Real estate — need, aspiration or megalomania?

People may be buying more than they can afford ( Photo: Danish Siddiqui \ Reuters)

First things first, there is no shortage of land supply in India. Ajay Shah of the National Institute of Public Finance & Policy, in a now famous argument, made it clear that at an FSI (Floor Space Index) of 1, India’s entire population may be housed and placed in office/factory spaces and that would still use up only 1 percent of the total land area of the country. Imagine if we moved to FSI of 2, that area would double.

If you are feeling uncomfortable already, and thinking of reasons as to why the property you just bought should keep on appreciating, I don’t want to burst the bubble. Posts like these turn out to be very unpopular anyway. Enough experts have written about why real estate is not a great investment anymore. But this post isn’t about that. After all, I know that markets get created only when there is a seller for every buyer. It is a fact that for every transaction in the market (real estate or any other asset class), we need fools as much as we need intelligent people – only one kind will not do. Hence, let that argument rest for now.

Here, I want to deal with the psychology behind buying more real estate than you can possibly need or use in this lifetime. You may give examples of people who have held land or property across generations. Well, there are people who have bought blue chip shares at face value and the dividends today can fund an entire generation’s lifetime so this is not the right line of argument as well. I agree that a lifestyle home in a prominent area is a great feel good factor, the ultimate form of satisfaction for some. But my feeling is, increasingly, people are buying more than they can afford.

Three recent incidents got me thinking:

Someone I know, who has three homes and has bought the fourth in a marquee lifestyle property, wants to sell it off immediately. He has been gloating on this purchase since he got a rate significantly lower than the going rate now – the building just got its occupancy certificate. The monthly maintenance charges are impossible to bear he says and the maximum rent he can charge will fetch him a yield of 2.5 percent. Suddenly he is not so proud of his decision. So ‘sell it’, I said. “Two problems” – one, the short term capital gains consideration; he needs to wait. The other, the unanticipated one, the builder still has 50 percent of the flats unsold and has started offering some crazy discounts. So technically, he can’t get a buyer. At least, right now.

A very rich man I know, just sold three properties. Two belonging to his father and one belonging to his wife – for large amounts of money since the addresses are aspirational. He invested the sum in the capital markets. According to him, he could not believe he could sell at those valuations. The current investments, if they work out as planned, will give him reasonable, predictable, liquid returns which he can use, now that he is retired and wants to travel across continents.

Some very rich people I knew, are not so rich anymore because they have liquidated their capital market portfolios and taken huge bank loans to buy properties that are worth more than their entire net worth. So they now no longer have portfolios. They have a house. And a job – to pay for the maintenance and other bills.

I rest my case. If you are buying real estate, stop to think once - do you need it, is it aspirational or are you just suffering from a need for excesses – of status, power and more.