Are Residential Real Estate prices in Pune undervalued? Shall one buy a property now or wait?
We have often heard someone saying that XYZ person bought a real estate property worth Rs.10 Lacs and has now become worth Rs.1 Crore over 20 years resulting in returns of approx. 12% p.a. However, since last 5 to 7 years prices in Pune have been flat to marginally positive and thus delivered poor capital appreciation/ returns to Investors for long time now. Thus, a valid question comes to mind whether Residential Real Estate Prices in Pune are undervalued and shall one buy a residential property now or wait? To my mind the straight forward answer would be to wait for a decade!! I believe even a 12% return p.a from hereon over next decade would be difficult.
Real Estate prices in Pune are overvalued in my view because of very low net rental yield of 2.5%-3% p.a. For eg: a 2BHK Apartment worth Rs.80 Lacs earns approximate rent of Rs.2.16 Lacs p.a (after deducting property tax, annual maintenance, etc. borne by owner) i.e approx. 2.7% net rental yield only. Comparing net rental yield of 2.5%-3% p.a with borrowing cost of 7.5%-8% p.a results in a no-brainer decision of staying on rent v/s buying a property.
To conclude, in my view, let’s wait for a decade and then buy!! I might sound stupid to most readers but let’s put up some numbers and check the rational.
| Residential Apartment | ||||||
| City | Type | Area (Sq.Ft) |
Avg Rate /Sq.Ft(Rs.) |
Investment amount (Rs.) |
Price Appreciation
(%) |
Estimated worth after 10 years (Rs.) |
| Pune | 2BHK | 1,000 | 8,000 | 80 Lacs | 8% | 1.73 Crores |
| Pune | 2BHK | 1,000 | 8,000 | 80 Lacs | 10% | 2.07 Crores |
| Pune | 2BHK | 1,000 | 8,000 | 80 Lacs | 12% | 2.48 Crores |
Situation 1: Buying a Property Now
♦ Currently for an individual aged 30 years earning decent salary of Rs.90,000 per month finds difficult to purchase flat worth
Rs.80 Lacs because of following:
Age |
Salary |
House Cost |
Down- payment |
Loan |
Tenure |
Interest rate |
EMI |
Monthly expenses (excluding education only) |
Education expenses (Assuming 1
|
Net Savings |
30 years |
Rs. 90,000 p.m |
Rs.80 Lacs |
Rs. 10-15 Lacs |
Rs. 65-70 Lacs |
20 years |
7.5% |
Rs. 54,000 p.m |
Rs. 20,000 p.m |
Rs. 9,000 p.m |
Rs. 7,000 p.m only |
Situation 2- Deferring the decision to buy property for 10 years because of current non-affordability
♦ Assuming an increase in salary of 8% p.a and 8% p.a increase in Real estate prices for next 10 years may result in following situation for that individual to buy house:
Age |
Salary |
House Cost |
Down- payment |
Loan |
Tenure |
Interest rate |
EMI |
Monthly expenses (excluding education) |
Education expenses (Assumed 1 Child) |
Net Savings |
40 years |
Rs. 1,94,000 p.m |
Rs. 1.73 Crores |
Rs.85
|
Rs.88 Lacs |
20 years |
7.5% |
Rs. 71,000 p.m |
Rs.35,800 p.m * |
Rs. 19,400 p.m * |
Rs. 67,800 p.m |
# Additional 70-75 lacs down-payment came through savings for next 10 years {amount saved on [EMI(54000)- Rent (18000)] +
savings (7000) for which returns assumed @ 6%-7% p.a approx.}
* Assuming monthly expenses inflation of 6% p.a and education inflation which is always higher assumed at 8% p.a.
Situation 3- Deferring the decision to buy house for 10 years because of current non-affordability
♦ Assuming an increase in 8% p.a salary increment, 10% increase in Real estate prices for next 10 years may result in following situation for that individual to buy house:
Age |
Salary |
House Cost |
Down- payment |
Loan |
Tenure |
Interest rate |
EMI |
Monthly expenses (excluding education) |
Education expenses (Assumed 1 Child) |
Net Savings |
40 years |
Rs. 1,94,000 p.m |
Rs. 2.07 Crores |
Rs.85
|
Rs.1.22 Crores |
20 years |
7.5% |
Rs. 98,000 p.m |
Rs. 35,800 p.m * |
Rs. 19,400 p.m * |
Rs. 40,800 p.m |
# Additional 70-75 lacs down-payment came through savings for next 10 years {amount saved on [EMI(54000)- Rent (18000)] +
savings (7000) for which returns assumed @ 6%-7% p.a approx.}
* Assuming monthly expenses inflation of 6% p.a and education inflation which is always higher assumed at 8% p.a.
Situation 4- Deferring the decision to buy house for 10 years because of current non-affordability
♦ Assuming an increase in 8% p.a salary increment, 12% increase in Real estate prices for next 10 years may result in following situation for that individual to buy house:
Age |
Salary |
House Cost |
Down- payment |
Loan |
Tenure |
Interest rate |
EMI |
Monthly expenses (excluding education) |
Education expenses (Assumed 1 Child) |
Net Savings |
40 years |
Rs. 1,94,000 p.m |
Rs. 2.48 Crores |
Rs.85
|
Rs. 1.63 Crores |
20 years |
7.5% |
Rs. 1,31,000 p.m |
Rs. 35,800 p.m * |
Rs. 19,400 p.m * |
Rs. 7,800 p.m |
# Additional 70-75 lacs down-payment came through savings for next 10 years {amount saved on [EMI(54000)- Rent (18000)] +
savings (7000) for which returns assumed @ 6%-7% p.a approx.}
* Assuming monthly expenses inflation of 6% p.a and education inflation which is always higher assumed at 8% p.a.
To Conclude, I let readers to think over following:
Food for thought:
> If real estate prices rise by more than 8% p.a over next decade and one can increase its income by 8% p.a. as given in situation 2, it makes sense to wait for a decade and then buy which could result in net savings of Rs.67,800 p.m.
> If real estate prices rise by more than 10% p.a over next decade and one can increase its income by 8% p.a. as given in situation 3, it makes sense to wait for a decade and then buy which could result in net savings of Rs.40,800 p.m.
> I don’t envisage so but if real estate prices rise by more than 12% p.a over next decade and one can increase its income by 8% p.a. as given in situation 4, it still makes sense to wait for a decade as net savings would be same as that of today but with a more clearer picture of financial condition of individual.
> I don’t envisage so but if real estate prices rise by more than 15% p.a over next decade, it would be next to impossible for most of the individuals to buy the property and to stay on rent would be a wiser idea.
> One may wait and then buy a property, provided he invests sensibly for next 10 years in inflation beating investments and with a proper asset allocation.
*****
(Above article is written by Anuj Chordiya, who is AFP (Investment Planning) professional and an Associate member of Institute of Cost Accountants of India. For feedback kindly contact on 9767656563/anuj.chordiya@talentax.in)
[Disclaimer: All calculations are based on assumptions and estimates and may vary in actual in future. These recommendations have been made for informational purpose only and should not be considered as financial advice. Views expressed are strictly personal and one must consult his/her financial advisor before making any decision.]
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Income tax benefits not factored?