Housing Price to Rent Ratio

Historically the price to annual rent ratio in the US was around 16-18 in most places, rarely going above 20 except in places like California. When I compare that to India, I see the ratios in excess of 30 in most places.

This is really high compared to US. In US the interest rates are around 4-8% vs 10% in India. The tenure of loan in US is about 30 years while in India its 20. In US the entire interest amount is tax deductible while in India its only upto 1,50,000. In us there are no tax deductions on rent while in India we do. In India, the rent control acts etc are so heavily in favor of the tenants that owners prefer keeping the house empty. This reduces the supply of rentable property. All of these factors point to a lower price-to-rent ratio. But its not.

In my view the properties in India are far overpriced than in US. Given the above one would expect the ratio to be 10. I do not see prices correcting that much. I think its not worth investing in a housing property unless you see remarkable growth in real estate value of the house. Housing as investment is really not worth it. One should buy a house only to live in it.

Sub Prime Country

Greed is good, said Ayn Rand. Greed is a national epidemic in the capitalist's capital of the world. Housing meltdown in the US highlights the dark side of it. But its also an important lesson on personal accountability for one's actions. I would not say people did not see it coming. The soothsayers have been predicting it for years. I've read articles about it for the last 3 years, but then no body knew when and how bad.

Analysts and experts have a field day projecting the future. They have no concept of middle ground. They love stay on either ends of the spectrum. They would either lead you on saying there is scope for further profits or tell you that worst is yet to come.

Through financial wizardry they have made housing as leveraged and dangerous as margin trading only with higher stakes (for common man). They lure you with teaser rates, allow you take possession of a house with no down payment and sell you dreams of quick profits before the high interest rates kick in. Surprisingly, they then palm off your mortgage to other investors by secutitizing it and de-risk themselves in case you should find yourself at the short end of the life.

I think the next logical thing to do is to start an insurance company that would cover people against foreclosures in case of adverse price movement. In fact I wonder if there already are such companies out there doing business. I tell you, there is money in playing on people's fears.