February 7, 2011 4:19:48 am
It is sacrilegious to say Do not buy a house and there is a good chance that I would get lynched for saying such a huge change of view. Most people I know will say Oh My God,you must be crazy not to own a house especially in Mumbais metros. After all real estate prices do not go down unlike the equity shares is the normal argument. In other words,most real estate advocates are convinced that real estate prices only go up,courtesy of what they have seen in the last couple of decades.
A particularly vocal group insists that if you do not buy a house now for a couple of crores,you will never be able to buy 10 years later at a double digit crore price! They argue that God does not make any of it anymore,so homes in certain older areas should command a premium. They are surely right about one thing that supply and demand will determine the price of your house. However to assume an ever increasing demand at prices which are 30X the starting salary of an MBA or a CA is a little difficult to believe in an economy where the salary is likely to stagnate!
Here consider the following before you buy or rent a house:
1. How long do you plan to stay in that place: The cost structure,the stamp duty,etc. in the purchase of a flat are so high that it takes almost 5-6 years for a house to break even on a sale. What happened from 2002 to 2010 was an aberration,not a rule.
2. Ability to make a down payment: Forget the fact that home loans are available for 90 per cent of the cost of the house unless you can make about 40 per cent of the cost of the house as a down payment,the risk of catching a downward spiral is really high.
3. Investment Potential: A residential house or an office property gives returns comparable to debt products. It just about matches inflation over long periods of time. So it is necessary to know what you will do with the money that you save by renting instead of buying. If you are planning to be in index equity funds,you may be better off renting. However if you plan to be in bank fixed deposits,buying may be a good option.
4. Job security and competing cash requirements: If you are not sure about your qualification,your company or the industry in which you work,renting is the way to go! A house ties you to a place and you are then not in a position to relocate. So only if you have a lot of surplus cash,committing to an EMI makes sense. Remember you are committing for 20 years,not less.
5. Taxes: The tax break is not a great thing to fall for. It is customary for the must own the house gang to flaunt tax breaks as a reason to buy a house. This is a fallacious argument. If you commit to a 20 year loan,and the tax break is withdrawn after 3 years,what do you do? Please do your math without the tax break.
6. Debt: See what levels of debt you are comfortable taking on. If I Were A Homebuyer now I would be asking myself the following questions: 1. Are we in the start,middle or end of a price boom middle or end is not a great time to be buying. It takes about 5-8 years to get back your price!
2.If I am not sure,I would rent for a year and then buy.
3.If I see interest rates peaking,I would go for a floating rate home loan,fixed at 10 % pa looks scary.
Author is a blogger at subramoney.com
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