thumbrule your house should not exceed 2-3 years of gross annual income at the time of purchase) is to use it as your primary residence because of the intangible effects it has on the quality of life (unless you bought under construction homes in Noida, Gurugram, Goregaon, Panvel etc) and hence it would qualify as a consumption item and not an investment. I am pretty sure, you are not going to sell half a bedroom, if the price appreciates a lot tomorrow, or you don’t need an extra bedroom anymore. And buy it back when it falls down. One of the reasons, people think they made in real estate is because of their smart investing skills, whereas most of the time it is because, one borrowed and had the benefit of leverage, and it is an illiquid investment which cannot be broken up and sold piecemeal. Whereas, one would be happy to dump stocks faster than one can say Nifty 50 or Dow Jones.

?

Another point I would add?is never buy an under construction home as your primary residence. It is always better to pay a bit higher and take a ready property. But it would be stupid to buy second, third and fourth homes, at these rates, if you are a decently savvy and well informed investor. The rental yields on residential homes are around 2% gross and post expenses about 1%. And with very little capital appreciation, why would one buy 2nd?and 3rd?ones beats me. But then like I said, I am biased.

?

So real estate , primary home is your consumption item. It can be a back up in bad times, although one would not be selling it unless things go really south. And after that your 2nd?home onwards are all terrible investments.

?

A primary residence (post loan) would qualify to be put into your safety bucket. More on this in the video next week. Apologies for not putting anything up this week as I was under the weather. Have a good weekend and see you next week.

?

Regards,

Anish