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Salary vs cost of Flat

Last updated: February 4 2010
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  • #51

    #51

    Re : Salary vs cost of Flat

    Originally posted by sanjaykg View Post
    Friends

    I'll try to bring you back on the main thread - Salary vs cost of Flat.

    Ideally one should take following basis for deciding cost of flats:-

    1. Price / gross salary ratio should be around 3
    2. Mortgage / gross salary should be around 2.3
    3. The lifestyle one wanted to maintain.

    Thanks for bringing the discussion back on track.

    Considering the floating nature of interest rates, I would say that 3 times salary is a little risky. In my opinion, price of house should ideally be 2 times salary if we are really cautious and risk-averse, and should not exceed 2.5 times gross salary if we are mostly risk averse but also a little optimistic in our future planning. 3x gross salary is too risky, in my humble opinion.

    I always like to plan anything big after taking into account the "worst case scenario". One example would be, after taking the house loan and making the down payment, and say one of the following happens:

    Scenario 1: We get hospitalized or bed-ridden due to which we have to take unpaid leave for 6 months. Include medical expense (even after medical insurance) of 10 lakhs. In such a tough time, we should be able to sustain the EMI and be able to feed and run our family for up to 12 months.

    Scenario 2: We lose our job while the job market is really bad. We realize that we need to get retrained or get an additional certification, and then apply for a job. This means spending 2-3 lakhs for retraining and certification, and a period of 6 months without any income.

    While I know I am sounding like the voice of doom here, won't it be wonderful if even after buying a house, we feel financially comfortable even when faced with a bad scenario? It would give us so much peace of mind!

    Comment

    • #52

      #52

      Re : Salary vs cost of Flat

      asliarun points are very relevant in today's scenario.

      Comment

      • #53

        #53

        Re : Salary vs cost of Flat

        Originally posted by asliarun
        won't it be wonderful if even after buying a house, we feel financially comfortable even when faced with a bad scenario? It would give us so much peace of mind!
        This should be precise decision making factor while dealing with your finances, be it RE or anything else.

        It is upto you to decide whether you want your mind to be in peace or in pieces.
        If you are happy, you are successful.

        Comment

        • #54

          #54

          Re : Salary vs cost of Flat

          Ideally, one should save for a downpayment while renting and buy the flat with a downpayment.

          Since renting is typically one fourth to half of EMI for same flat, one should at least aim for 50% to 75% downpayment, so that rent and EMI are approx same.

          Normally, rent/EMI should be around 20% of salary (tax being 30%) so that remaining 50% is for living and saving.

          It is foolish to pay 40% of salary as EMI, better to save and buy smaller flat.

          If EMI is coming more than 20% of salary, it means you are purchasing beyond your means.

          Originally posted by asliarun
          Thanks for bringing the discussion back on track.

          Considering the floating nature of interest rates, I would say that 3 times salary is a little risky. In my opinion, price of house should ideally be 2 times salary if we are really cautious and risk-averse, and should not exceed 2.5 times gross salary if we are mostly risk averse but also a little optimistic in our future planning. 3x gross salary is too risky, in my humble opinion.

          I always like to plan anything big after taking into account the "worst case scenario". One example would be, after taking the house loan and making the down payment, and say one of the following happens:

          Scenario 1: We get hospitalized or bed-ridden due to which we have to take unpaid leave for 6 months. Include medical expense (even after medical insurance) of 10 lakhs. In such a tough time, we should be able to sustain the EMI and be able to feed and run our family for up to 12 months.

          Scenario 2: We lose our job while the job market is really bad. We realize that we need to get retrained or get an additional certification, and then apply for a job. This means spending 2-3 lakhs for retraining and certification, and a period of 6 months without any income.

          While I know I am sounding like the voice of doom here, won't it be wonderful if even after buying a house, we feel financially comfortable even when faced with a bad scenario? It would give us so much peace of mind!
          Venky (Please read watch a or before posting)

          Comment

          • #55

            #55

            Re : Salary vs cost of Flat

            This is the widely quoted US figure. I swore by it throughout this decade and refused to buy.

            I think for India, given the ground realities and low rent vs high cost of RE in same area, one can never buy with this formula. After using this formula in 2003, I did not buy, since rent was 12000 and cost of flat was 30L-35 L. Since 200 times came to around 20-25 L, I thought it was one and a half times what it should be and was too expensive.

            Now rent is 15000 and cost of flat is 1 crore!!!!!! That is some 600 times rent.

            Historically in India, RE cost is 300 to 400 times rent. I expect this price target to be reached by 2012 (RE price stays same, inflation mounts) which would be the best time to buy.

            Waiting longer than 3-4 years with prices holding steady at current levels increases risk of mistiming, and getting left behind, which happened with me this decade.

            Originally posted by realacres View Post
            Rent/month * 200 = Total cost of the flat, all inc.

            Keeping this part aside, the EMIs should not exceed 30-35% of your TAKE HOME SALARY considering the loan duration is less or equal to 15 years.
            If the loan tenure is 15yr+, man you should not buy then.
            Personally I feel that home loan tenure should not be more than for 10 years which means that you have already put your financial house in order.
            Venky (Please read watch a or before posting)

            Comment

            • #56

              #56

              Re : Salary vs cost of Flat

              Venky,

              So can we say, buy in west & rent in India? Personally I feel that in west house is house while in India house is more than a house which may be a reason people shell more for less in many cases.

              Buying in west is financial game while in India it is more of emotions. You see, if you buy a Merc for 50L, hardly anyone will enquire; but if you buy a flat of 50L, 10 people will come up to enquire & advice. That's the difference I feel.
              If you are happy, you are successful.

              Comment

              • #57

                #57

                Re : Salary vs cost of Flat

                Very very truel.

                Between all your humour, there is some real deep thinking going on in your head.

                Our previous generation was, I think, badly traumatised by RE cost and scarcity. Certainly true for my parents in Delhi and relatives in Bombay also. People bought flats with great difficulty. Loans had 20% interest, if you could get it, which was almost never.

                Now its easy, so people buy three each!!!!

                Originally posted by realacres View Post
                Buying in west is financial game while in India it is more of emotions. You see, if you buy a Merc for 50L, hardly anyone will enquire; but if you buy a flat of 50L, 10 people will come up to enquire & advice. That's the difference I feel.
                Venky (Please read watch a or before posting)

                Comment

                • #58

                  #58

                  Re : Salary vs cost of Flat

                  Originally posted by Venkytalks View Post
                  I think for India, given the ground realities and low rent vs high cost of RE in same area, one can never buy with this formula. After using this formula in 2003, I did not buy, since rent was 12000 and cost of flat was 30L-35 L. Since 200 times came to around 20-25 L, I thought it was one and a half times what it should be and was too expensive.

                  Now rent is 15000 and cost of flat is 1 crore!!!!!! That is some 600 times rent.
                  I have a question.. do you really think your flat is currently worth 1 crore? Does this mean that each and every individual living in your neighborhood is today a crorepati? Seriously, if I had a 1 crore apartment, I would sell it, buy a cheaper house somewhere else, and live off the rest of the money for the rest of my life. However, not too many people seem to be doing so.

                  Is it because they're so attached to their current house that they are unwilling to part from it, even if it means that they will be financially set for the rest of their lives?? Or is this 1 crore number being pulled out of a hat, because people have "heard" from brokers, friends, etc. that the current rate of their flat is 1 crore, and their chest swells in pride at how wise and far-seeing they are (when in reality, they just fluked it).

                  Now, whatever the ground reality may be, a flat or land owner will always avoid selling their house because of the greed factor that the price will appreciate even more. Even if they are getting 4000 a sq ft currently, they will feel cheated as the price was probably 5000 (based on hear-say and stupid stats posted by Jones LaSang) a few months ago. Even if people know for a fact that a bank FD will get them better returns, they will still prefer to hold on to their land as it makes them feel like a zamindar.

                  Basically, my humble opinion in this matter is that real estate prices will only attain sensible levels if people (the common man, not the investor) are forced to liquidate their real estate holdings. This requires something dramatic and/or prolonged to happen in our economy that will convert the irrational exuberance, greed, and hubris to be replaced by irrational pessimism and fear.
                  Last edited by asliarun; February 3 2010, 03:20 PM.

                  Comment

                  • #59

                    #59

                    Re : Salary vs cost of Flat

                    Originally posted by asliarun View Post
                    I have a desi
                    Desi what? Khamba.
                    If you are happy, you are successful.

                    Comment

                    • #60

                      #60

                      Re : Salary vs cost of Flat

                      You are too quick, realacres

                      I typed in something so that it gets posted immediately, and I was editing the post.

                      Desi khamba? I thought it was sold in pouches

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