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Recently the Economist magazine reported trends in property value across the countries in the world, which makes some interesting reading. Out of the 21 countries that economist tracks 12 of them dropped in prices, and 5 of them gained. As per Economist "Many markets are returing to “fair value”, defined as the long-run average ratio of house prices to disposable income and to rents. Housing is now around or below its fair value in eight countries."
If we look at the charts below which shows property value trends in developed countries, over the last 37 years from 1975 to 2012, property values has shown tremendous gains. In some countries like Australia, the values have sky rocketed in the last decade or so. So while the largest market, United States is now picking up after a huge drop, the more a market is closer to its fair value, the prices seem to rise from thereon. In Spain which is reeling under the Eurozone crisis, prices have fallen 23% from their peak in 2007 (A note: Kochi prices fell 32% over the last three quarters and we now believe it has stabilized).
In the Asian countries, Hong Kong prices which were sky rocketing at 28% growth yoy is now growing at 6% yoy. Hong Kong prices had increased by about 67% since 2007 and followed only by Austria which reported a 23% increase since 2007. The biggest casualty of the price drop, Ireland has seen prices drop by 49% in the last 5 years.
So from an investor perspective in India, what does one make out of these global trends?
1. For one, it is clear that, after years of dizzying ascents, it seems like a big bulldozer has hit residential-property markets around the world and stabilized them to a large extent.
2. If you take the case of United States for example the housing bubble threw out some interesting facts. For many middle- and lower-middle-income Americans their home made up nearly all of their wealth. They were largely invested in a single asset that did very poorly in this period. Richer Americans, who held other assets, did not see such large declines. This demonstrates how important it is to diversify your wealth, even when you don't have much of it. It appears that there seemed to be a mentality that you should buy as much housing as you can afford, not as much as you need. That may be because of the pervasive view during this period that housing is always a good investment.
3. The case is not too different in India. During times of rapid ascent in property prices and going by trends world over, it is good to stop short and take a closer look and not go blind foldedly and invest. A well diversified portfolio consisting of government bonds, MF's, FMPs, VPFs would help a youngster in mid 30's to earn a good retirement income even if property crashes or stabilizes in the next decade.
4. To reduce the risk from your property portfolio, it is very important to do your ground research well and choose the property. Tie up with a good property consultant, who understands your financial situation and then advices you on the right kind of property go for.
5. Keep a track of price trends, fair value and other market indices to understand if you are over paying for your purchase or under selling on the property value. Negotiate well and don't hurry into your decision.
6. Take a long term view into investments and avoid short term investments unless you are aware of market realities.
Realty growth is here to stay in India and in Kerala, especially with burgeoning population figures in our country. But speculative investments in property, often made due to impulse buying and hearsay, may not be a good idea, unless backed by a good understanding of the overall market. After all the objective behind buying real estate may not always be a wish to own your home, but to become wealthier in the longer run. A good portfolio of assets and knowledge of how to build it, would always come in handy compared to risk prone, myopic investments in a few assets.
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