Agreed, buying a house has always been top of your list. But need you pay a king’s ransom for owning a house that you can rent for a fraction of the outgo.
Typically, everyone wants to own a home. Buying the first house is, in fact, the most aspirational investment that everyone prepares for. However, skyrocketing property prices have wracked and ruined that dream for many. And, while some have put off the plan to buy a house, others have simply resigned to the idea of continuing living on rent, which is relatively within their means.
But a close look at the situation will tell you that renting isn’t exactly for the hopeless. In the backdrop of the current market situation, staying on rent could actually be the wise thing to do. And many despite having the means, have actually chosen to stay in a rented house until the time is right.
When deciding to buy a house, one should factor in a lot of things besides high property prices, such as how long do you plan to stay in the city where you want to buy a house. For, if you happen to move out soon after the purchase, the house can turn out to be a bigger liability than an asset.
Alternatively, if buying a home at the moment would mean missing out on your other life goals in favour of the hefty home loan EMIs. Consider your family needs, financial situation, rising inflation, increasing cost of living, the state of the real estate market (especially in your preferred area), and then the cost involved in both the options, renting and buying.
On the basis of the internal and external factors, the decision to buy a house or stay on rent differs for everyone. However, listed below are a few reasons why you could be better off in a rented house in these times of high real estate prices and loan rates.
High property value versus low rentals
During the last decade, property prices went through the roof, while rentals remained modest. Says Manish Mehta, vice-president, IndiaHomes, a real-estate brokering firm: “On an average, in the last five years property values have increased by approximately 75 per cent. During the same period, rents rose by only 25-30 per cent.” Concurring with Mehta, Aditya Verma, executive vice-president and chief operating officer, Makaan.com, a real-estate portal, says: “During the last four years, property prices increased by about 14-18 per cent per annum on an average, whereas rents increased by 6-8 per cent per annum in the country.”
According to Makaan.com’s Buy vs. Rent Index (MBRI), high property prices in the Indian market is the key reason many home seekers are opting for rented accommodation. Property prices in India rose steeply between 2010 and 2012, whereas rentals remained stable through the period, making renting a highly preferred option among those looking for a home.
Take the example of 32-year-old Naresh Singh, who lives with his wife Priya in a rented apartment worth Rs 60 lakh in Mira Road, part of the Mumbai Metropolitan Region, for a monthly rent of Rs 10,000, which is just 2 per cent of the property value per annum. And like Singh, many stay in rented apartments because they cannot afford to buy a house whereas the rents are pretty pocket-friendly. Typically, annual rental values in India have been 2-4 per cent of property price. To put it in perspective, if one did have the funds to buy a house, he could invest it in a term deposit at 9 per cent a year, pay his rent and tax, and still have money left over.
High upfront cost
Ask people and chances are most will tell you that they would rather pay a home loan EMI than waste money on rent. But how many actually do have the deep pockets to pay the high upfront cost involved in buying a house. Typically, the down payment and other upfront cost range from 30-35 per cent of the property value, which is a big-ticket for any average pocket.
For instance, if Singh were to buy the house in which he stays, he would have to cough up Rs 20 lakh-22 lakh upfront: Rs 12 lakh (20 per cent of the property value) for down payment and another Rs 8 lakh-10 lakh towards stamp duty, registration fee, brokerage and so on) while he can only avail himself a maximum home loan of Rs 48 lakh (80 per cent of property value). Not just that, his monthly outgo (EMI as compared with rent) will shoot up by 360 per cent to Rs 46,176 (`962 per lakh from State Bank of India for a 20-year loan of Rs 48 lakh) compared to his current rent of Rs 10,000. What’s more, to do up the bare flat he gets and make it liveable, he would have to spend an additional 15-25 per cent of the cost of the bare flat. That could take the total initial outlay to Rs 35 lakh or more and leave him to pay EMIs in the bargain.
High inflation and rising cost of living
Let’s say you have the means to buy a house, but have you given the rising inflation and the consequential increase in living cost a thought? As a matter of fact, during the last few years, owing to unfavourable economic conditions, the increase in income has failed to keep pace with the racing inflation, making lives difficult for those servicing home loan EMIs. For instance, diesel price increased by approximately 20 per cent across the country in the last one year, which has had a multiplier effect on the cost of most products and services we use every day.
Lately, high inflation has resulted in significant erosion in borrowers’ net disposable income. Keeping the inflation in mind, it is advisable to opt for the floating rate option for home loans; the option gives some relief when the interest rate comes down. However, on the flip-side, it can hit doubly hard when the rate goes up, making things worse for you during times of high inflation and increasing interest rate.
Till date the residential property market is fairly unorganised. So, predicting trends is a pure game of speculation. For most buyers, the decision to buy is either based on their understanding of the market or on their financial ability to make a purchase. However, there are some real-estate portals—makaan.com and arthayantra.com—that can help you take a decision.
Says Suresh Sadagopan, founder, Ladder7 Financial Advisories, a Mumbai-based financial planning firm: “It sure makes sense to stay on rent if annual rental values, a percentage of property price, don’t cross (around) 3 per cent on a gross basis.” According to him: “Property values are currently elevated and the cycle has run for eight years; so, it is only a matter of time before the prices start coming down.” Those who want to buy property can wait for the cycle to turn—unlikely in many parts of the country—or wait for slowing down of realty price rise, which may allow income growth to catch up and, thus, enhance loan servicing capability, even as they keep socking away money for enhanced down payment in the future.
Uncertainty of stay
Beside external factors like rising property value, inflation and so on, there are other aspects to consider when making a buying decision. For instance, if you are not sure how long will you stay in a city, it is best to stay on rent. Buying a house typically ties you down to a place, making you less open to relocation. Says Ganesh Vasudevan, CEO, IndiaProperty.com, a real estate portal: “If one is looking for temporary stay flexibility and can invest savings wisely for better returns, it makes sense to stay on rent.”
Take the example of 27-year-old software professional Anil Viswakarma, who is staying for the past three years in an apartment worth Rs 90 lakh in Gurgaon for a monthly rent of Rs 16,000. Although he can well afford an EMI of Rs 65,000-75,000 as well as a down payment of up to Rs 20 lakh with some help from his parents, he doesn’t plan on buying a home there. Says Viswakarma: “I am not sure how long I’ll be in the city.” Working in an industry that offers tremendous growth within the country and overseas, Viswakarma wants to keep himself free from committing to EMIs for 20 long years.
Moreover, if he buys a house, it could actually result in a loss for him if he has to sell within a few years afterwards (see The Break-even Math). The costs can whittle down the profit margin on sale despite property price appreciation, if any, in the interim. Says Verma: “In an ideal situation, it takes around 6-7 years to achieve no-profit-no-loss.” So, unless you are sure that you’ll stay in the city at least that long, don’t buy a house there.
Run a quick check on your finances before you commit your life’s savings to a home. With the prevailing high property prices, it could burn a huge hole in your wallet. Not only does one have to shell out more for down payment, but live on less as the bulk of income goes towards paying EMIs. And if you try to cut short the tenure, you might end up with a negative cash flow as the EMI outgo goes up. That is a sure-fire recipe for jeopardising your other financial goals. Says Sadagopan: “Goals like retirement and children’s education should always get priority. After all, if you don’t own a house, you can still rent one.”
However, Arvind Rao, financial planner, Dreamzinfinite, says: “While buying a home can be deferred, it makes better financial sense to buy it sooner than later to capitalise on the appreciation potential of the property.”
When to buy
So, how long before one finally buys a house? Most financial advisors and real-estate experts say that first-time homebuyers should buy when they are financially comfortable. So, get your feet wet, only when you can actually afford it.
Says Sadagopan: “Buying a home is an emotional decision. Most people prefer staying in their own homes and, hence, this is a goal people should plan for.” But despite all the planning and budgeting, people often go overboard. You should only allow yourself to overshoot the budget if you have a surplus. Don’t bank on your future salary increments and bonuses. Remember, your payouts are certain, but your receipts are not.
The thumb rule dictates that your total principal outstanding should not be more than 50 per cent of your total assets at any point in time and that not more than half of your monthly take home pay should go into paying EMIs for all the loans you have.
When buying a house, ensure a few things. First, that you are certain to stay in the city for long if not settle there. Second, you've found the right house in the right area within your budget. Lastly and most importantly, a good credit history as well as enough savings for the down payment.
Also, be careful about selecting the property you intend to buy. Nowadays, timely completion of projects is the biggest issue; go for something you are likely to get in 12 months.
Buying a home at an early age is highly recommended as that gives you time to clear the home loan long before you get to retirement. Having said that, it is more important to first fulfil crucial financial steps such as building up a contingency fund, securing your life and health with adequate insurance and saving up for other life goals.
Dhawal Wadhwa, 23, who recently became a chartered accountant, lives in a rented apartment in Laxmi Nagar, Delhi, with his mother and younger brother, both financially dependent on him, paying a rent of Rs 9,500—about 25 per cent of his salary. Besides that, he has to take care of other household expenses. So, to bring down his expenses, he wants to buy a house as soon as he can and save the money spent on rent. But he says: “At present, my loan eligibility is either nil or very low, also I don’t have enough for the down payment.” It will, ideally, take him 3-4 years to save for the upfront cost for buying a house.
While some can afford and some can’t, everyone yearns for a house just as much. So, those who can should make sure that they are not bringing home a bad deal. And those who are making do with rented accommodation could wait for the market to turn to pursue their dream home.