A sane way to deal with spiraling property prices

I always used to love Asterix and Obelix comics.  They lived in a village in Gaul ( present day France to Switzerland ).. a bunch of colourful caricatures, if there were one.  Life was fine in the village… but they had one persistent and eternal fear – that the sky will fall on their heads!

Ofcourse, it did not fall, in any of the various despatches that I have read.  Such deep seated, but unfounded fear was comical to me when I read. But on deeper reflection, I felt, we all have our fears – we persist with it even if we are proved wrong.

One such is the fear that we will not be able to buy a home anytime in future, if we don’t buy today. This ofcourse is great news for real estate industry, for that would mean people buy, here and now.  The push the thing along by announcing special prices now and subtly indicating that prices are going to go up, in the near future.

The craving for a roof over the head is primal. A home of one’s own is even more important for the ladies.  They feel insecure at the thought of not having one’s own home. The thought of being thrown out of a rented home – the fear – is somehow etched in their mind. Women by nature seek security more than growth.  They are homemakers… they want their nice nest, even if it is small. It is still their nest.

Everything is fine, as long as it is possible to achieve the end of going for one’s home, with the earnings at their disposal. But, lot of times, the home prices have shot up so much that it has moved up, up and away… so much so that, it is no longer within reach.  This is when people start despairing and panicking. I know people who are willing to sell everything and put it in a home. That kind of behavior is counter productive.  Anything done in panic is bound to bring ruin. That will compromise the investments being made for the other goals.

The reason for people panicking is that they base their decision on what has happened in the past 5-6 years. Even in these 5-6 years, there was a period of 2 years when the markets corrected and the sentiment was deeply negative.  The problem now is that people have forgotten those days. They did not have the nerve to put in money in end 2008 or beginning 2009. Those would have been the right time to invest. But most investors, panicked at that time. People did not sell out in real estate primarily because it is not easy to exit out of real estate. Otherwise, a whole lot of them would have even got out at the wrong point.

The fact is that real estate market is also a cyclical market. It cannot keep going up all the time. There will be periods of correction. The 20-25% increase in a year in properties is another thing being talked about. This again cannot happen, year-on-year, in the longterm.  When the economy is increasing between 7-8% and salaries in the organized sector is increasing at a median of about 10%, how can real estate prices increase by 20-25%? This is such a simple thing for one to understand. Yet, many people don’t seem to get the point.

The best way to plan for a home is to start small. It would be an excellent idea to buy a small home to start with and then upgrade that to better & bigger homes over the years. This basic idea is not my own. This is what most people have been doing in the past. But, now people are looking to invest directly in their dream home.  The aspirations have gone up. People want a good living space, with top-of-the-line amenities and a good address, right at the start. But, that costs a load of money.  That is the problem today.

For those who do not want to do trade up over time, it would be a far better idea to rent a home in a place of their choice and accumulate savings and wait till the time the real estate markets turn. This is not as difficult as it sounds. The approximate rental for a Rs.50 Lakh property would be about Rs.15-17,000/-pm. Typically, rentals are about 3-4% of the current property value, for residential property.  The returns are even lesser in smaller towns. Hence home buyers are essentially betting that property prices will go up and give capital appreciation. Hence, owners are actually giving it to you cheap.  Instead of getting pressured into somehow buying a property, it is a saner thing to stay in the property of your choice on rent.  Even if one has to move, one can always move in the vicinity itself. The argument that school will get disrupted is not hence tenable. Address change is a problem and will entail some paperwork. That is unavoidable. But atleast, you will not be overstretching yourself and feel like a rubberband.

The sky is not falling. Property markets have cycles. You could always wait it out and buy later. In fact if more people do this, property prices will not shoot through the roof and speculators will exit the market as it is unattractive.  Think about it.

4 thoughts on “A sane way to deal with spiraling property prices”

  1. With idea of upgrading a home is good and financially manageable, I see one problem here. People when they stay in their own homes they get emotionally attached to it specially if it is your first home. This makes it very difficult to leave that home and go to a new one even if it is a better and bigger home.

    1. Entirely agree with that point. But if they get comfortable and are happy in their existing home, why anyway change? At the same time because of this inertia of people, they cannot go directly for their dream home, right in the beginning too – for that would impose a huge cost on them, which they may not even be able to bear.

  2. There is a need to buy a bigger home as your family grows. So if you have bought a small home initially, you will feel need to have a bigger home say 5 years down the road and hence you start looking for a bigger home today even though there is no problem with your current home today. As you rightly said new dream home which should be better than what you already have, do cost a ton of money.

  3. Hi Suresh,
    I am reading your articles from last 2 years, you are doing an awesome job for novice investors like us.

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