House Price Vs Gold Price In India

I happened to be looking at how apartment prices have increased in the last 2 to 4 decades. 

A flat that cost about Rs 1 lac (1lac = 100,000) in 1980, cost about Rs 12 lacs in 2000 and about 90 lacs in 2019. 

The price of gold was Rs 1.3lac/kg in 1980, Rs 4.4 lac in 2000 and Rs30 lac in 2019 (from https://www.bankbazaar.com/gold-rate/gold-rate-trend-in-india.html). 

The cost of the flat works out to 0.77kg of gold in 1980, 2.73kg gold in 2000 and 3kg in 2019.

Just an interesting perspective. I was trying to extrapolate the price of a flat in 2030 or 2040. Probably about 3 to 4kg of gold at the prevailing prices then.

The house price has increased at a CAGR of 12% in the last 40 years and at 10% in the last 19 years. 

Of course, I have taken only one data point but I assume the real estate figures provided are ballpark.

Additional Reading

1. https://vbala99.blogspot.com/2018/10/reel-estate.html
2. https://vbala99.blogspot.com/2012/12/pros-and-cons-of-buying-new-vs-old-flat.html

Reel Estate

There was some talk about demolition of a building with 12 apartments, each of 868 sq ft. The plot area is 3 grounds = 7200 sq ft. The current FSI (Floor Space Index = ratio of total area of all flats to the plot area is currently 1.5. FSI can go up to a maximum of 2.0. This raised the topic of whether the old building could be demolished and new flats constructed. A friend of mine contacted me with the details. I responded with real estate calculations:

Quick back of the envelope calculation:

Currently we have 3 grounds =7200 sq ft.

Total flat area = 12* 868= 10400 sq ft

FSI currently = 10400 / 7200=1.45

With FSI =2, builder can construct total 2*7200=14400sqft

Meaning 14400-10400=3600 extra sq ft.

Assume Rs20000/sq ft rate as the price for a new flat.

Assume  the cost of construction, including demolition, of 14400 sq ft = Rs3000 / sq ft. Total cost for builder =14400*3000=4.3 crore.

Assuming each of us wont have to shell out any money for getting a new flat, the builder needs to recoup at least his total cost of construction = Rs4.3 crore. This means he has to get 4.3crore/20000(rate of new flat per sq ft)= min 2100 sq ft out of the extra 3600 sq ft that we get from new FSI =2.

This means the 12 of us together get 3600-2100=1500 sq ft. 

Which is 1500/12 = 125 sq ft each in the new flat. In essence we will get rid of a 868 sq ft 30 years old flat to get a new 1000sq ft max flat assuming we don't pay extra cash. 

Of course the rates i mentioned are approx. You may use different or more realistic rates for cost of demolition + construction and price per sq ft new flat. But ballpark seems to be about 125 sq ft extra for each us. 

(125 sqft is the max we can get. Builder will need some profit margin. 125 sq ft assumed that the margin was zero.).

Consider also the intangible cost of moving some place else until new flat is ready. I am not sure what the LTCG tax implication would be even if there is no net money receipt. Maybe because the gains are "reinvested" in the new flat there may not be any. 

Where You Might Want A Retirement Home

A friend and I were discussing and the thought of a retirement home came up.

First, why do we need such a place? Because old age homes may not be good enough in terms of care provided or maybe too expensive. Children may not live with parents. Parents (old) may not be able to live all alone. And hence this thought.

We tried to specify what might be needed in such a place. 

Since everyone would be old having arthritis, diabetes etc the place had to have medical facilities and ambulance should be available within 30 minutes and a good hospital should be available within an hour's drive. Of course other amenities like continuous availability of good water, electricity and Internet are also expected in that place.

For those who do not reside in India, this may come as a shock since these are expected to be present anywhere. Well these are present in major cities but may not be in interior India.

If 4 families were to get together - the idea being that they are available, in case of emergency, for each other, they could pool in and buy 1 ground (2400 sq ft) and construct small apartments for each.

Cost of construction being about Rs 2500/sq ft now, a small 1BHK 600 ft would perhaps cost about Rs 1,500,000. If there was a good location away from the metropolis but still within an hour distance from hospitals, 1 ground might cost Rs 50 lacs. Split 4 ways, the land cost might about Rs 1,500,000 including registration and other charges. Note that this is only the land cost. The construction cost of 2 flats in 1st floor (with ground floor for car parking) and 2 flats in 2nd floor would be about 1,500,000 per family as explained earlier. 

The total cost per family would be Rs 3,000,000 (about $50,000). And for that price each gets a small 1BHK apartment and equal share of a 2400 sq ft property (undivided share of 600 sq ft). Of course this does not include the cost of special interiors or of car etc.

One could just buy the land initially and postpone construction of the flats. Land price generally rises much much faster than construction cost. So this might be hedge against rising prices. Flats can be constructed at a later date when the families need to move to that place. All the families may have a home right now and have members working in the city. 


Would we be willing to spend Rs 3,000,000 for such a flat? And of course you have to manage your own maintenance, ensure that Metro (corporation) Water is available etc. What other environmental factors would we look for in such a flat?

1. As mentioned earlier - Hospital, ambulance, water, electricity, Internet etc.
2. Place being safe even at night. Proximity to local transport. 
3. There is no particular danger of flooding or other natural calamities.
4. That the property has all the necessary approvals from other government agencies. This would help apply for bank loans.
5. The plot is of a reasonable size that it will find buyer(s) when the decision is made to sell. 
6. That there is no fear of encroachment during the time the plot is vacant or when flats are unoccupied. 
7. That the people in the neighborhood are not hostile towards the communities to which the 4 families might belong.

Related to the above are other points with respect to dissolution (or dilution) of the 4 family units or other intrafamily issues which are listed below:

• Note that one or more of the 4 families might want to opt out at any time. Would there be buyers to buy one plot in a "society with only 4 flats". 
• What would the mechanics be when the 4 families consist of 3 members from the original four and a new family? Would this cause an issue?
• Considering that the flats will be in 1st and 2nd floor, how would we entice 2 families consider the 2nd floor should everyone want the 1st floor flat? Or, the other way around if the 2nd floor were to be more appealing than the 1st floor for any reason.
• Design and maintenance of common utilities such as:
• Garden, if any
• Sump
• Water purchase in summer and draining during monsoon

Pros And Cons Of Buying New Vs Old Flat

A friend of mine was planning to buy a new flat. He gave me a link which the builder had given him that stated the cost of the flat and amenities like 2 covered parking, 24 hours power backup and what not. The cost of the flat was Rs1.5 crore (approx $268,000).

It was a 1100 sq ft apartment which had a UDS (Undivided share) of 567 sq ft. The land cost in this area is Rs 4 crore per ground (per 2400 sq ft). I worked out that the UDS cost for 567 sq ft is about Rs 93 lacs (about $166,000) and the premium he was paying (excess of market price excluding tax / registration charge over UDS price) was about Rs 57 lacs ($100,000). I treat the UDS price as a book value. The ratio of market price 1.5 crore / UDS 93 lacs is like the price to book value (P/BV) ratio.

I felt it was not a very good deal to pay one third of the total price as premium, it should be far lesser. Could he not look for a flat which had a higher ratio of UDS price to market price. My friend's contention was that the if he only bought the UDS, it is like buying land and it will not fetch rent. Having a construction and roof over the land made it livable. And this construction essentially becomes the premium that one paid. My friend and I both agreed that the annual rent of a residential property across India was about 3.5% of the current market value. This figure of 3.5% is from my own data based on what I have seen in Chennai. I am sure it applies to other Indian cities as well. 

My friend pointed out that the rent is 3.5% of the total current value of the property, UDS + premium. Very true.

But the point is, while the value of UDS keeps increasing (say @ 10% CAGR), the premium depreciates. All your battery and woodwork and A/c are depreciating assets. At the end of 20 years they may lose all their worth. My data shows that the premium probably gets a negative worth after about 25 or 30 years. 

If this is so, the premium that you pay fetches you 3.5% annually on a declining value. Bank deposit gets you more than 7% where the capital is protected. What sense does it make to pay a high premium value? Is it not a better idea to buy a real estate with very low premium, for example very old flats? The entire property value would fetch 3.5% annual return PLUS there is little / no depreciation. Two flats, one old and one new are compared and the detailed workings are in the sheet below.

Buying a flat with low premium (example: a very old flat), fetches you 1 to 1.5% more CAGR.

This is another article which talks about the same subject.