Most people have a “where I was” story about the night of 8 November 2016. Some of us also have a story on ‘how much money I had’ on the night that Prime Minister Narendra Modi invalidated 86% of Indian currency. I was just dragging myself back home after my Iyengar yoga class (those who join the Beginners will identify with my use of the word ‘dragging’), ready to eat some dinner and collapse. But of course, the team and I were up until midnight, reporting and writing on the biggest news of a personal finance journalist’s lifetime. How much money did I have? I had three Rs500 notes that day. Having moved to cards and then digital, I’d moved my household staff to bank accounts and electronic transfer of salaries some years back. Cash was needed for everyday buying of milk, bread, eggs, vegetables kind of stuff. The local Mother Dairy booth was accepting old notes for future purchases, so I was spared the lines to deposit my money. We all have our stories of what happened that night. This was mine.
Apart from the personal shock to our money lives, demonetisation quickly became a huge political, social and intellectual battle. The battle lines got drawn deep in the ground and your pro- or anti-Modi stance decided where you stood on the demonetisation debate. I wrote a column one day after demonetisation in which I said that the step will raise the cost of black money, it will not eliminate it. That it is one step in a larger plan to go after corruption. You can read it here: bit.ly/2mmdYeZ. How does it look a year later? Modi gave four reasons for demonetisation: to curb corruption, black money, fake notes and terror finance. To judge the success or failure of demonetisation on these four metrics is almost impossible because demonetisation was one of the several weapons the government has deployed against these issues. But let me try and unpack them.
Has there been a dent in corruption and black money? Anecdotal stories say that high-level corruption in the central government is gone, but the cancer of graft elsewhere in the system still thrives. It is unrealistic to expect the deep-rooted habit of graft to disappear overnight, but at least there is serious political will behind the anti-corruption war in India today. What of black money, or money on which income tax has not been paid? Black money is back in the system—talk to any builder (real estate is the biggest sump of black money and talking to builders is a quick way to figure out if cash deals are back) and they say it is as if demonetisation never happened. But they admit to the cash ratio going down and the fear factor lurking at the back of every deal.
Should you rent or buy a house? Many young families face this decision when they move out of the joint family to be on their own or when they shift to a new city for work. Notice that this is not an invest-or-not question, to which the answer will be very different. This is a should-I-rent-a-house-that-I-will-live-in or should-I-buy-now question. For others already on rent, the family conversation about ‘rent or buy’ comes up each time the math is done on how much rent flows out of the family budget each month. “If we had bought our own house, we’d be owning it soon rather than all this money getting wasted in rent” is something most renting families stress over. I’ve had this conversation at home many years ago; especially when money is tight and the growing family’s needs are many, the rent vs buy decision seems even more crucial. Why not put money down for something you will own rather than down the drain in rent?
If real estate markets were efficient, there should be almost no arbitrage between the decision to rent a house or buy it. The rent and the equated monthly instalment (EMI) would be not all that far away and you would be able to stretch just a bit to compensate for the mortgage cost to turn the rent into an EMI. But real estate markets in India are far from this utopia and follow no rational rules for valuations for residential real estate. At current market prices where the rental yields (annual rent divided by value of property, or the return you get from the asset if you were to rent it out in percentage terms) are just 1-2%, renting is clearly better than buying. Look at it this way— what you can rent for Rs25,000 a month will cost you at least Rs1.2 lakh in EMI in Delhi and Mumbai.
How do we know when a market is overvalued? The equity market looks at price: earning (P-E) ratios, book value, price earning to growth (PEG) ratios and valuations to see if stocks, or entire markets, are overpriced or underpriced. Is there a similar metric for real estate, a rule of thumb that tells you when a property, or the whole real estate market, is overpriced or underpriced? Mature markets use some rough rules of thumb to decide over- or under-pricing in real estate. The first is the ‘gross rent ratio’. Divide the sale price of a property with the gross annual rent it will get. Gross rent does not account for costs of the loan, maintenance or society fees. If a flat sells for Rs1 crore and can be rented for Rs50,000 a month, or Rs6 lakh a year, the gross rent ratio is 16.6. Real estate investors use a rough rule of thumb that says: buy at 10 and sell at 20. Buy when the rent ratio is 10 and sell when it touches 20 because the property is overvalued. The second metric is the yield which just switches the two numbers. Divide the gross annual rent by the sale value of the property. The annual rent of Rs6 lakh divided by a capital value of Rs1 crore gives a yield of 6%. Mature market thumb rules say buy at a yield of 5% and sell at 10%.
Getting those real estate itchy fingers? Stock markets have been on a roll and the upswing in markets is usually a precursor of a jump in real estate prices as investors book profits and sink their money in land. The breathless expectations from a new real estate regulator, combined with an overall upswing in the mood of the economy, is making people begin sniffing the air for real estate deals one more time. One more time I write to caution real estate aspirants, specially those who cannot deal with the clunkyness of the asset, against jumping in. Of course, it still remains a really bad investment at current prices when you compare it to alternatives.
Two weeks after the sudden death of a bulk of Indian currency notes, the most obvious panic seems to be over but the elephant of demonetisation is yet to work its way through the system. The entire process will take months before the python digests the elephant.
Arguments, edits, opeds, conversations, debates and social media are sharply divided on what the currency replacement will achieve. I remain in the ‘it’s good for the country’ side of the debate and want to address some of the arguments against demonetisation.
The sudden shock of the currency ban and an unexpected election result in the US caused markets to open 6% down on 9 November. But a day later, the story has changed—all markets are up. So why are stock markets surging? Why are bond markets happy? Why are real estate magnates walking like zombies? What lies ahead for your money?
Readers of this column are hopefully smug with their financial plans and asset allocation in place and are not wasting time wondering if stocks are a good ‘bet’. But let’s deconstruct why markets are up on Day 2 of the #currencyban. Day 0 was 8 November, when Prime Minister Modi made his #currencyban address to the nation.