Why you should buy property in US rather than in India

US real estate is emerging as a long-term play for investors based in India and other countries. Falling prices in the real estate markets have slowed, and we are now seeing slow and steady appreciation.

[caption id=“attachment_751525” align=“alignleft” width=“380”] Properties bought with no debt yield a net rate of return of 4-5 percent on rentals. AFP[/caption]

Since the US housing market gives steady returns and prices are still near the bottom, international buyers snapped up about 5 percent of US residential properties in 2012.

The sales of US residential properties totalled $845 billion in 2012 out of which buyers permanently residing outside the US bought $41 billion worth of property.

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Indians accounted to 6 percent of international buyers snapping up around $2 billion worth of residential property in 2012. The demand from international buyers is higher in 2013.

[caption id=“attachment_751501” align=“alignleft” width=“500”] Demand for US properties [/caption]

So what’s driving demand for US residential properties. First is the record low prices, second is the portfolio diversification imperative, third is the ability to get regular income and finally the fact of overpriced alternate investment avenues such as stocks and realty in other countries.

First, let’s look at the price levels of US residential property.

[caption id=“attachment_751503” align=“alignleft” width=“600”] Fredchart[/caption]

The chart shows the Case-Shiller index of home values of 20 major metros in the US. The index is calculated from data on repeat sales of single-family homes. This is the best way to track prices as it shows how real values on individual homes changed. Most other data give average prices of all homes sold. So if in a certain period at lot of expensive homes got sold, the average prices get inflated. By tracking repeat sales, the index eliminates distortions created by averages.

You will notice that prices, after hitting a low in 2009, rose slightly in 2010 only to fall lower. Now finally prices have gone higher than the 2010 levels, but they are still significantly below 2006 highs. The rise in home prices in 2010 was due to multiple government incentives to prop up house prices. Then the pumping of money by the Federal Reserve has prevented values from falling and drove prices a little higher. The assets that boomed in a loose money environment in the US were stocks, commodities and bonds. Real estate has stayed subdued.

Some analysts predict that real estate may rise soon at a faster pace and try to catch up with the equity markets. Even though that remains to be seen, a slow continued appreciation is expected by most industry watchers. Hence the likelihood of a price rise has fuelled some speculative interest.

Some non-US investors prefer to get country diversification by picking up property in the US. Not only do they get an asset in a foreign country, but the asset is denominated in US dollars, which is still the currency of choice around the globe. Given the diversity and wide base of the US economy, investors see more stability in prices. China, for instance, is largely a government-driven economy where one wrong policy can affect the whole country. The US, in contrast, is a country built of multiple private enterprises, where the errors of one enterprise need not affect the whole economy.

The other attractive feature is that realty gets decent rates of return in the US. Properties bought with no debt yield a net rate of return of 4-5 percent on rentals. This return is net of taxes, insurance, other fees and expenses. If there is leverage involved, the rate of return increases dramatically. A 5 percent return in the US is much better that what banks give on fixed deposits. This is considered good when compared to India where returns on fixed deposits are higher than returns earned on rentals.

Rental yields in India are typically 1-2 percent, due to inflated property prices. People invest in properties more for capital appreciation and less for regular income. But given the run up in homes prices in India, there is risk of a strong correction.

Some may argue, why go through the hassle of buying property in the US, when fixed deposits in India earn about 9 percent. The answer is simple. In India, high inflation gives a negative rate of return on fixed deposits. In the US, on the other hand, inflation is low, giving a positive rate of return. This actually translates to the dollar getting stronger against the rupee, which increases rupees earned when converted from the greenback.

Finally, while most asset classes have run up in price, real estate is relatively cheap. This gives investors a chance to get in on the ground floor in the US.

So where are people buying. By and large the most popular state is Florida, because of its weather, tourist attraction and no state income taxes. The second most popular is California, again due to the weather and tourist attractions. But taxes there are pretty high. Florida attracts investors as the state goes through wild price swings, giving an opportunity to buy low and sell high.

Nifty: The index broke above the resistance level we had marked on the chart last week and has now come down. ( See the Nifty chart below)

[caption id=“attachment_751515” align=“alignleft” width=“600”] Nifty[/caption]

This essentially means that we’d have gotten stopped out. You’ll notice that prices went above the zone marked by the red lines. Now to short we’d wait for prices to reach the upper red lines. To go long, wait for prices to dip to the blue lines below current price.