Bangalore Real Estate: Buy vs. Rent for Purva Sunshine
Another example of the out-of-whack real estate prices in the Sarjapur / Outer Ring Road area:
First, the ‘for-rent‘ ad - given that it’s a broker ad, I’m assuming that there’s atleast a 10% discount to be had off the expected rent of 15k per month.
The ‘for-sale‘ ad lists an expected rate of Rs 3600 per square foot (you’ve got to be kidding me), for a total of Rs 54 lakhs.
Add in another 12% for overhead (registration, stamp duty, and what not) and let’s round it to Rs 60 lakhs. Using HDFC’s home loan calculator, the monthly installment (EMI) with 100% financing works out to ~ Rs 66,000 per month - based on a 20-year loan period and a (optimistic) fixed interest rate of 12%.
The monthly EMI/Rent ratio is almost 5, the annualized Price/Rent ratio is over 37 and the corresponding annual rental yield is a paltry 2.7%. A reasonable EMI/Rent ratio of 2.5 or Price/Rent ratio of 20 or rental yield of 5% would require the asking rate to come down over 40% to Rs 2000 per square foot. Food for thought.
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November 15th, 2007 at 1:16 pm
Have been a recent visitor to your site. Agree with your line of thinking on irrational real estate prices. However, have you considered the capital gains angle in the buy vs. rent argument. People are expecting their investments to double when they pay 54 lakhs for these apartments. In any case, real estate prices have remained out-of-whack for a long time now (since 2003 i believe). As Keynes said, markets can remain irrational longer than a lot of people can remain solvent!
November 15th, 2007 at 7:31 pm
Raag: Not sure what you mean by the capital gains angle? I agree that everyone’s betting on price appreciation - if they weren’t, it would be a dumb investment. The question is: are prices going to double? I highly doubt it. Those who bought this year in these areas will be lucky to avoid double-digit losses.
November 16th, 2007 at 6:55 pm
raag - we’re not talking about a stock doubling from $350 to $700 - we are talking about a 3 bedroom 1 crore apartment.
Can you describe the financial profile of people who would be able to buy these houses ? And, is there any evidence to suggest that this profile of people have not already bought a house ?
Unless you’re going to make the case that thousands of people who are currently middle-class are suddenly going to be able to afford 1 crore houses, I dont see who’s left to buy.
Prices go up until they can’t.