The myth of real estate being a great investment is mostly a result of mathematical illiteracy about compound growth. People will tell you about how the value of a certain plot of land or house grew 50 or 100 times in 40-50 years. This sounds fabulous, but is actually nothing special. The BSE Sensex has become 300 times its value in 38 years. Even a gain of 100 times in 50 years comes to only 9.6% per annum, which is not exceptional. But even these gains in real estate could only have happened under the old model of real estate investment.

They cannot happen now. Let's try to understand where real estate returns came from historically. There are perhaps five sources of gains in the price of a given property, and the final profit is a product of these. First, the original change in usage of a piece of land from agricultural or barren to residential or commercial. Second, the development of physical infrastructure which makes this land usable for the new purpose. Third, the improvement in livability or commercial viability as the area becomes more and more populated. Fourth, the periodic booms and busts that afflict real estate, and fifth, the general inflation of the economy that becomes part of the visible change in the property's price.

When your parents' generation bought property, they often did so at an early stage. As a result, all the gains from the second to the fifth point above accrued to them over two or three decades. Now, you typically buy an apartment from a real estate developer, and all gains from stage one to three accrue to him. What is even worse is that the developer also tries to capture much of the value of the later stages in advance from the buyer, and often succeeds in doing so. The intense marketing hype around real estate developments is intended to convince you that one day in the imminent future, the property you are buying will be among the most desirable in your part of country. Therefore, you must pay up now.

To put things in investment terms, your acquisition price is at a high multiple of a value that will supposedly be attained in the far future. Therefore, the price of a property in South Mumbai or South Delhi may have grown 50 times in 50 years. However, the flat on the outskirts of these cities that someone is trying to convince you is worth `5 crore today is not going to be saleable for `250 crore in another 50 years, because the developer has factored in much of the future value into the current price.

The real estate investment model has changed, and as far as the individual buyer is concerned, it has changed for the worse. Much worse.

Therefore, it's only logical that savers should buy only one house, the one in which they are going to live. If your lifestyle and family require many houses, then that's fine, but don't consider it to be an investment.

---Dhirendra Kumar | May 8, 2017,