Is your investment in housing a paying one?

It is widely believed that an investment in real estate will give good returns and appreciation. However data from the NHB Residex which measures changes in housing prices and which covers data from 26 cities shows that the average real appreciation ( after taking inflation into account) in housing prices was NIL for the period 2007 - 2014. 

Quoting from an article in the Business Standard - Does a housing investment pay at all? , -  Data shows that there has been no real appreciation in residential property in urban India over 2007-14

The author writes:

The NHB Residex (an index constructed by National Housing Bank based on "actual transaction prices") covers 26 cities all over India. The index stood at 100 in 2007 for each city. For January-March 2014, the all-India index was 178.69 (arrived at by taking a simple average of the index levels for the 26 cities). An increase from the base value of 100 in 2007 (on, say, 30-6-2007) to the recent value of 178.69 (on, say, 31-3-2014) translates to an average appreciation rate of 8.97 per cent annually.

Further, it is written:

There has been an average annual inflation rate of about 9.25 per cent since 2007-08 (this is based on the data used for computing real capital gains for income tax purposes). Inflation eats into whatever returns there are.An 8.97 per cent nominal appreciation alongside a 9.25 per cent inflation rate implies the real appreciation rate over the period 2007-14 is a negative 0.28 per cent annually. Let us simplify and say the real appreciation has been zero. This is the basic story according to NHB data. This contradicts widely held beliefs in India.

One is bound to find city-wise divergence in appreciation as seen in this graph . Note that the index value of Chennai is 349, which translates to a growth of more than 19% annualised. Remove Chennai from the picture and the overall average decreases.

Quoting from the article:

Kochi has seen real depreciation at an average rate of about 11.5 per cent every year since 2007! Delhi and Mumbai have seen average real appreciation of 1.47 per cent and 3.8 per cent, respectively. 

The NHB data is consistent with a recent IMF Report. It showed an international comparison of real appreciation in real estate in 52 countries for 2013, fourth quarter or latest (annual per cent change). There are 18 countries which had witnessed depreciation in real terms. And, guess what? India showed the maximum depreciation in real terms, at about eight per cent! (http://www.imf.org/external/research/housing/index.htm). The NHB data shows there has been hardly any real appreciation in urban residential property in India in the past seven years or so. We do not know anything about real appreciation in the earlier years from NHB data. Then, real appreciation might have been high. This can explain why people historically believe residential property is a good asset for investment purposes.

Please note that the NHB data covers only the change in price of housing property. The price of land may have appreciated more and that is not covered in the NHB Residex. It must be noted that such data and this index will have limitations but is a useful indicator for all of us.

Such data re-inforces our view that while we must have an asset allocation and distribute our assets over various classes, over-dependence on property may be counter-productive. For some professionals who have invested in housing property, it is natural due to the high value of such investments, that the allocation is skewed heavily towards property and the allocation to equity is minimal. This may hamper wealth creation.

Read the full Business standard article here.

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