Inflation in the Housing Market - Time to Plan & Invest

Inflation in the Housing Market – Time to Plan & Invest

Roboadviso     Asset Allocation,Economy,Financial Planning     Posted On, Fri 16th September, 2016     No comments
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Housing Inflation Investment Mutual Fund

We had talked about escalating inflation in the education and medical sector in earlier weeks. Today, let us discuss how the residential market is fraught with rising prices.

Rental expenses in 2016 have moved up to 5.48 percent compared to the scenario where it was 4.49 percent in 2015. The repair costs of residential homes are growing at a rate of 6.76 percent compared to 5.57 percent in the previous year.

Reason for inflation in the residential market
One of the biggest triggers for inflation in the cost of housing is due to escalating labor and maintenance costs. However, the rentals have not really picked up, they have either fallen or remain unchanged in most places.

The reason for non-performance for residential rental market is excess supply between 2011 and 2013. Rental yields in metropolitan cities like Mumbai are down to 2 percent from 6 percent in 2006. Experts however, state that people who plan to stay on rentals, may assume the inflation to grow at the rate of 8 to 10 percent in the years to come.

The 12th Five Year Plan states that that though it took 40 years (1971-2008) for India’s urban population to increase to 230 million, it can take just 20 years to add another 250 million. The Census 2011 have shown that 10 million people are migrating to Indian cities every year. KMPG’s report on Indian real estate growth showed in 2015 that the ‘affordable segment’ of the cities is going to witness a demand for 2 million additional houses each year. Development has to grow at this pace, if it does not happen; the shortage of rental space will make the prices go up.

Higher labor and constructions costs are going to push the rental prices further up. Rentals in cities like Mumbai, Bangalore, Pune and Hyderabad are going to witness a 9 to 10 percent increase in the next few years, with people migrating for these places for better job and business prospects.

The solution
Considering that you are living or hoping to shift to a metropolitan city in the next few years, you may expect the rental prices to rise in the next few years. Even if you invest in a debt mutual fund through the SIP, you can expect inflation-beating returns that you can use to pay off your rent.

As a home owner, you may have noticed that the rental yields are dismally low compared to inflation. While, the yields may improve with demand increasing the supply especially in metropolitan cities, the returns are nowhere as good as what equity mutual funds can give. Invest in equity mutual funds for returns that beat inflation and real estate on a long-term basis.

What about the aspiration of buying a home?

Real estate transactions have taken a beating, falling almost to 60 percent, because most people in cities cannot afford a home, given the rising prices and stagnant income. The average price of a home is way beyond one’s average income. Banks are being tight-fisted about lending, considering inflation-adjusted household incomes are going down. They are increasing collateral at the rate of nearly 30 percent of property value, which the average person cannot afford.

Instead of going for an EMI-based home loan and adding to your stress levels, invest the same EMI amount or even half of it in an equity-based mutual fund SIP and buy that home. You can forget about houses getting costlier because equities are known to beat inflation and real estate on a long-term basis.

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