What does one do now about property ?

It’s everyone’s dream to own a home. Big or small, a roof over one’s head has such an appeal with people, even Rajnikant can only dream of!

But, the dream of a home has become a distant dream for many due to the spiraling home prices.  People have been waiting in the sidelines, expecting some correction to happen. In 2008, there was a correction.  As in any downturn, there were swirling rumors of property prices further going down.  The upshot – most people sat on the fence, in a wait and watch mode.

In some of the markets – notably Mumbai & Delhi, the property prices have increased and in many places crossed the highs it hit in 2007. In many other cities, it has not risen as much as Mumbai or Delhi. Those who missed the bus of buying in the bust, are now coming back after a long wait.

Should you buy now ?

It depends on whether the property is for own use or as an investment. If it for own use, it may make sense to scout around for reasonable prices and go for it.  Homes bought for residential purposes are long term investments. It will not matter too much if the property price goes up or comes down, in the near future.  In the long term property valuations will go up. Even then, it can be unlocked only if it is sold. So, if a property is found which is a good value proposition and also is convenient in all other respects, one should go in for it.

If it is for investments, should you still buy?

From investment point of view, there are many options. Residential apartments, commercial property, land, serviced apartments are some common options available. Apart from this, there are also Real Estate PMS that invest in properties across the country.

In property, the prices can vary widely even in the same vicinity, from project to project.  Before buying a property, one should check on the reputation of the builder in terms of delivering on promises as far as amenities,  construction quality, timeliness in delivery and  reputation for clean & fair dealings.  Property values go up depending on the developments in the vicinity too.  Property supply in the area and amenities like parks, schools, malls etc. also impact the prices.  All these need to be factored while taking a decision.  Many times, it may be difficult to take a call on this.

For those who want to play it safe, it may be a good idea to consider a Real Estate Fund.  These funds typically invest in land, residential, commercial and other developments across the country. There will be professional management and risk diversification in view of the different kinds of assets they invest in and geographical diversification.

In case of someone buying a property directly, tax savings through investments in Capital gains bonds or investment in another residential property are possible.  This will not be possible in a real estate fund and the income from this will be applied to tax.

Will the interest rates go up ?

That is a million dollar question. The interest rate tightening cycle has more or less run it’s course and there may be very little left. That means, the interest rates may still go up but by a small increment.

What this means is that even floating rate loans can be a good idea now, especially since floating rate loans are offered at a lower level as compared to fixed interest loans. There are some teaser loans which give certainty of interest rates for 2-3 years. It may be a good idea to take it up as a) the interest rates are comparatively low in the first 2-3 years b) there is certainty about the amount of outgoes, at least in the first 2-3 years.

Is it a good idea to prepay housing loans ?

Housing loan interest rates are some of the lowest loan rates available. Currently it is in the region of about 9.5% – 10%. Along with the income tax exemptions available, the effective rates will be less than 9%.  In view of this, it may be a better idea to retain the home loan and invest surpluses in instruments which offer over 9% returns. The exception to this rule is for people who may spend the money. For such people, it may be a better idea to prepay. However, while prepaying one should take note of any penalties that may be applicable for prepayment. The other exception is if the amount of EMI being paid constitutes over 50% of the monthly income. In such a case, it makes sense to prepay and bring down the EMI outgo to within 40% of the monthly income.

Property has a huge lure among the public. For one it is tangible and everyone understands it. Over time, property definitely appreciates and can be a great security to the family. The important thing is to be prudent when evaluating and buying property.  Timing is difficult here, as in equity markets. Take a longterm view. Once you do all this, you could not go wrong!