The question that bothers a lot of prospective home buyers is whether they will miss the bus if they wait any further. However, the right question should be: Can I afford to buy a house today? Even if you are one of those blessed ones, the thought should be: Is it a fair price for the house? Your house might not be an investment, but does that mean you should pay any price for it?

The prices currently being quoted are simply atrocious. From a time, not too long ago, when people talked about loans of Rs 10 lakh to Rs 50 lakh, today the average loan size is substantially higher.

A simple 2-bedroom house in Malad can cost up to Rs 1.2 crore (including stamp duty and registration charges). This is the price that sellers expect, but this does not mean they are actually getting it. The cost of a similar flat 4 years ago was close to Rs 30 lakh.

The entire real estate boom took off in 2003 on the back of very low interest rates and low prices. However, the situation has changed now with realty prices going up 3-4 times, while interest rates are 60-70% higher. Incomes have certainly not grown four-fold in the past four years. Today, even if you are earning Rs 25 lakh annually, it is extremely difficult to buy a 2-bedroom house in the suburbs.

Even if you make a down payment of Rs 20 lakh, you will still end up borrowing close to Rs 1 crore. This would mean an EMI of close to Rs 1 lakh per month. So, after tax and EMIs, a person with Rs 25 lakh gross income will be left with just Rs 5-6 lakh as disposable income for lifestyle and living expenses. Once you take EPF contributions, you will just be left with Rs 4 lakh annually.

Lifestyle inflation (driving a car, visiting malls, eating out & entertainment), which is much higher than normal living expenses, eats up a significant portion of one’s income. Hence, it is just not possible even for someone earning Rs 30 lakh to service an EMI of Rs 1 lakh every month. Even if you do manage to do it, you will be left with no savings.

Real estate prices, though location-specific, have been witnessing a slowdown in demand. One might argue that luxury accommodations might not be impacted by this. However, there is a visible slowdown in real estate and prices are down on an average by 10-15% in places like Mumbai.

Unlike the stock market, there is no index for the real estate market and no price-discovery mechanism. In fact, the price discovery is very subjective and identical properties in the same building can go for two different prices. If one had a real estate index, it would have had given details on number of transactions.

There have been several reports of builders borrowing at very high interest rates and some defaulting on their interest payouts. In fact, real estate stocks have been hammered the most and the basic assumptions on which their landbanks were valued are a matter of debate now.

Speculators have started to exit since late last year and investors trying to exit now are unable to get the price they could dictate some time back. With rising interest rates, demand should come down. However, location still rules and some premium commercial property could still fetch good money.

Not that it is any indicator, but if you look at the price-to-rent ratio (PR Ratio) similar to PE ratio, one can clearly see that the prices are in the bubble territory.

Since there are no margin calls in the realty space, the holding capacity of an investment can be substantially higher than a leveraged exposure in stock market, where margin calls have to be attended immediately. Hence, real estate prices generally do not fall drastically.

Small builders are cash-starved and are not getting into new projects. This is the case with mid-size developers. However, big builders with access to IPO funds and PE funds can wait for an extended period of time before cutting prices.

One can clearly see that the discounts offered in the form of stamp duty waivers or furnishings are nothing but a desperate attempt to get end-users.

Like in the stock market, it pays to be patient in the real estate market too. For realty market to sustain itself there should be a steady inflow of end-users. Speculators and investors can only take it to a certain level. End-users can only come when prices are affordable and for that at least 30% correction is a must.