Do not get me wrong. I have no problem with wanting to own the house I live in. That decision is like insurance, provided the housing loan is paid off. Even when a limb is lost, a job is lost, or bad times come, the comfort of a roof over one’s head, the stability of a known location, and the relief of not paying rent, are all precious. A house in which one actually lives is fine. Many people find it difficult to find a home of their choice, that is another discussion.
My problem is with the attitude of treating real estate as a Investment, An attitude that affects people across income groups. The middle class wants a second home; The upper middle class wants one house per child; The rich think chunky big investments are a status symbol; The super-rich waste their money on farmhouses and multi-city ownerships; And billionaires behave like nothing else Property fit for their money. I have twirled my little mind for what I was missing in this universal madness, but returned empty every time.
A relative had bought a one bedroom flat a few years before his retirement on the outskirts of his city. Not a single explanation he offered made sense. The house was too small for him or his children to live in and the EMI was a burden on the single income post retirement. After living in the hope that the property would increase in value, and without earning any rental income, he finally sold it after a long wait. I expected a shadow of regret when they announced the sale. Now we can pay off the outstanding loan, he declared triumphantly. I wish they worked on math instead.
Another friend told me about a very comfortable liquidity position. He also helpfully added that his share Investments are doing very well. This completely sane long-term equity investor chose to buy a luxurious flat funded by a housing company that went belly up. After many years of litigation and struggle, buyers have finally found an exit. In case of substantial damage. But they are relieved that that “investment” has at least gotten some money. How is an equity investor unable to see the dangers of concentration? Or the risks of not being able to split or liquidate? Or the apparent dishonesty of the real estate market? How can a careful buyer of equity shares sink a large sum of money in just one property? search me.
What is even more worrying is that people make the same mistakes over and over again, with the hope that doing the same thing may eventually lead to a different result. They do not see this as an illogical proposition. They cling to a chance win, and ignore a series of setbacks. In the early 2000s, a friend fortunately bought a flat at a low interest rate. They felt like winners and quickly made another investment in a much hyped large ultra modern township that never materialised. They struggled to sell for years and when they finally did, they bought another flat in town. Upcoming area, he told me. which was never completed. They sold two years ago with even greater difficulty, 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 are not rational beings. Economics, as a subject area, is coming with that glaring challenge to its core concepts. I love lists, but I hate creating them. First, people prefer absolute numbers. They don’t know maths and they don’t care. I bought it for Rs 20 lakh and now it is worth Rs 2 crore, they will tell you. That the return is a bad single digit number has been lost on those that have happened over long years. Nobody understands inflation, and I don’t intend to waste my breath on it for the ninth time.
Second, people look for excuses to buy property. Twenty-five-year-olds buy a home to settle down when they don’t know where their job will take them. Thirty-five-year-olds buy into retirement, assuming they’ll move into the 20-year-old’s assets when they retire as CXOs. Forty-five year olds buy for children who will not return to pay the dues of the society. Fifty-five year olds shop to engage in farming, bird watching, natural life and fresh air, even if they don’t step out of their AC offices, cars and homes for 20 minutes a day. You get the flow.
Third, people buy with fond hopes and romantic dreams. Our children will get married here; Our parents will live here happily; We will retire at this place; If we need money we will sell it; It will only appreciate and if required we will be able to raise loan against it; And so on. A home enables these dreams like no other investment can, because people visualize and imagine these events and feel very happy about it. They almost never sell because they don’t want the dream to end.
Fourth, people prefer the material possessions that the property consists of. Makes for high social interactions. Duck questions on the project, or valuation, of interest rates, without trying your mind to describe the global economy. One can only dwell on the well-known argument that real estate will only go up. No proof exists except for the bad math already stated at one point. I stop the list because I am suffocating. Why should people not buy property?
The answers are already present in many of the words I wrote above. An asset is a chunky indivisible investment in a dishonest market with untold difficulties in selling it with a profit that is nominally high, but normal or low when adjusted for inflation. When the younger generation says they don’t care much about ownership, I see a glimmer of hope. But the broad shoulders of well-intentioned parents cast a long shadow on that light: don’t rent; Pay EMI; You will be the owner of a property. That’s what the devil is saying. Argh.
(The author is chairperson of the Center for Investment Education and Learning)