[ecis2016.org] There are certain mistakes that home seekers make, when the real estate market is in a downturn. Here are five common ones that you should avoid
The current real estate slowdown has put the spotlight on some of the mistakes people commit in the realty market.
You are reading: Five common investing mistakes during a market slowdown
Over-concentration
The past decade’s strong real estate returns have led to investors ignoring diversification. In the case of many middle-class buyers, their first home accounts for most of their wealth. However, when people go on to invest in a second home, 80% of their net worth is tied up in real estate (in the first property). In the event of a prolonged real estate slump, their investment could earn low or even negative returns, for years. If they have taken a home loan, it would mean a negative return on borrowed capital, which is claiming an interest of around 10%. The current scenario emphasises the significance of investing across different asset classes: equities, fixed income, etc.
Speculation
The slowdown has also highlighted the risk involved in speculating the future of real estate. “I know many investors who have invested in as many as six apartments,” points out Bibhash Surya, head of Sri Sai Dreamlands, a Noida-based real estate consultancy.
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“They purchased them at the pre-launch stage and wanted to exit by the launch stage. However, currently, buyers have become hard to find. Meanwhile, payments to builders are becoming due and they are finding it impossible to raise the money.”
Overlooking liquidity and fungibility concerns
The slowdown has also put the spotlight on realty’s illiquid character. Even when the outlook is positive, it could take you up to three months to sell property. However, during a downturn, liquidity tends to dry up entirely. “A friend of mine was able to sell his apartment only after six months and that too, after he reduced the price a few times,” states SG Raja Sekharan, who teaches wealth management at Bengaluru’s Christ University, and has authored a book titled, How to get rich and retire early. Liquidity is especially an issue for apartments situated in upcoming and outlying areas. Fungibility is another problem. For example, many senior citizens, who have most of their wealth tied up in real estate, are asset rich but cash poor. If they need Rs 5 lakh for a surgical procedure, they can’t sell one portion of their house which is worth Rs 2 crores.
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Overlooking crucial financial goals
Sometimes, the obsession with real estate results in crucial goals being overlooked. A person who wants to transition from being a salaried worker to an independent consultant, may never find the courage because of the EMI responsibility.
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Higher education needs of children, which require a substantial corpus, could be compromised due to the EMI burden.
Real estate as a foolproof investment
One popular myth in India is that real estate is a solid fail-proof investment. Real estate cycles are much longer and deeper than that of equities. The upswing in the market lasts so long that people forget about the previous downturn. Many younger investors will not recall the previous downturn in real estate, between 1995 and 2001. In such downturns, you could witness both, a price and time correction: prices remain stagnant for a significant period, which results in your investment earning no returns for a prolonged period.
Real estate investments can also fare poorly due to other factors; if the quality of the neighbourhood deteriorates or too much supply is unsold in an area.
Source: https://ecis2016.org/.
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Source: https://ecis2016.org
Category: Lifestyle
