To buy or not to buy?
Possibly the biggest buying decision of your lifetime — purchasing your own house — has become a lot more difficult than before, with prices skyrocketing in the big cities. In certain prime locations, the affordability index has gone through the roof, posing a big question before aspirants: To buy or to rent?
Demand for property prices is driven by the emotional need to own a home and a lower affordability factor. While there’s a strong growth in demographics and many new young workers would like to own their own home, affordability is a niggling worry.
A few years ago, a typical two-bedroom- hall-kitchen (2BHK) apartment was available for around 10 times the average annual income in, say, a technology hub like Bengaluru. While incomes have risen, property prices have increased at a faster pace and are now 12-14 times one’s average income. Income levels have stagnated and property prices have increased, making affordability difficult in 2014. High inflation and high interest rates have been a deterrent to new buyers in financing their own homes.
On the other hand, rentals in many areas have not gone up commensurately.
Property prices have increased in many parts of the country but rents have not gone up that much. Rental yields are a small percentage on current property values and in certain parts have come down despite an increase in prices.
So, should you buy a house or rent one?
If looking for a property in premium places, there’s a high likelihood that you might not be able to earn good capital appreciation on your purchase from current levels in 2014. Premium property prices have peaked and are unaffordable. In such a situation, it makes sense for a buyer to put purchase plans on hold for now and look for property in areas that are cheaper.
But renting is not a long-term option, though annual rentals are only about a fraction of the property price in many locations. So how do buying and renting compare? Consider the option of buying a house. A 2BHK apartment in the suburbs of Mumbai would cost around Rs100 lakh today. And if you are going for a home loan at 85% of the cost you would be required to make a down payment of say Rs15 lakh. This effectively means a home loan of Rs85 lakh. Considering the rate of interest of 11% per annum, you would pay roughly Rs87,736 every month for the next 20 years after which you own the house.
Now consider this second option of renting a house now and buying one later: Assuming a 4% per annum rent on capital value, you will be required to pay a rent of Rs33,333 every month for a two bedroom apartment in Mumbai. Let’s assume that the annual rent escalation is 5%. So the actual difference between the rent and the EMI would shrink every year. Ironically, in the 20th year, the rent will be almost same as the EMI.
Even if you manage to invest every month for 20 years and assuming 10% return could see your investments grow only to Rs3.1 crore at the end of the 20 years. And if you add the down payment of Rs15 lakh that you could have paid for your home loan plus the 10% interest on it, still your investment put together at the end of 20 years will be somewhere around Rs4.2 crore.
In contrast, the value of your own house would be Rs6.7 crore at the end of 20 years!
Below are some factors to consider while arriving at a merit-based decision:
While buying a house
Amount of down-payment for house loan
Time to save for down payment (No. of years)
EMI on house loan
Monthly property maintenance charges
Annual property tax
Income tax savings
While renting a house
Yearly increase in rent
Monthly property maintenance charges
Income tax savings under HRA Exemptions