Getting real about real estate

Of all asset purchases, real estate has got to be the most complex. Not just the purchase process but the decision itself. The reasons for buying are often the least rational even though real estate typically forms well more than half of most middle income Indians’ net worth.

We took a look at over 5000 users of our Buy or Rent a house ‘tool’ and filtered these into about 2000 valid users that visited the platform over the last 12 months. The graph below shows people from 7 different cities’ expectations of annual price rise in the future.

Our findings throw up 2 broad interesting finds:

1) Across the 7 cities, anywhere from 60% to over 80% of our users expect property prices to rise at less than 10% per annum. Considering that most home loans come at 10% or more annual interest and further, that a large proportion of homes are financed, what is the financial logic of buying a ready property to live in? Especially when you consider that the same property could possibly be rented for less than 3% per annum of it’s value ? While this has always been a mathematical argument, our data suggests that the recent years have toned down people’s expectations of real estate and that it’s no surprise that the property market has not risen like the stock market has over the last year.

2) There’s a reasonably large difference in people’s expectations of real estate appreciation by city – with people in Gurgaon being far more optimistic, where over 40% of users feel property prices will grow by over 10% per annum than people in a city like Hyderabad where not only do over 80% believe expected appreciation will be less than 10% but a handful of users actually expect it to depreciate. This is perhaps in keeping with their recent experience of property prices in their cities.

While property is a key asset class for most of us (myself included), one does hope that the tempering of our expectations of the future will get us to become more objective in our decision making, going forward.