Is real estate a good investment plan?
A slow and steady growth was recorded by the Indian real estate market in 2015. Its nearing the end of 2016, and yet the issues plaguing the sector is still at large. Things like rising unsold inventories, stagnated demands and trust issues between the builders and the home buyers along with huge gap between the price and buying strength of the millennials are some of the major issues.
Indian real estate market set to crash or see a long period of stagnation
Last year, only 4% of the homes were actually bought in major cities like Delhi/NCR, Bangalore, Hyderabad, Mumbai, Pune, Kolkata, Chennai and Ahmedabad. Majority of these cities recorded a huge quantity of units unsold, a backlog that can take up-to 2 to 3 years to clear, which is only when no new construction would take place.
Furthermore, rental yield in these residential properties, which is the rental income as a percentage of market price, is extremely low in India. This clearly shows it be to a senseless form of investment. Additionally, the returns would also have to take into account the future appreciation, which means that buyers and sellers of properties are planning based only on the price rise. The concern lies in the fact that what happens if the price rise does not happen?
To cite an instance, let’s consider a house for rent in Hyderabad. The owner yields a profit of 2-2.5% on the flat from his/her rental yields. What this simply means is that if the owner bought the home as a place to stay, it’s okay, but if invested for rent, the owner is better off keeping his/her money in the bank.
Market research actually revealed that Indian real estate market rental yields are the lowest when compared to other countries. Why is this? Simply because inspite of low demand, the price quoted is often high and the yield’s low. The property market is rigged and if it were to function effectively as the stock market and give higher returns, the real estate market should basically crash.
Concerns that plague the buyers and sellers
One of the major issues that plagues the real estate market is the exponential growth of urbanization. Bangalore, for instance sees a regular influx of immigrants, which has created a demand for housing in urban areas. At the same time, the lack of planning and infrastructure has infact posed as a major challenge. Moreover, interested buyers and developers are concerned about the lack of clarity of government regulations on real estate development. Developers need regulations to be free of ambiguity and with some accountability of the ruling government.
Another major concern that plagues the middle class men is the unaffordability of the properties located in the urban areas thereby giving preference to the suburbs instead. This means that the crash is inevitable.
Currently, the property prices are unsustainable, which implies that we cannot predict for sure that this time would be when the market crashed. There are a number of factors that can accelerate the crash, like the prolonged stagnation, increased income and property prices. The best thing is that the crash should happen at a slow motion, wherein the property price and the income is properly aligned. This means that property is the last thing that you should invest in currently.