Personal Finance

Should I lock in on property now?

Meera Siva | Updated on April 14, 2020 Published on April 14, 2020

Falling financial asset prices and comfort of home are creating interest in home buying. But analyse and decide carefully

Kumar was agitated on seeing the PDF, which showed how his investments had fared in March 2020. He called his friend Pai, who was also in the same worried state of mind. He wondered if he must sell his risky assets and invest more in property. They decided to do a group call to discuss the pros and cons of home buying, given the current crisis.

Why buy

“There are many reasons why I feel it is a good idea to consider buying a property now,” said Pai. “One, it is a real asset of use ― you can live in it or rent it out to earn regular income. It will not evaporate like the financial ones which, I worry, are very risky now. And people know how nice it is to own a home, after the lockdown.

“Two, more money is expected to come into the system as the government jump starts the economy. This will likely lead to increase in property prices, as was seen in other countries in earlier crises, such as in 2008. For example, in the US, median home prices fell 20-30 per cent in 2008 but increased by 50 per cent over the decade since 2009.

“Three, property value has not been appreciating in the last many years and prices are reasonable. There are also lots of choices. For instance, as of December 2019, there is an estimated unsold inventory of 7.75 lakh units in the country’s nine prime residential markets, as per online real estate portal PropTiger. This would take an estimated 29 months to sell. And with expectations of more distress sales in the near term, there may be more opportunities to scoop-up good properties at a bargain.

“Four, to add to the lower prices, interest rates, which were on a downtrend, were lowered again recently. There are expectations that it would remain at these levels or dip further. So, taking a loan becomes more affordable and buying a home becomes within reach,” he said.

The group erupted into a cacophony of objections.

Why avoid

Sahoo summarised the counter points after everyone voiced their thoughts.

“For one, the key concern that we need to address during any crisis is that of liquidity. Currently, we hear of serious cashflow crunch, with even pensions seeing cuts. So, managing cash would be a priority for everyone; and given this, investing in an illiquid asset such as real estate, seems detrimental. While financial assets may fall in value, at least you can liquidate quickly – not so with property. So, being asset-rich and cashflow-poor may be a bad situation to be in.

“To add to this, there will be a lot of concern over jobs and income growth in the short to medium term. So, taking on a loan and locking into long-term commitments or launching into big-ticket purchases is not a wise decision, given the uncertainties.

“And second, while home prices have not increased in the last few years, data show that housing affordability is still low. For instance, residential asset price monitoring survey data published in July 2019 by the RBI showed that the house-price-to-income ratio worsened between March 2015 and March 2019. And all data on whether it is better to rent a house or own, points to renting as a clear winner in many cities.

“For those buying to earn rent ― as a hedge against inflation ― the low rental yield in the residential market does not make it an attractive idea. While yields are better in retail and office segments, how well these will hold up remains to be seen,” she said.

The younger members in the group added that there is also a shift from ownership to acceptance of rental. So, demand may also see a change going forward, reducing price growth potential.

Prudent move

Hassan, a financial advisor, addressed the questions on asset allocation strategy.

“It is important to take a fresh look at one’s overall investment portfolio and rethink how to distribute it. While it may seem tempting to sell assets that are falling, it is critical to weigh the potential over the investment horizon. If you need cash, consider exiting short-term speculative bets and hold quality ones bought for the long haul.

“Do not be comforted by the fact that there has been no correction in home prices so far ― this may change now and there will likely be a steep and quick drop. So, it is prudent to wait one-two quarters before locking down your money in a property. And in a low interest rate environment, property-related investments such as REITs may also be worth considering,” she said.

Real asset

Unlike financial ones, home is a real asset that provides tangible comfort and utility to the owner

Caution needed

Existing oversupply

No demand-pull

Not easy to sell

(The author is an independent financial consultant)

Published on April 14, 2020

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