Here’s conclusive evidence that it makes no financial sense to invest in a house


According to the index, the average all India return from residential real estate in 2020-21 stood at 2.2%. As can be seen from the accompanying chart, this is the lowest since 2011-12 or over the period for which data for this index exists.

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According to the index, the average all India return from residential real estate in 2020-21 stood at 2.2%.

Also, as can be seen from the accompanying chart, the returns from residential real estate have constantly fallen from 2011-12 onwards, except in 2014-15, when they rose a bit, to start falling again.

It is important to clarify that the return we are talking about here is not the yearly return as of the end of March every year. Instead, it is the average of the one-year return as of the end of June, September, December March, every financial year.

In 2020-21, the average return of 2.2% was arrived at by considering the one-year return as of June 2020, September 2020, December 2020, March 2021, which stood at 2.8%, 1.1%, 2.2% 2.7%, respectively. Thus, the average of these returns worked out to 2.2% for the year. This has been done to picture the situation as it prevailed throughout the year not just at a point in time. Further, this irons out any random upticks in return during the year, to some extent.

It needs to be said here that the returns of one city have had a disproportionate on all India return in 2020-21. Homes in Bengaluru saw an appreciation of 13.2% during the year. As can be seen from the accompanying chart, the returns in other cities which form a part of the 10-city index have been in low-single digits. In some cases, prices have gone down between 2019-20 2020-21.

The average price in the biggest cities, where possibly the most latent demlies, is around  <span class=₹40-50 lakh, not a price many Indians can afford.” title=”The average price in the biggest cities, where possibly the most latent demlies, is around ₹40-50 lakh, not a price many Indians can afford.”>

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The average price in the biggest cities, where possibly the most latent demlies, is around 40-50 lakh, not a price many Indians can afford.

While Mumbai saw a price appreciation of 0.7% during 2020-21, Delhi saw a contraction of 3.3%.

If someone needed more proof on why investing in real estate doesn’t make much sense, this is it. The major reason for this is that home prices continue to remain very high for those who want to buy a home to live in it. The average price in the biggest cities, where possibly the most latent demlies, is around 40-50 lakh, not a price many Indians can afford.

As far as investing in real estate is concerned, the market seems to be saturated. For example, 2019 report jointly authored by real estate consultant Knight Frank India law firm, Khaitan Co. pointed out that India had nearly 11.09 million vacant urban homes, four-fifths being in 10 states Union territories.

Given this, real estate investors have a lot of inventory on their hand, which they don’t want to rent out given the low rental yield (annual rent divided by market price), they don’t want to sell given the fact that the prices have barely gone up over the last few years. So they are waiting for a better price. Over the past five years, the average return per year has been around 5.3% at the all-India level. This barely even meets the rate of inflation.

There are other costs to owning real estate. Everything from society maintenance charges to property taxes to interest on a home loan needs to be paid. There is also the risk of owning real estate in India, which needs to be factored in. Hence, if residential prices don’t give annual returns in double digits, there is no point in investing.

Of course, this comes with a few disclaimers. First, any average data has a few outliers. Like Bengaluru in 2020-21. Also, the RBI House Price index tracks only 10 cities. It doesn’t track major cities like Pune Hyderabad, for some reason.

It also doesn’t track any mid-level or smaller cities where the prevailing situation might be different. Nevertheless, there are difficulties in living in one part of the country owning a home in another part as an investment, unless one has relatives there or one originally comes from that place.

Also, the RBI House Price Index is constructed using registration price data from different cities. This comes with its advantages disadvantages. When it comes to advantages, as an RBI research paper points out: “The coverage of property registration data is more robust as compared to property loan data collected from banks/housing finance companies, as all house transactions are not financed by banks/housing finance companies.”

When it comes to disadvantages, as another RBI research paper points out: “It is often believed that registered prices of houses are in general, underestimated due to various reasons like high registration fees stamp duty, obligations for the payment of property tax, etc. Further, the differences in the time gaps between the actual transactions registrations also do not always follow the similar pattern across different states.”

But even with these disclaimers, there is enough evidence to suggest that investing in real estate has been a loss-making proposition for more than a few years. Moreover, in the aftermath of covid, the situation might not change much.

Of course, if you are planning to buy a house to live in it, it makes sense to do that as long as you are in a position to pay the EMI make the downpayment on it.

Vivek Kaul is the author of Bad Money.

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