– by Akash Pharande, managing Director – Pharande Spaces
Property prices increase even though buildings age. How come? In the case of most other manufactured products other than gold ornaments, prices decrease as the product ages, don’t they?
Most people prefer to buy new homes rather than used properties because older properties need more maintenance and repair and because new projects have better amenities and facilities. A TV, car or mobile phone rapidly lose value every month because of wear and tear, and newer models are constantly being churned out.
But while older properties do lose resale value to some extent, they retain much of their inherent value no matter how old they get – and, if one waits long enough, eventually become more valuable than before.
Properties in older buildings in one area cost more than properties in another, much newer buildings. How does this happen?
It’s a good question, and every existing or aspiring homebuyer should understand the dynamics involved. To get a grip on it, let’s return to the above example of gold ornaments. There are two primary factors involved:
The inherent value of the basic material: Gold is a precious metal whose value appreciates because of scarcity because there are finite gold reserves on the planet
The manufacturer’s brand: A gold ornament made by a famous jewellery brand is worth more than an ornament with the same amount of gold by an unknown manufacturer. This is because the well-known brand has invested much more in timeless design and quality workmanship. Therefore, it stands the test of time and commands more desirability.
What does this have to do with housing?
The inherent value of the basic material: In rapidly developing or fully-developed urban areas, available land is limited and gets costlier over time. Every apartment owner has a share of the land on which the project is built.
The constantly decreasing supply of land pushes up property prices, even if the buildings themselves are aging. Location plays a huge role because some areas provide a better lifestyle than others.
The manufacturer’s brand: As in the case of jewellery, the brand of a real estate developer matters. Today, most homebuyers prefer to buy properties by reputed developers, and not only because they know that their under-construction homes will be delivered on time. Branded players invest more into both the quality and location of their projects and also in the scope and quality of project maintenance. For this reason, their projects also see much more rental demand.
Don’t aging building depreciate?
Even with the most careful use, gold ornaments get tarnished over time. Decades after they were first made, they will have lost much of their sheen. Nevertheless, the base material – gold – not only retains its value but becomes even more valuable.
Old ornaments can be melted down to make new ones with a brand-new sheen. No value is lost in the process, and the ‘making charges’ are already recouped because gold has already become scarcer.
The cement, steel and other materials used in modern buildings – even those by branded builders – degrade over the decades. However, the basic input – land – appreciates, and every property owner’s share of the project’s land becomes more valuable. In high-quality such as integrated townships and gated communities, the developer has locked in the appreciating power of not only land but location, as well as reserved green open areas and amenity spaces that add further value over and above the base value of every apartment owner’s share of the plot.
Old buildings are demolished after 50-60 years, and new ones with superior amenities are built. At this point, the original property owners are in the driver’s seat, and their new properties are invariably bigger, better and more valuable than the first ones.
– Supply and Demand: The demand for property is influenced by population growth, economic conditions, and the desirability of the location. If the demand for property in a particular area outweighs the available supply, prices will rise, irrespective of the age of the buildings.
– Inflation: Property prices are influenced by overall inflation, which erodes currency’s purchasing power and causes products with in-built value to appreciate over time. Here again, gold and real estate share very similar attributes.
All of the above revolves around monetary value, but an owned property is valuable in many other respects. You pay no rent on it, and it gives you a lifetime of safety and convenience – or income if it is rented out. Moreover, there is ‘social value’ to consider.
Property owners and tenants hardly share the same social status, nor do tenants have as many legal rights than owners when it comes to using the property. And finally, tenants have no share in the value of the property they occupy.
Interestingly, the age-old ‘buy or rent’ debate was finally put to rest during the Covid-19 pandemic – ‘buy’ has emerged as the way to go. Why did it take a global health cataclysm to cause even life-long renters to come to the market as property buyers? There are plenty of theories, but all the reasons are a combination of human psychology and fiscal prudence.
We like to own what we use, and we like to see our investments grow. And housing prices zooming anywhere between 5-15% in just the last two years, the investment sense behind owning residential real estate is far beyond dispute.