Sunday, April 22, 2007

Housing boom or bust??

The author is seriously incompetent to make any rational judgement and comment on the general state of economy, politics or any other matters. All the views are personal and not endorsed by any of the firms that might have employed him in the past or are currently employing him.

Recently with many of my friends actually moving to buy a house (well I think for those people in the fast lane, who got married soon after b-school, and now are getting settled by buying a house), people were contemplating the decision to rent or buy.

Many people believe that house prices can simply never come down (this imagination is fuelled by the current housing boom in India, just like the rest of the world) and people in India would rather pay an EMI (monthly mortgage payments) of Rs 50,000 instead of renting the same flat for Rs. 25,000.
That is negative carry of Rs. 25,000 a month!!!
All this for convinience of not moving frequently, and believing that the same house would keep appreciating in value by the same amount each month.

Since my dad works in the construction industry in Mumbai, I do know that housing prices can be equally volatile, but yet not every one believes me.

Thankfully for skeptics, the US Subprime housing crisis has already started and people have started accepting the Reality.

I found this link on the Freakanomics blog which has plot the inflation adjusted house prices from 1890 onwards.
This confirms the current trend since mid 1990s about the skyrocketing housing prices (driven in an era of low inflation, easy consumer financing, growing economy and rising incomes) but go back a little further and the real picture emerges.

India like in every other thing is a little behind the rest of the world, and much more volatile than the rest of the world, would surely follow the suit.

so my advice to anyone right now: "Keep renting"
(Hahaha, this is keeping in mind the disclaimer above)
I am doing the same in London, (not that I have enough money to buy anyways)
And you can see the graph for yourself

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