Today’s Losses Will Lead to Future Gains
In today’s apparently depressing times of the real estate cycle, most people are operating under “fear”. Cash balances in banks are increasing and many would-be investors are taking the money that would have otherwise been invested in property and investing them in mutual funds and other money market accounts that pay negligible low-single-digit rates of interest. Such types of fearful investors are thinking, “Who cares about return on capital?! I just want to stay safe and feel confident that I am protecting my capital.”
If you have read the highly insightful book “The Intelligent Investor” by Ben Graham (Warren Buffet’s professor in college!), there is a character in the book called Mr. Market! Mr. Market is basically the crowd mentality of people. Crowd mentality moods are known to swing like a pendulum from irrational exuberance to bewildering fear and confusion. Which market moods actually provide the best investment opportunities? Which mood of Mr. Market entices investors into taking the highest possible risk? Which mood of Mr. Market reduces fear in the minds of the investors?
Booms Enlarge Risk
Boom times are the times when actual risk is at it’s highest peak. During the exuberant boom times when irrationality is the dominant mood, investors do not see any risk but real risk looms large at such times as prices of properties rise sky high, rental income yields fall and huge amounts of loans pile up. This example can be seen very clearly in the Mumbai property market which reached it’s peak sometime in the earlier half of this decade. Property prices reached astronomical heights even though rent collections remained too low to cover operating expenses and debt repayment. This lopsidedness of the market has remained even in current times especially in the residential side of the market.
History has proved this time and again in various parts of the world right from ancient Rome to Las Vegas and closer home in Dubai, China and India. During the boom times in Las Vegas in the US, so-called investors who were actually speculators believed that flipping properties for huge gains would keep on continuing. Properties were purchased in Las Vegas with dangerously high loan-to-value (LTV) rations of 90% to 100% or even more! The investors assumed rather naively that they continue to hit the same jackpots that were winning in the past into the future. They could not see the fool’s gold. They did not realize that the growing gap between mortgage payments and rent numbers could not continue beyond a certain point. Compare that to past and even present conditions in Mumbai. EMI’s for typically purchased luxury properties in OC-received South Mumbai building properties could approach ₹ ten lakhs per month. Potential rent for these same properties would reach no more than ₹ three lakhs to ₹ five lakhs per month. Finding such renters willing to pay these rents was also a tough task leading to such homes remaining vacant for long periods of time leading to far bigger losses!
When a crocodile like this is chomping on your leg you are basically in a world of danger! And in a world of pain if I may add! As mentioned, high debt, low rental income and high hopes for out-sized and continuous increase in prices for properties or even stocks and gold can break your back and trigger a reversal of fortunes. It is true that the hot speculative fever or mania in Las Vegas, Dubai, Spain, Shanghai and Mumbai does stand out as exceptions-to-the-norm. Most other cities and countries do not experience such heightened frenzy among both the builders and buyers.
With most testosterone-heavy right-brained dominant speculative buyers having been forced out of the market today, investing in today’s real estate market once again is offering buyers profit potential with little risk.
Market Downturns Kill Market Risk
During the past few years, property prices across India have fallen by 15 – 50 % from their previous peak levels. If one compares the current rent levels and construction cost to the current property prices then today’s post-Covid scenario is indeed the most favourable buying time for Indians since independence in 1947! With property prices now situated below construction costs (for the most part), property developers cannot start new projects and launch new properties in the market and make a profit at the same time. Today’s home investors are protected from new competition. New property launches for luxury projects will not happen for a long time going forward. Builders will not launch new projects at even half the speed of what they were doing earlier until the market price of properties increases enough to generate a decent profit margin.
Right Time to Buy Property
Of course there is always the nagging thought in your head asking you whether now is really the right time to buy property? Can prices go even lower? Can we enter a double-dip recession? Will the pipelines of foreclosed properties flood the market with a large number of “distress sale” properties? You may be thinking that even the good opportunities such as the one we are seeing today may be eclipsed by even better bargain basement prices in the near future.
Possibly yes. But do not forget about interest rates. Over a holding period for property, the extra costs of higher interest rates could dwarf any savings that you might get in price. Nevertheless if you still prefer to adopt a wait-and-watch approach in the current realty market, do so intelligently.
Knowledge is Power
If you are waiting to invest even now, I would advise you to monitor the market. Check for distress sale properties, foreclosed properties, existing home sales, interest rates, employment figures, new project launches, etc. Find out what are the turning points in the data as well as investor and buyer confidence. Instead of just lazy procrastination which most people do, if you adopt the habits of intelligent monitoring and wait opportunistically then you are a step ahead in the game.
Also do remember that property investing can offer you multiple ways to earn a good return. Market-bottom lowest-price deals are only one and not necessarily the most important reason to invest in a good piece of property or land.