Comparing real estate market and the stock market

Stock market is the true indicator of financial health of the country. BSE realty index was launched in 2007 and consisted of 11 real estate scrips which represented almost 95% of the capitalization of real estate companies in Sensex. Today, Realty index is at 1442 and Sensex is at 20000. This is in stark contrast to January 2008, when Sensex was at 21000 and BSE realty index was at 13400. While the Sensex is down 5% from its peak, the realty index is down by a staggering 90%!!  

It is important to understand the risk as well as the opportunities when opting for an investment opportunity. Investment required in stock markets is very less as compared to real estate. More often than not one has to depend on home loans. EMI eats into the future lifestyle of the family. Profit margin in stocks has always been substantially higher than any other asset class. Stock market investments offer advantages such as liquidity and flexibility, which real estate does not. Stocks also offer the growth rates that the real estate can rarely match. It is also easier to track stock prices which are centrally controlled. Real estate change hands in a very non-transparent manner and often common man gets duped in the process.

Nevertheless, real estate is a tangible asset that any man aspires to possess. It provides a sense of security and satisfaction to any family. Also as discussed in previous post, capital appreciation as well as rental income provides gains to the owner. Unlike stocks which is less predictable as evidenced by various ‘Black Mondays’ and ‘Black Fridays’ on which the Sensex tanked by about 10% on a single day, such occurrence is unheard of in real estate.

Useful Read: Should I invest in Indian real estate?

I am not saying that real estate prices do not fall, but a steep decline of 10% on one day is unheard of. Ever wondered why? The basic reason that I could come up with is because an owner finds it hard to switch houses whether prices rise or fall, may be due to emotional attachment he has with his house, or due to the costs and paperwork involved, also may be due to other ties with locality such as children’s school, relatives, friends etc. Even if the value of a home drops, the chances of homeowner leaving his house and shifting to another one are negligible. (Though the same do not hold true for those who buy houses entirely for investment purpose.)

Owning a house should be more about settling down and homemaking and less of an investment asset when you are new to this asset class and you have less knowledge of how the market is performing. But does that not hold true for all asset classes!! Knowledge is GOD, either u have it or you know where to find it!