Housing remains an important goal for Indians. Soaring inflation, high interest rates, and the surging costs of property in metros and non-metros haven’t deterred the aam aadmi’s dream of owning a roof over his head. Various data points reflect this.

Retail bank lending, valued at Rs 43 trillion in September, had grown at 18 per cent in a one-year period. Housing loans is nearly half this pie, growing robustly at 14 per cent to Rs 20 trillion. Recently, low interest rates fuelled a boom in all asset classes from real estate to cryptocurrencies and everything in between. Boom creates recency bias. Housing seems great. The view in some quarters is that the good times will last forever. In many markets, there are stories of buyers flipping their properties for 100 per cent gains in under five years. If the costs were high-enough, these returns could be life-altering. Does this mean housing is now a great investment? Or should we temper our expectations? Are consumption and self-occupation better?

What the data says

According to the RBI’s House Price Index (HPI), which tracks prices through registration authorities in 10 major cities, the 10-year all-India returns on housing are at 6.75 per cent per annum. Of course, there will be pockets of outperformance. Premium projects and in-demand localities would have seen much higher appreciation.

There were also pockets of negative returns such as in Delhi between 2017-18 and 2022-23 where the HPI fell 8.7 per cent. The pre-pandemic decade saw low appreciation, with all-India returns nudging towards 2 per cent. Add rental yields to this and the returns may have been around 4-5 per cent— barely comparable to a savings account. Then followed low-interest rates in the pandemic. The market boomed again.

How housing compares

The BSE Sensex Total Returns Index, which provides returns from stock prices and dividends of India’s largest listed companies, has returned nearly 14 per cent annually over this 10-year period. Index fund investors would have enjoyed similar returns in this period. Mutual fund investors may have seen marginally higher returns.

Gold, the crisis investment, has done very well in the last five years, returning around 12-13 per cent after several years of being inert. With interest rate volatility and inflation, bonds and fixed deposits have also had their moments. So with the data at hand, these instruments have outperformed housing as an investment option. However, the experience would vary from one investor to another.

Pros & cons

Housing is an illiquid investment as it cannot be purchased or sold easily. Financial investments such as mutual funds or fixed deposits do much better in this regard. Housing costs are high, and there are statutory and maintenance costs, and loan interest as well. With the low returns and high costs, housing becomes the primary form of savings for many households which, therefore, will experience wealth growth at a conservative rate. Returns will come in stops and starts.

Therefore, for retail investors, housing becomes a risky proposition in the short-term where returns may be net negative considering all costs. But long-term holding may lead to positive rental yields and price appreciation, giving investors a much better chance of earning from their housing investment.

Occupation the better option

This brings us to the ideal use case for housing. I often say that housing for self-consumption is best. You can achieve your wealth creation goals through financial instruments such as mutual funds and provident fund. But the house gives permanent shelter for your family and the chance to develop happy memories which are far more important than what the returns could be. But as you pay off your loan and grow your equity in the asset, you also have the option to sell it and move on.

Of course, certain situations are more amenable to homeownership than others. When you’ve decided to settle down in a place, have the financial readiness for a down payment and a housing loan, and when you’ve identified your options, it may be time to buy. Till then, you can rent. Multiple lenders and developers that BankBazaar spoke to recently said the next wave of growth in real estate is coming from beyond Tier 1 centres.

Quality-conscious millennials are preferring A-grade builders delivering projects priced in the Rs 1-2 crore range. Working women are also seeing the immense value in securing a roof. But the occupy versus invest debate needs to be had, and the exuberance in any booming market must be tempered with a look at the big picture.