kprgroup

Thnaks to whoever write this......

This is the question that concerns majority of the people who have relocated to other cities following a job or business requirement – Should I buy the house NOW by taking a loan OR should I wait for some more time for the real estate prices to come down and interest rates to stabilize?

You will find different answers from different people whom you ask this question.

Call up the bank and home loan officer – his response – “We have excellent discounts available, the interest rates are just right to take a loan – in future it may appreciate further. Let me know your details and I’ll visit you and explain”

Call up the realtors selling apartments – their response – “Only 2 flats are left in this building, rest all are booked and this is the most upcoming and happening areas which will only appreciate in value. If you miss it now, it will become costlier day by day and unavailable”

Ask you friend who has already taken a house loan – “You MUST take a house loan as soon as possible. See, I took loan 1 year back. I got the possession 2 months back and the price of my house has increased to 1.5 times in just one year. There can be no better investment than house and house loan. So just go ahead and invest.”

Ask your friend who has NOT taken a house loan and is staying in rented apartment – “Yaar, rented apartment is the best. No long term commitment and freedom to relocate to any place and in any city. God knows how long can I keep up my job.”

Another friend who has bought a piece of land or plot – “Forget about house, a house depreciates in value. Some day or the other the fall will come in real estate. Land only appreciates in value, irrespective of the market situation. So invest in land, and later sell it at much-much higher price to buy apartment.”

Basically, all you will hear is the psychological biases of individuals trying to justify what they have done. Hardly anyone will know anything about the markets – all have taken random shots for their financial commitments and will be ready to shout at the top of their voice to claim that what they did was correct and you should soon follow them by taking their valuable advice.

Now, many-many articles are available on site like rediff, citing extreme end examples of people who should take loans and people who should not take loans. However, a general dilemma can never go away.

Unfortunately, no one can tell what you should do. It is you who has to take the call. It is you who will be responsible for your financial obligations if things go wrong and you get into a financial distress. Hence, take advice from others, but take decisions on your own.

As a finance professional, I know one thing for sure: No markets, No Industry, No country can continue to grow consistently with even a double digit growth. People who claim to make claims of even a mediocre 20% profit from their stock picking skills are again reminded of how the overall market has performed.
Now forget about the stock market and its overall fantastic returns. All of you must have already heard the “Indian Growth Rate ranging from 8% to 10%”. If it is so easy to make money, why is the government, the country still struggling to keep up the growth rate at mere 9% (not even touching the smallest double digit figure of 10%)?

The reason is same as cited above. Overall, the profits from one segment are nullified (to a major extent) by the losses in another segment. A high salary requires relocation, and the cost of living eats up majority of salary. If you can make and save more – you are just lucky.

So coming back to the real estate market – there has to be a saturation level –atleast in terms of the price rise. If today, the house prices are rising with annual 20-50% range, then there will definitely be a time when the prices will either fall nosedive, if the MNC start laying off people (the major customers of real-estate boom) OR atleast there will be a time when the price rise will be limited in a single digit range. When will it happen? No one knows. But my finance knowledge and historical data is sufficient to convince me for this.

kprgroup

So unfortunately, the dilemma continues. But just take an example as cited in my previous article. You decide to buy a flat costing 40 lakhs. You get 32 lakhs as loan from the bank. Rest 8 lakhs you put in from your own kitty. The EMI typically comes to around 30,000 per month for 20 years. So for 32 lakhs loan, you return to the bank an amount = 30 K * 12 months * 20 years = 72 lakhs.

This amount is double the amount of money you are taking from the bank as house loan.

Off course this has to be repayed over a long duration of 20 years so DCF analysis will lead to a lower amount, but this figure tells you the cost of loan. But is it really worth taking a loan when the bank is earning more than double the amount from you? More so, in the world which is full of uncertainties – about your job, your salary and everything else?

Also, don’t forget that 8 lakhs you are paying from your pocket. Ultimately, if everything goes well for 20 long years – one fine day you will become the real proud owner of your house, maybe when you reach in your forties or approaching 50. During these 20 years, you would have lived with either of the two:
• A bit worried look about job and salary uncertainty – due to your home loan commitment OR
• An ignorant belief and worry less life if you want to keep yourself ignorant about your home loan & your uncertainties

To me, majority of (sane) persons would be forced to live with option 1. Add to it the increase in cost of living due to marriage, kids, their education, elderly parents (their medical care) and so on, and things will keep looking difficult (may not be difficult in reality, but due to the commitments).

Ultimately, it all depends upon the individual – how he takes it. People will have all kinds of flashy words & phrases – “Positive outlook towards life”, “Taking up the Challenge”, “Doing something on my own” and so on, the fact is that in case of a financial distress (if it occurs), you will be left all alone. The same friends who advice you will no longer be willing to see you and you will have to face the situation on your own.

Take a step forward:
Instead of taking the house on loan now, go for a rented one for a period of say 10 years. In an IT city like Hyderabad, a typical 2 BHK flat would cost 8 to 10 K per month. Assume that you start with 9K and your house rent increase each year by 10%. So overall, during these 10 years, you would pay to different house-owners a total of 17.2 lakh Rs. (Round it to 18 Laks)

On the other hand, during the same 10 year period, if you had taken a housing loan, you would have repaid to the bank half of 72 lakhs – i.e. 36 lakhs and 8 lakhs upfront from your kitty = total 44 lakhs. Of course you would have become part owner of your house in this case.

So, in case of renting the apartment, you save 44 – 18 = 26 Lakhs as compared to buying one on loan.

Even if the real-estate prices keep on increasing at a rate of 8% each year, the house costing 40 lakhs today will cost 80 lakhs after 10 years.

So think about buying the house then. Will it be a better option? Let’s see:

• During these 10 years – you’ve lived freely – no commitment – no worries
• If you loose your job, you pack up your bags and go back to your native town.
• If you are still able to keep up your job for 10 years – that means you are worth it. However low, you can still expect atleast a 5% salary hike each year. That will add to your accumulated savings, which will severely reduce your loan amount.
• You can take decision on “Take things as they come” basis
• Your rent savings will be more, if instead of paying an increased rent, you opt to move to another apartment of same rent or low rent.
• You don’t have to worry about any kinds of problems that may be linked to a house purchase and its later consequences as mentioned
• If the reality markets go for a correction, you will have the option of buying the similar flats with cheaper price levels – anytime during the 10 year period – meaning more savings in future than present day high price purchase
• In the 10 year period, you may move around 3 time to 3 different houses. It’s not that difficult to find a house on rent

Nothing in this world comes without risks and compromises:
• You will have to keep moving to other apartments if the rented house or house owner is not good (Independence for some, problems for others)
• You will have to think carefully about your family (if married) and plan your family developments
• People usually do not appreciate a family man living in rented apartments for long. One may have to face it. However, the benefits of postponing the purchase can be a major beneficiary

Ultimately, the choice is yours. You have to fight against the variations in the markets. You have to take the decisions on till when to rent and when to buy. If buying then is the market really low or can it go down further.

I may have missed some points in the calculations above. Some assumptions may be faulty. However, the essence that I want to convey is that just don’t forget that loan is very-very costly. Avoid it as much as possible. The mental tension that one gets once he’s in debt cannot be explained. His negotiation power reduces, he cannot switch job and move to another city easily, he starts worrying about the job, its’ security, the family, kids and very simple liabilities add up.

Hence, take the minimum possible loan. Live a happy and stress free life. Use your own money. Leave the OPM concept to banks and brokers (OPM – Other people’s money –like the business of MF managers, brokers, etc.) OPM is not for people without financial background.

lsjey

Excellent post!!!. Some more points:

1. If the reality market shoots up, in the 10 yr period here are some possibilities:

a) May not be able to rent at the budget that one may have planned. It may become costly to rent.
b) If one buys home at high prices, the emi's also go up and one will end up with higher loans and more worries

2. If the real estate tanks
a) rental values also will decline and savings can increase
b) Premiums on home prices will decline so that housing will become affordable

In essence it is always better to stay flexible and rent during real estate booms and plan for buying during real estate busts. Easier said than done.

One of my friends told me the following valuation method

Rent * 200 should be a fair price for a house anything above that is premium.

Regards,
lsjey

sanjeevr

Here is my view:

Approach 1: Buy

Suppose you have 40L worth of sum in your kitty. A 3-BHK in a reputed society in NCR is not going to be less than 60L. So you take a home loan of 20 L and Pay all 40L from your kitty (thus nullifying all your savings in one go). Instead, you now have a liability of 20 K per month to pay back to bank as an EMI towards you HM. 20 * 12 * 20 = 48L on an average (keep in view of fluctuating Interest Rates. Above this you have Maintainance Cost and Miscllaneous taxes to pay as a house owner on an avergae 3 K Per Month. Now your monthly spend is around 23 K towards my Home liability.

In Approach 1: Advantages:

1: You have your own home
2: Hopefully, it only goes up, which i think is little unlikley as demand and supply will keep a cap on the already high price of 60L for this 3 BHK flat. Maximum it can go up in next 20 yrs is 1.2 crs i guess.


In Approach 1: Disadvantages

1: All savings lost in the form of 40L downpayment
2: A huge sum of 23K (Approx) Per Month hanging on your neck which you need to pay for long 20 yrs even being a virtual so called House Owner
3: Highly non-flexible option to move out whenever there is any need of any kind (Have to literally scratch my head to take a decision)
4. Always a fear of loosing job in the private sector. As rightly said above, the negotiation skills goes down.
5. Last but not the least, if anything goes wrong, you still have to repay my loan back and have 23K worth of liability on my head. You have to face bank people and their harrassments for defaulting any payments, if any. (All this still at the cost of being the so called virtual Home Owner)

Approach 2: Rent

The other option is to rent a house near office which comes anywhere in the range of 10-12K and earn interest on 40L or you can choose to diversify my investment options to get more returns in long term. Let's assume you keep in traditional FD in bank where you can easily get minimum of 16.5 K Per Month as interest from my bank. (This is calculated 7 P.A. - 30% Taxes as TDS.

In Approach 2: Advantages

1: First an foremost, You still have 40L still in your kitty
2: Always a free bird and flexible to change home anytime you want
3: No Liabilities of any kind except the rent that is thrown away (You may also relate it to the interest portion of your HM EMI that you give it to bank, which comes out to be the same as your monthly rent. This is also equivalent of throwing your money)
4. You are living on rent virtually for free as the rent is being paid from Bank's interest.
5. Above all, no tensions, always relaxed, can enjoy life as you have backup of your kitty in bank.



In Approach 2: Disadvantages

1: Landlord hassles (which i believe can be taken care because you still are flexible to change it nearby your current location. Not that difficult to find)
2: Setup of schools for your kids (this is the only worrisome part but can be taken care by renting a similar house in nearby location in 1-2 months time.

So the choice is yours, a worrisome life by being a so called virtual Home Owner (the home is still not yours for next 20 yrs) or live a relaxed and flexible life with all options open and a back up of your savings still in your bank. (Remember, these savings will keep increasing as you don't have any loans of any kind.)

Let me know your views on this now.

Yahswa Younis

Well Rent and loan bought things are create tension for everyone how he belongs a job or business. If you need property for residence then loan is better for you. If you need property for business and then rent is better for you.

buy2gain

Thanks for thoughtful posts guys!

Even after reading all these thoughts ppl still succumb to social pressure and become virtual home owners

svsundar81

One point to be noted down here is,

EMI Will not increase when the time goes down. But the rent will increase.



regards
Sundar

needless101

Yeah, but you will have accumulated a significant sum (compounding) by saving the difference in EMI paid and rent paid, which in some areas is 100-200%!

So you can then put in more down payment, and reduce the interest paid to banks

*Have a look here:
http://spreadsheets.google.com/ccc?k...FM0NDMVE&hl=en

*Courtesy Abeerbagul

roshan.sharda

The assumption is wrong and I it can be expected that real estate prices will go up by atleaset 7% annualy. Even it this case the prices will go up to RS 2.32 crores in 20 years for a 6 Lac flat currently.
Also the the rents will increase by 10% say for next ten years annually given indian economy is growing and then by 8%, so a rent of 2.64 lcas (RS 22000 monthly) will be payable for the falt will become 11.10 Lcas in next 20 years.

needless101

You are making some seriously flawed assumptions here. Firstly, you are assuming that real estate will always go up by 7% annually for the next 20 years - very very unlikely sir!

No economy in the world can grow at the rate of 8% for 10-15 years. Secondly, rent will never increase at the same rate as real estate because rent paid depends on actual earnings as opposed to a loan which is given out on future earnings