Why we prefer real estate to stocks ::Business Line

It is no secret that Indians have a special affinity for real estate. In fact, one of the first important decisions that a young professional takes is to save enough to make down payment for a dream home. We do not have the same urge to buy shares or bonds. What makes real estate different from stocks and bonds?

One of the most obvious reasons is that real estate is a physical asset. But why should a physical asset give us more satisfaction than a financial asset? You will agree that living in a house worth Rs 1 crore or possessing Rs 1 crore worth of diamonds gives you more happiness than having Rs 1 crore worth of shares in your demat account. Why?

For one, you can touch and feel your physical asset. Your brain is typically excited when you feel the objects you own. This is true with real estate because a house is a consumption asset while shares have to be sold and converted into cash before it can be consumed. For another, you can use your physical asset even as you own it. You live in your house or sometimes even wear your diamonds. But you cannot flaunt your investments in shares or bonds.

Then, there is the high comfort factor that can be associated with real estate purchases. For one, you believe real estate is ‘safe’ investment, as you have rarely seen prices decline. For another, you believe real estate does not require the same quality of analysis as do stocks. Both these false beliefs can be attributed to the fact that real estate is not traded actively. This means wrong choice of stocks is visible while wrong choice of real estate is not. And visible prices cause regret when choices are wrong. Besides, your parents and grandparents are more likely to have bought real estate than stocks. It, therefore, becomes easy for you to do the same.

Finally, you leverage real estate without guilt and fear because you have been told that it is good to borrow to buy a house. But are you comfortable borrowing to buy stocks? True, real estate is a durable asset that you can transfer to your children. But so are stocks, as they do not have a finite life. So, why are you comfortable borrowing to buy a house? The reason, perhaps, has to do with visible stock prices; that can cause even more distress when your investment on borrowed money declines. As for leveraged real estate, you can draw comfort from the fact that you can live in it or earn rentals even if its price declines.

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