The tale of Salman Rushdie's house is fascinating, but it leads to mistaken conclusions about gains from investing in realty.
There was this news recently about the author losing a case over a valuable piece of property in Delhi. According to reports, Rushdie will get about RS 100 crore for a property in North Delhi that his father had originally sold for Rs. 3.75 lakh in 1970. Stories about any property gaining enormous value always fascinate everyone and when you add a colourful character like Salman Rushdie, it's all the more interesting. However, the biggest source of amazement is - as one newspaper put it - the jaw-dropping rise in the property's value.
But is it really jaw-dropping? How low would the gain over 42 years have to be for one's jaw to stay in position? The annualised rate of gain for Rushdie's father's property has been 20.1%. Not so jaw-dropping, is it? I mean it's high, but very far from being in lottery territory. For many of these 42 years, money was scarce in India and real rates of inflation were into double digits. A nominal gain of 20% sounds like a bonanza only because of the very long period of compounding.
We don't have any simple way of comparing the returns from this property with that of the stock market but from 1979 onwards, we do have the BSE Sensex available. From its start on April 1, 1979, the Sensex has an annualised gain of 16.9%, which is definitely in the same ballpark as Rushdie's house. The point is that general impression of real estate being a fabulous source of gains unrivalled by anything else is simply not true.
Even the speculative price that is being bandied about for a highly coveted property doesn't have a rate of return that is out of the ordinary. Add to that the risk of illiquidity and the kind of entanglement that this house has gone through, the real lesson from the story could be very different from what it appears to be at first sight.