No matter who you are and where you work, one question that every Indian struggles with is whether they should buy a house or not. With opportunities available nationwide, migrants are puzzled whether they should buy a house or keep living in a rented space. Is living in a rent a problem? Is buying a house a solution? This piece tries to answer some of these questions.
The Problems with Rented Space
Rented spaces have certain problems. The rent would not stay the same throughout. In most places, rent increases every 11 months. The owner of the house may be annoying and is always at your head. The amount given as rent adds nothing to your life other than a shelter for a month.
This makes people think about personal space.
The Problems with Personal Space
The biggest reason most people in India buy a house is because of their emotions. People do not tend to calculate that EMI of the personal space, which will be around 2.33 times of their current rent. There is a 20% downpayment required when you take the loan. Hence, people must be ready to give up their current lifestyle for years to come.
Moreover, if you want an affordable home, you will have to compromise on location and the structure of the new house.
What is right? The rented space or personal space, both have their economic implications. The following numbers would enhance your understanding of what is better for you.
The Cost of Buying a House
Suppose there is a house worth ₹50 lakhs. Assume you stay in this place for the next 20 years.
If you buy this house, you have to pay the home loan EMI of ₹35000 per month. This also needs a sum of ₹10 lakhs as a downpayment (20% of value). Downpayment is the upfront payment you make, while the rest of the amount is paid through the loan by the bank.
However, there are certain tax benefits one gets for paying the home loan. The interest paid is exempted up to ₹2 lakhs. The maximum principal amount exempted from tax is ₹1.5 lakhs in Section 80C. Assuming the person is earning the above ₹10 lakhs per annum, he pays 30% of income as tax. The tax saved is around ₹12 lakhs. For someone in 20% tax slab, the tax saved would be about ₹9 lakhs.
The Cost of Renting a House
If you rent this place, you have to give ₹15000 per month. In this case, you save ₹20000 per month and another ₹10 lakhs that you might have given in downpayment.
The rent increases at a standard 8% per annum. This rent of ₹15000 would become ₹65000 in 20 years. Hence, you can save the difference between the rent and the would-be EMI for some years and invest that in a mutual fund SIP.
Since rent increases at 8% per annum, you will be able to save money only for the first 11 years (If rent increases at standard 8%, the rent paid every year will exceed the would-be EMI). If SIP from 11 years of savings gives a 14% return, your corpus at the end of 20 years will stand ₹1.3 crores.
Assume you invest this lump sum of ₹10 lakhs at a reasonable return of 12%, the return would be around ₹1 crores. Hence, the total amount you have after 20 years is ₹ 2.3 crores!
Is buying the house that costly?
Now here is the catch. You bought the house. It holds a certain value. In fact, the value would appreciate over time. Assuming that your property worth ₹50 lakhs appreciated at a rate of 10% per annum, the property values ₹3.36 crores, beating the renters by half! Add the tax savings you did while paying a home loan and it becomes ₹3.5 crores roughly.
In addition, in the case of renting folk, we assumed that they invested all the money they saved. This is not a realistic case. In fact, buying a house forces you to pay the EMI. In a way, it is a forced saving, unlike the renting folk would practically do.
Is buying the house the best option?
I would put forth certain things associated with the house and it is for you to decide.
Firstly, what we have considered is a long-term duration of 20 years. In this case, buying a house will always benefit rather than renting. Renting provides flexibility to move. So if you have a long-term plan to settle at a place, buy the house.
Secondly, if you have decided to settle, buy the house as soon as possible. Try to save the downpayment amount as quickly as possible otherwise, the property rates would shoot up.
Thirdly, our discussion has been limited to a house. We did not consider if it is a stand-alone bungalow or an apartment. The stand-alone bungalows will see an ever-rising price. This is because, in a normal scenario, the value of land appreciates over time. The value of house constructed might be much less of a matter then.
Instead, the apartments have a different appreciation pattern. Their value appreciates because the overall value of the location appreciates. On the other hand, the construction turns older and it pushes down its value. The apartment owner only owns his space and not the land. Hence, the final price is somewhere in between. In a period of 15-20 years, the price of the apartment would reach its peak and it would flatten from there.
Lastly, no matter what is the price of your house today, it does not matter if you do not sell. Though the house of ₹50 lakhs today would value ₹3.36 crores after 20 years, you will not get a penny out of these crores unless you sell the house; and this is rarely done if you are living in the house well settled with your family for past 20 years.
Here is the important conclusion of the discussion. Buy the house if you have to stay for long (at least 10 years), else rent it and invest the most of it. The value of the property does appreciate. However, the rate depends on several factors.
We can generalize just a few things. In the case of land, it will appreciate throughout your life. In the case of apartments, the growth would not be any match to land, and it would flatten over the longer period.
The only thing one should carefully calculate is the EMI they can afford, be it stand-alone or an apartment. It is a healthy ratio if your EMI is at most 30% of your total savings, so one must try to stay in this limit.
In India, people tend to make financial decisions emotionally. This piece tries to prevent your emotions from clouding over your judgment.