Investing in homes despite inflation

As India tries to adjust to the new realities brought on by the Covid-19 and then the war in Europe, we see profound changes in the country's economy. The pandemic had created an environment where in transporting goods became harder to get and, therefore, more expensive.

Just as the pandemic's worst effects reduced, the Russia-Ukraine war created fuel shortages which compounded the problem. Inflation has become a serious issue both in terms of business cycles as well as personal finances. The financial decisions taken today can be literally 'make or break' choices.

In the current inflationary environment, we are seeing the value of the Indian rupee fall even as the demand for goods and services increases. The increasing cost of goods and materials impacts everyone, from manufacturers to companies to end-users. Not only must the cost of materials but also labour rises, as companies pay their employees more so that they can continue to subsist on their salaries.

The cost of homeownership is increasing along with the cost of everything else. So it may not be self-evident why Indians continue to buy homes even though they are more expensive. During the Covid pandemic, Indians were buying homes because prices were attractively low and homebuyer sentiment was high.

What is driving the desire to own homes today, amid inflation and even talks of coming stagflation - stagnant economic growth coupled with inflation? There is a simple answer to this - it makes perfect investment sense. When money begins to lose value, it becomes essential to lock in its value before it depreciates further. That's why people buy gold and take out fixed deposits. While the value of gold keeps fluctuating, fixed deposits at least guarantee some growth because of higher interest rates.

Apart from locking in the value of money, it also becomes important to buy today what may no longer be affordable before very long. For 6-7 years before Covid, housing prices had hardly moved. Now they are beginning to increase again, and they will continue to increase because inflation demands it.

Before this new growth phase, many aspiring homebuyers became fence-sitters because they expected prices to drop further. Today, they can see that this will not happen. Even if some Indians may still see housing prices as unacceptably high, they also know that the price of buying a home will never again be as low as it is today.

While Indians may consider many assets as discretionary - for instance, automobiles or jewellery - housing is seen as a necessity in this vast country where a vast number of fellow Indians are homeless. This psychological basic aside, there can also be no proper financial security for those who perpetually live in rented homes. If one intends to buy a home sooner or later, it now emerges that when the cost of everything is rising steadily, later may very simply be too late.

Today's homebuyers know that if they buy homes now, leveraging interest rates which are still relatively low when compared to their historic highs (and are now rising) and the current property prices, they have purchased bargains.

Those who feel real estate prices are high today will be even more discouraged three, five and ten years hence. Housing prices have increased by anywhere between 3-6% in most cities over the last 18 months. Property is not becoming more expensive because of the greed of developers. Builders always want to price their products affordably so that enough people can buy them. The real problem is that the purchasing power of the Indian rupee is decreasing. It costs builders more to create housing; they cannot sell at a loss, or their business will collapse. Builders have to shoulder the higher cost of construction materials and must also pay their workforce enough so that they can survive inflation.

Assured Appreciation

God forbid that it should become necessary, except to upgrade - but a home purchased today will be a lot more valuable a few days down the line. Urban space is getting increasingly restricted with every passing year, and securing a spot on the city map is by far the most intelligent investment you can ever make. When you buy a home, you are not gambling on a 'maybe' as with stocks and gold. The growth of a residential property's value is assured. In the meantime, it frees its owner from the financial bondage of steadily rising monthly rents, which yield zero returns but only buy a little time. Even Indian millennials, who used to be openly contemptuous of homeownership and considered renting the only smart thing to do, have been scouting the market for ownership homes over the last two years.

(The author is Chairman of Pharande Spaces, and President - CREDAI Pune-Metro)