When the pandemic hit, there was a panic and for correct reasons. Everything was closed, there was uncertainty about how long this will be, how dangerous this disease really is, and how badly the businesses will be affected. The stock markets crashed for a bit of time, there were some very cheap deals in real estate (distressed deals) and there was a panic buying going on all over for the essential items like food, not only in India but the world over. Businesses had to pay their employees without any real production occurring and many businesses lost everything and closed down as they could not afford this or because they gave up immediately thinking about what would happen in the future.
Later things started to return to their normal operation by 30-70%. Most businesses have still not returned to their usual and normal operations and income. Despite that the stock markets have rallied and the real estate prices have risen. If the incomes have not gone up, what has caused the real estate prices to go up? Stock markets can go up based on the future expectations and many stocks had crashed 50-70% in value also. But Real Estate? Why would prices go up? Here are a few reasons that played their part:
- As a solution to the coming slowdown the government printed endless amounts of money to make sure there is more liquidity and more spending in the economy. Also interest rates were reduced on FDs, Home Loans etc. With a fall in interest rates, the money becomes cheaper straightaway. That means the value of assets goes up compared to the money as that basically means there is more money chasing fewer assets. That increased the value for assets indirectly. Here’s a graph to show the total money supply in the economy
With that much more money chasing the assets, the value of assets definitely went up. Looking at the future also, it does not seem likely that the government will reduce the money supply ever, but will only increase it further and that will reduce the value of money more and so more money will chase more assets. That seems to mean that the property prices will also increase in the future.
- The interest rates were drastically reduced. That meant that the money sitting in bank accounts gave a lower return. Currently (Jan 2021) the FD rates are around 4.9% a year. You also pay your income tax of 30% on it meaning net returns are very low (about 3.4%). And even banks are no more the safe place they were believed to be after few banks failed or almost failed. The rentals that can be obtained from the residential properties, although quite low around 2% or so, started to look better than the earlier 7% vs 2%, to the now 4.9% vs 2%. The chances are that these rates will be further reduced. So Money has to flow out of the FDs into something with better future prospects.
- The lower interest rates on home loans also meant that the EMI would be a lot less. At an 8% rate, the EMI for a 1 crore loan for a tenure of 20 years was Rs. 83644/-. At the lower rate of current 6.75% the EMI for a Rs 1 crore loan for a tenure of 20 years now is Rs. 76000/-. This is definitely more easily payable. Plus there are hopes that the interest rates may get lowered again.
- Businesses have been very uncertain if they should invest more in their business or scale up right now and if they have money sitting idle, they look for some investment. Given the above factors, a lot of businesses went into buying real estate and kept business spending limited.
- CASH! In India, a lot of business loans are given out in cash, also known as black money. They get a very good interest in it somewhere in the range of 1-3% per month!! But with such uncertainty, these cash-rich people did not want to give out any more loans as they were not sure if the loan will ever come back. Who knows if the person taking the loan will even survive this pandemic. Now, where do these people go? They don’t get any returns if they just sit on it. The only choice left is buying some gold, and the rest goes into buying a property.
- So why did people not invest in commercial properties? The current scene has led people to believe that there will be permanent work-from-home for many companies, many companies will shut down, many companies will reduce their workforce, and also the size of space they are leasing. All this has already happened and many spaces vacated. So commercial properties don’t look lucrative to most. (Although I would think if one can get a great commercial property, cheaper right now, it will definitely be back to normal and more in the future. The current scene is more driven by emotions and they will change.) But anyway, where does this money go? If people don’t invest in commercial properties, they invest in residential properties, which have a great track record of appreciation.
- With the current Work-from-HOME culture and seemingly a permanent thing for future (or at least many people see it like that), HOMES become very important in people’s minds and they want to upgrade their homes, as it is also now their office! And spending on the office is okay! And what is safer than your own home?
These are some of the main reasons, that seem to have driven the prices of residential spaces up, rather than down. If you can think of more reasons do share with me on firstname.lastname@example.org or WhatsApp/ Signal 9818968866. Also do connect with me to close some real estate deals. These blogs don’t pay 😉
Hope this helped.
With Much Love
Your Real Estate Agent and Advisor