In 1999, you could get an apartment in Malabar Hill Mumbai for approximately, Rs 30,000/square feet. Now, a similar apartment is about Rs 75,000/square feet. A 2.5x return in 15 years looks interesting if you can’t do compound interest math. But, if you can, the return turns out to be about 6.5%/year which is similar to what people would get from a fixed deposit rate.

How is it that people still continue to believe in the magical qualities of real estate investing when the past historical returns have been anything but extra-ordinary? The answer lies in the first question your home loan banker asks you when you walk into the bank & ask for a home loan: What is your income?

Most home loans are given based on a factor of your income & what bankers refer to as debt to income ratios. Generally, most banks lend up to 40% of your monthly salary. Suppose, you make Rs 1 Lakh per month, your monthly installment (including interest & principal payments) cannot be more than Rs 40,000/month. So, therefore, it naturally follows that real estate property follows income growth rate.

Now, lets take the current case of another hot property market: Gurgaon, India & take a location like DLF City Phase 2 where according to MagicBricks, the going rate is Rs 13,000/ square feet. If you bought a 1500 square feet apartment, the total cost of the apartment would be Rs 1.95 Crores. If you decide to finance Rs 1.5 crores of that, then a 15 year loan at 9% interest rate means, your monthly installment would be 1.5 Lakhs/month. At 40% of your income, your total income to support such a home loan should be Rs 3.75 Lakhs/ month or $6250/month ($75,000/year).

If you compound at 7.2%/year, then the DLF City Phase 2 apartment would double in 10 years or be worth Rs 3.9 Crores in 2024. The person buying the apartment from you in 2024 has to also double his income too from from 2014 to $150,000/year. To put that in context, we can compare those figures to the Manhattan property market. According to details available at MortgageDex, the median income levels of an applicant for a home loan in Manhattan, is about $100,000 or Rs 66 Lakhs per year.

Therefore to make, to generate a 7.2% return over 10 years in Gurgaon DLF City Phase 2, the typical Gurgaon resident in ten years has to be making 50% more than the typical Manhattan resident of today. To make the reality even clearer, a typical Gurgaon resident earning $150,000 in 10 years can’t do that in isolation (the entire area, support services, staff salaries, restaurant prices etc) has to be Manhattan like in a decade.

Is that reality or is it a delusion?