THE mythical belief that 'property prices will always go up' brought about the 2008 crisis, equally for individuals as well as for the financing institutions. The last few weeks in the US brought me face to face with these "victims", and got me thinking of the lessons that we can learn. It also made me strengthen my faith in the Indian financial systems and the ethos that we follow.
Our Attraction To Property
I suppose we have largely had positive experiences with property purchases. We have been prepared to hold on to this asset for 10 years or forever and always found a profit at the time of sale. Selling an asset purchased for Rs 12 lakh at a profit of Rs 1 crore 20 years later will give anyone a high (the fact is that the returns are 11% pa and are below equity market returns for the same period). But this article is not about property vs equity, but about our beliefs and investment philosophies.
What We Indians Do Right
Even if we do take housing loans, we ensure that we make the 15% down payment and then ensure that the equated monthly installments comprise principal plus interest, and not interest alone. The tenure of the loan we take may be set at 15 or 20 years, but our focused objective seems to be pay down this loan at the earliest. In the US, home owners are keen to increase their 30-year mortgages and get incremental interest-only funding for the enhanced value of their homes. The institutions too find themselves at a disadvantage when property prices fall as foreclosures increase and individuals return the key of their home to the bank in the mail and walk out to a cheaper accommodation.
The additional money obtained by this individual to invest in other assets results in a situation of over-leverage.
Savings Vs Spending Culture
One of the key cultural differences between India and the West is that we live within our means. We may be heading in that direction, but as of today, we do not spend more than we earn. A far cry from living it up on plastic, and spending today what we hope to earn tomorrow and the day after! The subprime crisis may be over; but the prime mortgage defaults are increasing as former double income families are finding it difficult to make ends meet after one of them has been unemployed for a few months, and jobs are not coming back in a hurry.
Lessons For The Future
Investments must be diversified. We must accept the truth that other countries could do better than ours. In fact in the past 10 years (2000-2009), India has never been the best performer, though in consistency it has remained among the better performers worldwide. The assets one possesses must remain in India at least to the extent they are required for the local financial goals; the rest must be invested elsewhere. Those in the US learnt it the hard way in the past decade. Since end 2001, the Sensex has gained 450% vs the Dow Jones Industrial Average's nil, yes zero, return. From a currency point of view too, the $ has weakened against the Re by 3% during the same period, enhancing equity returns in dollar terms even more. Heed the five words of your financial planner: asset allocation is the key. We don't want to be caught napping with our eyes open, I suppose.
