Everyone needs a home. In ancient times, people built houses to live and last a lifetime. Then modernity happened and the house turned from primarily a place to live to an investment vehicle and a speculative instrument, turning home-buying turned into a high-stakes gamble. In big cities, space crunch dictated that homes be concrete boxes in high-rises. Their hassle-free ownership, unlimited numbers, seemingly relatively low maintenance and deception of easy liquidity made apartments the go-to investment fad at the turn of the millennium. This fad turned into a craze peaking around 2012 as people bought up apartments with the sole ultimate objective to “sell later at a profit”. This mania was so severe that people even took out 12% loans for that third concrete box in the sky, dreaming of triple returns in the near future because “real estate prices will always go up!” A large majority of apartments lying vacant across Indian cities today are those “investments”. When asked about their contingency plan, it was always: “Yes, I can always easily sell it off! You should also buy one, because if you don’t need it, you can also do the same, namely sell it, and that too at a profit! Well, it looks like it isn’t that simple anymore. People who “invested” in apartments in the hope that prices would double every five years, are stuck, and stuck badly. Apparently these days no one wants to buy those second-hand apartments and as a result, prices are stagnant and are not appreciating. This is going to change everything we knew about urban real estate investing in India.
Who will buy your old apartment at the same price as a new one?
Today, An apartment is no longer a viable investment option in Bangalore or any other Indian city because they don’t increase in value and are not easily saleable. Reason: there are simply too many of them! As supply outstrips demand, today flats are actually losing value, or depreciating, like a car. When consumers are spoilt for choice you can’t expect them to buy an old, second-hand item at the same price as a new one no matter how premium it might be.
Prestige Acropolis. A long time ago, after a late night at a Koramangala pub, I would stand on unsteady legs and stare at the at the pristine white walls and soaring Greek columns behind wrought iron gates and wonder how it was like to pay a crore to live there. Today, a 3BHK unit in this 20-year old abode of Asthma costs around a paltry Rs. 2.75 crores. Four kilometres due south-east, still in Koramangala, Prestige group is completing their Pine Wood project (you won’t find any pines or woods there) where a brand new 3BHK also sells for about the same Rs. 2.75 crores. And therein lies the crux of the matter. Despite the bling and location and everything, the Acropolis is still a concrete structure with everything in it – the materials used in its construction, its floor plans, decor, amenities, features, everything – now more than two decades old. The Pine Woods is new, fresh and contemporary. Now, if it were you, where would you put your 3 crores?
Of course, the Acropolis will find buyers any given Tuesday thanks to the location and the brand name. Companies looking for guesthouses, high-flying corporate executives or super-duper businessmen or glamorous actors who need to keep up appearances will find value in it, the hovering cloud of vehicle exhaust notwithstanding. But your vague, unbranded, decade-old middle class apartment in Kaggadasapura built by some nameless developer long since gone with the wind, won’t. Would you pay new money for a ten year old flat? If you were to buy a new flat today expecting a someone ten years in the future to pay you then-prevailing market prices, you should be ready to do the same for a decade-old flat today, pay the same money as a new flat today. Would you buy a car for 15 lakhs today that does not have a touchscreen central console? You would’ve 10 years ago. This simple logic notwithstanding, the crazy valuations of real estate properties in Indian cities were always unsustainable, because nothing keeps growing forever.
Apartments No Longer Deliver Return on Investment
During the manic years, people were confident that apartment-based real estate investments in big Indian cities would hand them around 10-15% returns. But today, with stagnant or declining prices, investors will probably never even recoup their money. After taking into account inflation, interest paid (and lost) on EMIs and down payments, the actual worth of most apartments today are less than what they actually were bought for. To beat inflation and make profits on your investments you will have sell them at prices exceeding their current worth in their past values or Present Value (NPV). Looking at a real-life example, let us consider someone sold a solid, 7-year old middle class apartment somewhere in the dustbowls of Bellandur in Bangalore for a million more than what they bought it for. They think they landed a profit. Or did they?
Price of the apartment in 2012: Rs.60,00,000
EMI on Rs.40,00,000 at 9% for 20 years: Rs.35,989
Cost incurred in seven years: Rs.30,23,076 EMI+Rs.20 lakh (down payment)=Rs.50 lakhs
Actual sale price in 2019: Rs.70,00,0000
Apparent profit: Rs.10,00,000
But, Present Value (actual worth) of the apartment today calculated at 5% inflation on the buying price: Rs.85,00,000.
After considering inflation, you will see that the property was actually sold at a loss of Rs.15 lakhs, because the actual worth of the flat is Rs.85 lakhs today. In other words, the 70 lakhs they got for it is actually worth only 55 lakhs today in terms of 2012 money. In still other words, they will find that they will have to shell out another additional 15 lakhs to buy a comparable apartment in the same area. If they were expecting a return of 10%, the flat should’ve sold at Rs.1.3 crore today. If you consider this loss on valuation, they sold the apartment at a loss of Rs.75 lakhs!
A flat in Purva Fountain Square in Marathahalli, a location as prime as it gets, sells at around a crore and change today after negotiation, which is only slightly more than at what it would’ve fetched four years ago! For the Acropolis that costed a then-unheard amount of one crore in 2000, if considered an investment, 2.75 crore in 20 years makes it a princely 5% return, making it by far the worst investment over that time period. It should’ve been selling at 10 crores today. And those who took loans to “invest” never even stood a chance because even a 9% return would not even cover the loan interest! It was high time that the mania came to an end and sanity prevailed.
Why Did Apartments Lose Value?
“But I know people who sold flats at a profit!”, you will insist. Indeed, they did, once upon a time. This was because they were in short supply then. Around the mid 2000s there was an actual shortage of premium apartments in major Indian cities, fueled by the red-hot IT-jobs-driven consumptive market. Institutional investors started buying up any apartment, sometimes whole blocks at a time, whose strategy was soon copied by individuals. Prices skyrocketed. Builders took notice and started launching hundreds of mega-projects wherever they could find any space. Towers started sprouting out of the landscape everywhere like enormous concrete anthills. The result is the current supply glut that is the reason for the sharp decline in prices (again, why would you buy an old flat when there are 10 new ones available for the same price?). Then came 2008 followed by the much talked about disruption in the IT industry that put the brakes on conspicuous consumption resulting that there simply aren’t enough people to buy all those apartments at these prices. And finally, government initiatives like RERA, demonetisation and tough controls of the last five years have brought in much needed regulation and transparency to the sector that it is no longer a jungle out there. So, the situation now is that we have an oversupply of apartments and no one to buy them. All those who went flat harvesting after hearing someone slurring over beers about how their father’s friend’s son’s girlfriend’s uncle regularly flipped concrete boxes in the sky at double the money, grossly underestimated both rate at which builders could complete projects and the number of people who earned in a range to afford their apartment, and above all, that buyers wouldn’t be as stupid as they thought they would be. Do you still have to look for answers?
Apartments are concrete boxes that make up a high-rise building with no value of their own. They are man-made constructions with a finite lifespan. They are built of materials that age, weather, corrode and break down and hence need constant upkeep, replenishment and maintenance, expenses for which increase exponentially as they age, making them a liability and a burden. It is stupid to consider something that is a utility item and will exist for only 35 years an investment. They were worth so only because people believed their high demand could be converted into monetary value, an anomaly we call a bubble. And such bubbles burst when the collective of people stop believing in its worth due to supply exceeding demand. That is what happened. Without that mystical power of speculation and considering the laws of nature and economics alone, apartments will depreciate like any other utility item. This is the truism that will apply going forward and is set to drastically change how the next crop of urban Indians own property.
How Homeownership in Indian Cities will Change
The covenant of ownership was the biggest argument everyone from old uncles to your obnoxious colleagues raised in favour of buying instead of renting. You owned the property, an immutable asset in your name with an embedded, ever-increasing value which you could encash at any time by simply selling the property! The high EMI you were paying was the investment towards that ultimate windfall, while renting was just throwing money out of the window. All that is all gone today. An investment makes sense only if it is easily liquidateable. An apartment is no longer that because no, you cannot “simply sell” it anymore. Yes, you still “own” it under your “name”, superficially, but what difference does that make when that biggest benefit of “owning” it does not exist anymore? What sense does it make to pay three times the rent to the bank? Unless you plan to live your entire life in it, why spend your life’s gain for a huge, depreciating liability in a world full of uncertainties, where even the very notion of a life-long stable career is going away? Why willingly get into a life-long slavery-debt trap?
Apartments are on the way to becoming a utility item, like a vehicle, intended for end-use only and not for financial speculation. As more people realise that “ownership” alone offers no practical benefits in life other than giving that emotional feel-good factor, they will turn to more prudent, practical and profitable ways to invest and spend their money. They will learn that paying a third of the rent to individuals than to the bank can help them live them fuller and stress-free lives and invest more in worthwhile things, like education for themselves or their children. Big-city migrants will start thinking twice about permanent lives in the city and liquidating properties in their small hometowns and villages. A more plausible scenario is the entire industry moving to a long-term rent/lease-driven model, like in Europe or in the Middle East. This is going to be the real change. Flats will be owned for life by banks, companies and governments, leased out to people for very long periods, for probably a generation. Tenants will only pay rents and maintenance. Owning an apartment will be seen nonsensical and as a burden. The real-estate sector will be regulated and organised, cleansed of all black money and illegal transactions, ultimately eliminating the difference between owning and renting. In a world which is moving away from car ownership, there is no reason why homeownership shouldn’t follow.
A high-end, branded Shoba, Brigade or Prestige flat that cost 3 times a normal, unbranded one is like a luxury car such as a Mercedes or BMW. Only after the initial euphoria fades will you realise how much of a drag it is on your life. It does give you that warm, fuzzy feeling and bragging rights but also ties you up in little knots. It comes with a hundred headaches. It costs bonkers to maintain and upkeep. You are expected to live up to a certain image. A lot of ordinary people who walk around with dreams of owning Mercedes and Audis do not realise that their rich owners buy these cars not for the “fun” or because it was their “dream”, but primarily for the (material, monetary or otherwise tangible) gains the ownership of these cars bring from their social circles. Nobody who knows the value of money will spend millions on such huge liabilities without seeing a reason to gain from them. This is also why middle class remains middle class.
P.S.: In 2000, it costed around 5-10 lakhs to complete MBBS and around 50 to 75 lakhs for PG (MD) in a reputed private medical college in South India. Today, this is around 50 lakhs and 10 crores and above respectively. You know what smart people would’ve invested in back in 2000? In a medical seat, and not some damn box.
P.P.S. If you are planning to buy a flat for self end use, to make a happy home and live there peacefully, there is not a better time as now.