Should you invest in real estate now?

After peaking in 2013, property prices have been on the decline over the last three years. So, for aspiring home buyers and real estate investors,the million dollar question is: will the prices move northwards or will they keep moving southwards?

Mar 11, 2017 06:03 IST India Infoline News Service

After peaking in 2013, property prices have been on the decline over the last three years. So, for aspiring home buyers and real estate investors,the million dollar question is: will the prices move northwards or will they keep moving southwards? Let’s try to find the answer to the question.

Typically, the real estate market moves in prolonged cycles, that is, the boom and the bust periods last for 5-10 years. So, the boom in real estate that started in 1988 peaked out in 1994, with prices in some areas going up 10 times the level of 1988. Thereafter, the property prices went downhill and by 2002 the prices were less than 50% of their peak levels.

After reaching the trough in 2002, property prices started rising again and continued their uptrend till 2013, by which time prices had gone up 8-10 times over the levels of 2002.

Thereafter, real estate prices went into correction mode and are still correcting. It is difficult to foresee when the correction phase will end and the level to which the prices will correct, since different markets have different price levels due to different demand-supply dynamics.But one can certainly say that the bear phase in the real estate market is likely to continue for some more time, maybe couple of years more.

The residential segment of the real estate market is influenced by interest rates on home loans. The interest rates have declined over the years and are likely to decline further. This will make home loans cheaper thereby creating demand for residential properties. However, since the property prices are still considered to be high by aspirant home buyers, they may prefer to wait for further downward movement in prices as the high cost of property may offset the advantage of lower interest cost on home loans. Also, if the rent to be paid for a rented residential property is much less than the home loan instalment, there is no reason for the end-user to buy the property.

On the other hand, if an investor wishes to invest in a residential or commercial property and rent it out, the rental yield on his investment has to be high enough to incentivize the investor to put in his money. But currently, the rental yields in most of the tier-1 and tier-2 cities range between 2-4 per cent, which is quite low and acts as a disincentive for real estate investors.

Considering the above, there is not much likelihood of the real estate market reviving in the near future and it is advisable for the end-users as well as investors to adopt a wait-and-watch approach for now.

Related Story