Bangalore Real Estate: Yet Another Price/Rent ratio of 5
This time it’s a 3BHK apartment in HSR Layout (South Bangalore); data courtesy of Bangalore Craigslist:
2000 sq ft * 4000 per sq ft = Rs 80 lakhs + registration. Per HDFC’s home loan calculator, a loan of Rs. 85 lakhs over a 20 year period at a fixed interest rate of 13.5% works out to a monthly installment (EMI) of over Rs 100,000.
Here’s an ad for a 3BHK apartment rental in the same complex - the expected monthly rent is 18500. Mind you, this is a broker ad, so I would expect at least a 10% discount. But instead, let us raise the rent to 20k per month.
Still, the Price/Rent ratio for this place is 5; the annual rental yield is just 2.8% (2.4 lakhs / 85 lakhs)! I can’t think of why this would be an attractive proposition for any buyer.
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August 19th, 2007 at 1:26 am
Kaushik,
I’ve followed your posts on Bangalore to an extent. However most of them seem to point to the apartments in Bangalore. It is not clear to me if the land prices are falling as well. I would doubt it. The real indicator of a real estate is the prices of land. If that is still hot, I would then consider that there is excess supply of flats. It’s probably a good correction. The prices are over inflated (if there’s a term like that) - so a little drop would not hurt, I guess!
Nagesh
August 19th, 2007 at 7:33 am
I think you are right - land prices are unlikely to drop. What I like to track is the trend in apartment prices, given that most people can only afford apartments now, and given the huge amount of construction that has gone on.
The other reason for these posts is to point out that buying real estate is not ALWAYS a good idea. With rental yields of less than 3%, and limited upside potential for appreciation, one should think twice before buying at these levels.
August 20th, 2007 at 7:55 pm
Kaushik,
Despite comprehensive ratios or analysis against buying REAL ESTATE, people in India alteast will still continue to buy it. The reasons are many: Its like an asset ( never mind the time it will take for them to recoup it) and can be always gifted to your son/daughter whenever they grow up ( in the case of buying a second apartment). In the case of purchase of a first apartment, any day its a recognition of the fact that you have arrived in our society. And the psychological boost you receive when you can tell anyone/everyone that you are not paying RENT and instead living in your own apartment. Also, land purchase can be a pretty risky factor considering the way our real estate sector is regulated in India. And finally, say someone does buy into the notion that its nonsense to buy one at these levels, the next question will be: where do I invest my money? He is simply not interested in doing painstaking research in stockmarkets every month to find out the best stock and put money in it. Rather than that, its easier to put the money into a EMI!
And anyday, a person will prefer to pump huge amounts of money into a concrete building, rather than stockmarkets ( where money can disappear overnight) as it gives you a comfortable feeling that your money is safe and is locked up in an apartment.
Due to all these and perhaps even more reasons, people will continue to buy REAL estate.
August 21st, 2007 at 8:30 am
Chandra,
I completely agree. The emotional & intangible effects of ‘owning your own place’ seem to dominate over investment merit.
I figure that since everyone (builders, real estate brokers and loan providers) encourage people to buy - no matter the price levels - there should be someone taking the opposite side.
August 21st, 2007 at 11:48 am
Kaushik:
Someone is taking the “opposite side” to the retail investor in every real estate transaction - the builder!
I remember one of these builders trying to hurry me into buying a plot because “the rates are going up by at least 10% by the end of this month”.
I told him that I thought he was being a bad businessman for selling something now that would be worth 10% more in just a few weeks.
The look on his face was priceless (and one year later, I still see ads for the same plot).
How do you say “toppy” in Hindi ?