Don’t get me wrong. I have no problem with the desire to own the house one lives in. That decision is like insurance, provided the housing loan has been paid off. Even if a limb is lost, a job is gone, or bad times strike, the comfort of a roof over one’s head, the stability of a known location and the relief of not having to pay rent, are all precious. One house that one actually lives in is fine. That many find it unaffordable to find a home of their preference is another discussion.
My problem is with the attitude of treating real estate as an investment. An attitude that afflicts people across the income bracket. The middle class craves a second home; the upper middle class wants one house per child; the rich think chunky large investments is a status symbol; the ultra rich waste their wealth on farmhouses and multi city ownerships; and the billionaires behave as if nothing else but property is fit for their wealth. I have twisted my tiny brain earnestly for what I might be missing in this universal madness, but have returned blank each time.
A relative bought a one bedroom flat a couple of years before retirement on the outskirts of his city. Not a single explanation he offered made sense. The house was too tiny for him or his children to live in and the EMI was a burden on the single income after retirement. After living in fond hope that the property will appreciate in value, and after earning no rental income, he finally sold it after a prolonged wait. I expected a tinge of regret when he announced the sale. We can now pay off the outstanding loan, he triumphantly announced. I wish they worked out the math instead.
Another friend informed me about a very comfortable liquidity position. He also helpfully added that his equity investments are doing very well. This absolutely sensible long term equity investor chose to buy a luxurious flat funded by a housing company that went belly up. After several years of litigation and struggle, the buyers have finally found an exit. At a considerable loss. But he is relieved that at least some money has been recovered from that “investment.” How is an equity investor not able to see the perils of concentration? Or the risks of not being able to divide or liquidate? Or the obvious unscrupulousness of the real estate market? How can a careful buyer of equity shares simply sink a large sum in one property? Search me.
What is even more alarming is that people make the same mistakes again and again, with the fond hope that doing the same thing might after all deliver a different outcome. They don’t see that as an illogical proposition. They hold on to one chance victory, and overlook a series of failures. A friend bought a flat at a fortunately low interest rate in the early 2000s. They felt like winners and quickly made another investment in a much touted large ultra modern township that never materialised. They struggled to sell for years and when they finally did, they bought another flat in the city. Upcoming area, they asserted to me. That never got completed. They sold with even greater difficulty two years ago, and yes, you guessed it, they just reinvested in another property.
There are innumerable reasons why people love property. Most are irrational. But then we already know that humans aren’t rational beings. Economics as a subject area, is coming to terms with that stupendous challenge to its core assumptions. I love lists, but this one I so hate to make. First, people love absolute numbers. They don’t know math and they don’t care. I bought this for `20 lakh and it is now worth `2 crore is all they will tell you. That the return is a poor single digit number, over the long years that happened is lost on them. No one understands inflation, and I don’t intend wasting my breath on that for the nth time.
Second, people find an excuse to buy a property. Twenty five-year olds buy for settling down when they don’t know where their job will take them. Thirty five-year olds buy for retirement, assuming they will move into a 20-year old property when they retire as CXOs. Forty five-year olds buy for children that won’t even come back to pay the society’s dues. Fifty five-year olds buy to engage in farming, bird watching, natural living and fresh air, even if they don’t get out of their AC offices, cars and homes for 20 minutes per day. You get the drift.
Third, people buy with fond hope and romantic dreams. Our children will get married here; our parents will live happily here; we will retire in this place; we will sell this off if we need the money; this will only appreciate and we will be able to raise a loan against it if needed; and so on. A house enables these dreams like no other investment can, because people imagine and visualise these events and feel mighty pleased about it. They almost never sell as they don’t want the dream to end.
Fourth, people love the physical possession that property entails. Makes for lofty social conversation. Without trying your mind to describe the global economy, project interest rates, or duck questions on valuation. One can simply hold forth on the much massaged argument that real estate will only go up. No evidence exists except for the poor math already alluded to at point one. I stop the list as I am suffocating. Why should people not buy property?
The answers are present in the many words already written above. Property is one chunky indivisible investment in an unscrupulous market with untold difficulties in selling it off to make gains that are nominally high, but just normal or lower if adjusted for inflation. When the younger generation says that it doesn’t care much for ownership, I begin to see a ray of hope. But the broad shoulders of the well intentioned parent casts a long shadow on that light: Don’t pay rent; pay EMI; you will own an asset. That is what the devil is saying. Aargh.
(The author is Chairperson, Centre for Investment Education and Learning)
