Bihar, Jharkhand Invest Most In Real Estate, Says RBI Report

A recent report by the Reserve Bank of India's Housing Finance Committee (RBI) has revealed some interesting facts about India's real estate. Let us have a look at them:

Who is investing the most in real estate?

For most Indians, real estate investments form the biggest part of their savings. But, it is people from Bihar, Jharkhand, Uttar Pradesh, Nagaland and Jammu and Kashmir who invest the most in this asset.

… and gold

The second most popular investment option for Indians is the yellow metal. People from Tamil Nadu (28.3 per cent), Pondicherry (25.7 per cent), Daman and Diu (24.4 per cent), Andaman and Nicobar (23.5 per cent) and Andhra Pradesh (21.6 per cent) invest the most the gold.

Also Read: 9 Interesting Facts About Indian Real Estate

… and financial assets

The states that put most in bank deposits, publicly traded shares and government securities, mutual funds, managed accounts, and informal loans are Daman and Diu (11.8 per cent), Sikkim (11.6 per cent), Dadra and Nagar Haveli (10.5 per cent), Delhi (9.8 per cent), Chandigarh (8.3 per cent) and Arunachal Pradesh (8.3 per cent)

Those focusing most on retirement corpus

Private pension accounts, provident funds, annuity certificates, and life insurance accounts are top priorities for people from Andaman and Nicobar (18.1 per cent), Chandigarh (14.1 per cent), Dadra and Nagar Haveli (12.4 per cent), Daman and Diu (10.8 per cent) and Sikkim (10.3 per cent).

Real estate's importance after retirement is surprising

After retirement, people depend on different sources to survive. For a little over 50 per cent of the survey participants, the source of income after retirement was their children. For a little over 25 per cent of people, their own business was what they relied upon. Next come bank deposits. More than 20 per cent of the participants said they didn't know how they would manage their retirement. Other sources opted by these participants were provident fund, government pensions, gold, wealth, other sources, financial assets, movable assets and real estate. Real estate was opted for as a source of income by less than five per cent of participants.

One of the takeaway from the report is its observation.

“We find that households simply shift gold holdings towards real estate, and do not increase their wealth allocation to either financial assets or retirement accounts, even as they move towards the top of the wealth distribution.” Even then, real estate could be seen mostly as a security and not an actively yielding income generation source.

What happens to their property, then?  It simply moves on to the next generation.

“Nevertheless, the enforcement of this informal arrangement can also put substantial pressure on the social fabric of society, creating inter-generational tensions, limiting the education and productivity potential of the young generation, and locking up a large part of the nation's wealth in highly illiquid assets,” reads the report.

Some key points from the report worth your attention:

• The largest expected growth (in absolute terms) is in real estate.

• An increase in housing demand by around 45 per cent. There are two conclusions that we can draw here: On one side, absent massive investment in new housing construction, this development is likely to put large pressure on house prices, potentially decreasing affordability even more, and especially in the urban centres where the young population is likely to cluster. But at the same time, even if housing supply reacts by expanding greatly, it seems inefficient for an economy to allocate such a large portion of its total wealth to a single sector, says the committee's report.

• The average share of real estate in household wealth is likely to actually increase, while the share of financial assets is projected to remain constant.

• The housing market would be subject to large demand pressure, but any price volatility will generate more uncertainty for the average Indian household, as it gets more and more undiversified by holding larger and larger amounts of real estate.

Note: In all the states, real estate investment comprises of the largest share of asset allocation.