Every asset, in the real sense, is a bubble that bursts sooner or later. The demonetisation announcement not only shattered those who were hoarding cash, it also gave a jolt to those who were undisciplined with their finances and it changed the way real estate will be perceived as an investment hereafter. Going by the warnings by the government, the next lathi charge will be on gold hoarding and investments done in real estate beyond one’s means of accounted income.
There are several pitfalls at the macro-economic level with people hoarding money at home or in office or anywhere for that matter, whether accounted or unaccounted. For instance, if a homemaker had been hoarding all the cash received as gift from husband, parents, children, siblings, from relatives and so on over a period of time, that cash is unproductive for the country.
It is neither spent on any consumption nor saved in any bank or investment instrument. If we multiply such possibilities with several women keeping cash at home it can run into several crores, which was proved consequent to the announcement of demonetisation. Though this cash cannot be classified as unaccounted by any standard, it was unproductive nevertheless.
While there is enough cash within the system itself, the government runs from pillar to post to borrow money to meet budgetary requirements. And it is sad that only a handful of people pay taxes that add to the woes of the government. It was the need of the hour to bring such cash into the system. It can be that simple to understand demonetisation.
Unhealthy growth
Further, higher disposable income, excessive unaccounted cash and evading taxes had led to enormous but unhealthy growth of real estate sector in the country. Prices have gone beyond affordability with commoners either investing in inferior quality buildings or taking home loans stretching beyond their repayment capabilities.
The flow of cash between buyers and sellers and at the registration offices, and unauthorised constructions had gone beyond control. A section of wealthy people continuously bought acres of land, converted their unaccounted money and then sold the land at high or unreasonable prices. These unethical practices had made investing in real estate a nightmare. The sheer number of builders in a city and the advertisements in every type of media is the mirror of such unhealthy development.
Let’s dissect the reasons behind this obsessive investing culture. It is an accepted fact that we Indians are poor with financial literacy and awareness. With below-par education dissemination system, the investing cultures are largely transferred from parents to their children. Without understanding the risk, liquidity, return possibilities and taxation aspects across asset classes, people are used to investing without any specific plans or objectives.
When there is money in hand, a common householder buys gold or jewellery thinking that it is the best investment after fixed deposit, buys unwanted insurance plans (particularly traditional plans that are low on return, high on premiums) and seeks investing opportunities in real estate. Interestingly, the motivation behind investing in real estate happens by hearing stories that are built around the price rise in their neighbourhood, the ‘wow’ factor of how much a house or a vacant plot fetched a seller.
Lack of application
The common man does not think of the pros and cons of such investment, not bothering about whether in future it can be easily converted into cash, that will be taxable at 20%, that the entire sale proceeds cannot be used for at least another three years from the date of sale without investing in capital gain bonds, that they may have to deal with unaccounted cash and so on.
There has been no healthy mix of asset classes in one’s investment portfolio. It would invariably be skewed towards single assets.
Real estate as an investment, no doubt, is a tangible asset but assuming that it would yield higher returns in the future can just be a myth. With changing social and economic patterns, investing to gain handsomely from real estate could be a futile expectation and may not be prudent at all.
