Price of houses is a topic that is on most of our minds, at least with those of us who have begun to earn our living. It is the one area where we will end up spending the largest fraction of our hard earned income. Indeed the thought whether it really deserves that much expense may not cross our minds; or if it does, it is quickly brushed aside by the overwhelming evidence we see around us, in that our friends and colleagues are buying houses at similar or even higher rates.

In this post and a few following posts, we will attempt to look at housing industry in general  in India, across the world, the prominent trends that are in place, the pitfalls to watch out for, how to value houses etc. Attempt will be to analyse dispassionately, with a blind eye on prevailing rates and their seeming permanence. It should be a learning journey for us as well as you.

For starters, let us look at how much monetary value we should place on a house. From a fundamental perspective, the value of a house will never exceed the income you could generate from it. In other words, what is the total rental income that a house can give over its lifetime? Get that figure and adjust it for inflation in rupee value and you should have your house valued pretty neatly.

The trouble of course arises in being able to forecast accurately the rental rates in future. In fast growing urban areas, rents can double in a few short years; while in small towns the growth in rates could be almost non-existent. You will realize that this is very similar to how we value stocks of companies in the share market. And similar to that, houses should also have Price to Earnings ratio if you ask me.

With our dear Sensex now trading at above 20 PE, what are our houses trading at? Any ideas?