21 May, 2011

It is difficult to time the real estate market

It’s everyone’s dream to own a home. Big or small, a roof over one’s head has such an appeal with people, even Rajnikant can only dream of!

But owning a house has become a distant dream for many due to spiraling prices. People have been waiting in the sidelines, expecting some correction to happen. In 2008, there was a correction. As in any downturn, there were swirling rumors of prices dipping further. The upshot – most people sat on the fence, in a wait and watch mode.

In some markets – notably Mumbai and Delhi, the property prices have risen in many places and crossed the highs hit in 2007. In many other cities, prices have not risen as much as in Mumbai or Delhi. Those who missed the bus of buying in the bust, are now returning after a long wait.

Should you buy now ?

It depends on whether the property is for own use or an investment. It makes sense to scout around for reasonable prices if the property is for own use. Homes bought for residential purposes are long term investments. It will not matter too much if the property price goes up or comes down, in the near future. In the long term property valuations are expected to only rise. Even then, value can be unlocked only if it is sold. So, if a property is found which is a good value proposition and also is convenient in all other respects, one should go for it.for investments, should you still buy?

From an investment point of view, there are many options. Residential apartments, commercial property, land, serviced apartments are some common options. Apart from this, there are also Real Estate PMS that invest in properties across the country.
In property, the prices can vary widely even in the same vicinity, from project to project. Before buying a property, one should check on the reputation of the builder in terms of delivering on promises as far as amenities, construction quality, timeliness in delivery and reputation for clean & fair dealings. Property values go up depending on the developments in the vicinity too. Property supply in the area and amenities like parks, schools, malls etc also impact the prices. All these need to be factored while taking a decision. Many times, it may be difficult to take a call on this.

For those who want to play it safe, it may be a good idea to consider a Real Estate Fund. These funds typically invest in land, residential, commercial and other developments across the country. There will be professional management and risk diversification in view of the different kinds of assets they invest in and geographical diversification.

In case of someone buying a property directly, tax savings through investments in capital gains bonds or investment in another residential property are possible. This will not be possible in a real estate fund and the income from this will be applied to tax.

Will the interest rates go up ?

That is a million dollar question! The interest rate tightening cycle has more or less run it’s course and there may be very little left. That means, the interest rates may still go up but by a small increment.

What this means is that even floating rate loans can be a good idea now, especially since floating rate loans are offered at a lower level as compared to fixed interest loans.

Is it a good idea to prepay housing loans ?

Housing loan interest rates are some of the lowest loan rates available. Currently it is in the region of about 9.5 per cent – 10 per cent. Along with the income tax exemptions available, the effective rates will be less than 9 per cent. In view of this, it may be a better idea to retain the home loan and invest surpluses in instruments which offer over 9 per cent returns. The exception to this rule is for those who may spend the money. For such people, it may be a better idea to prepay. However, while prepaying one should take note of any penalties that may be applicable for prepayment. The other exception is if the amount of EMI being paid constitutes over 50 per cent of the monthly income. In such a case, it makes sense to prepay and bring down the EMI outgo to within 40 per cent of the monthly income.
Property has a huge lure among the public. For one it is tangible and everyone understands it. Over time, property definitely appreciates and can be a great security to the family. The important thing is to be prudent when evaluating and buying property. Timing is difficult here, as in equity markets. Take a longterm view. Once you do all this, you cannot go wrong!

Author - Suresh Sadagopan ; Article appeared in Indian Express on 16/4/2011

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