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Saturday, October 31, 2020

Explained: Amid Covid-19, is this the right time to buy a house or rent?

Falling prices and low interest may be tempting, but those whose incomes have fallen should ideally not rush. For those paying rent, it makes sense to look at the property’s rental yield before taking the plunge

Written by Sandeep Singh | New Delhi | Updated: October 8, 2020 8:01:19 am
property prices, property prices covid-19, real estate, buying a house, covid 19 property prices, indian expressFor those who have their jobs and salaries intact, this may be the right time to buy the house. Those under financial stress should wait. (Express Photo: Gajendra Yadav)

Decline in property prices and prevailing low-interest rates may entice someone who has been either looking to buy his/ her first house or looking to upgrade to a bigger house. However, the decision to buy a house needs careful consideration, especially at a time when income levels are falling, property prices are expected to remain at lower levels and rental yields are on a decline. Individuals must also understand that in the pandemic-induced slowdown, it is important to hold on to liquidity and not go for additional liability.

Should you buy or stay on rent?

At least for those who have their jobs and salary levels intact, and who have been looking to buy a house of their own for quite some time, it may be one of the better times to buy a house. If the price correction over the last 4-5 years and a sharp decline in interest rates are factors that favour such a decision, the fact that there is an ample ready-to-move inventory in the market and that buyers hold the negotiating power in the current market situation only makes it more tempting to take the plunge.

“It is an opportune time for those who have been waiting to buy for a long time. For the first time in around 15 years, the real estate market has turned a buyer’s market as over the last 10-15 years builders and suppliers dictated terms. One can bargain hard and get the house at a lower-than-quoted price,” said Pankaj Kapoor, founder and MD, Liases Foras, a real estate research firm.

For those who are experiencing some financial stress, the decision to buy a home can be deferred until they see stabilisation in cash flows, and they could be better off staying on rent or renegotiating their monthly rent.

With the economy under stress on account of the pandemic, growing joblessness in the economy and outward migration from cities, a scenario is developing where both rental rates and property prices may continue to remain under pressure, so staying on rent may be a smart decision.

Also in Explained Your Money | Should you invest in fixed deposits (FDs) with banks?

Buy versus rent — what are the factors to consider?

Even for those who can buy the house, there needs to be a careful consideration before taking the plunge. A drop in rental yields means that the property may be overvalued and future capital appreciation may be limited, and so a property in the location of your choice may be available at the almost the same price over the next few years at least.

Experts say that if the rental yield of the property that someone is looking to buy is more than 3.5%, then one should buy the house as, besides giving a sense of security, it will also mean future capital appreciation.

“If the rental yield of the property to be bought is less than 2.5%, one should simply stay on rent because lower and declining rental yields mean low capital appreciation going forward. And given the current scenario, yields will decline further on account of rising joblessness and outward migration of people from cities,” Kapoor said.

Consider this: if you are looking to buy a house which is priced at Rs 1 crore and you take a loan of 80 lakh. At an interest rate of 7.5% for a 20-year loan, your monthly EMI would come to around Rs 65,000, which means an annual EMI outgo of Rs 7,80,000.

By comparison, if you stay on rent in a similar property and location, a 5% rental yield would mean an annual rental outgo of Rs 5 lakh and a 2.5% rental yield would mean an annual rent of Rs 2.5 lakh. What it also means is that if the rental yield is 5%, the property would see capital appreciation. On the other hand, if the rental yield is 2.5%, it means that the property is overvalued and may not see much capital appreciation going forward.

So, homebuyers would be better off not buying a house which has a rental yield of 2.5% or less, and should instead stay on rent.

It is important to note that while those paying home loan EMI can claim deduction of up to Rs 2 lakh on the interest component of the home loan in a year, those staying on rent will see their HRA component of the salary exempted from tax.

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Should you buy realty for investment?

Amid the prospect of declining rental yields, low capital appreciation over the last 10 years and real estate being not a liquid investment, retail investors would be wise not to buy real estate purely for investment purposes.

While an HNI (high net-worth individual) investor can go for real estate investment in the current times and get a property at a discount of 20-30%, a retail investor would be better off putting that money in a more liquid asset.

One must remember that in case of economic stress, real estate is the first to lose value and turn illiquid. If gold preserves its value and turns more precious in times of economic crisis, real estate does just the opposite. Real estate investments are not for bad times — in bad times, you may end up doing a distress sale.

Another important factor is that one should not take a loan to buy real estate for investment, as you may be paying an interest of around 8% on the loan and earning 2.5-4% as rental yield.

Should you keep the pandemic and slowdown in mind?

At a time when the economy is undergoing a slowdown, individuals both salaried and self-employed are witnessing a dip in cash flows, and there is uncertainty about the future, it must be understood that an additional liability will only add to stress levels. With no medical breakthrough yet on Covid-19 and daily cases rising, individuals must look to keep liquidity with them for any contingency.

The purchase of a house in current times would mean utilising one’s own liquidity for the down payment besides adding a huge liability in the form of a loan in an environment where income levels are falling and future cash flows remain uncertain. The big decision of buying a house should ideally be made when the pandemic is behind us and there is reasonable certainty over revival of the economy.

So, only individuals who are not impacted much by the Covid-induced slowdown and are comfortably placed should buy a house. Others can wait until the situation improves.

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