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Buy a house or save for retirement?

B. Venkatesh
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The largest liability that you will typically have on your personal balance-sheet is your home loan. And because most of us tend to stretch our home budget, the home loan repayment consumes more than 40 per cent of total monthly income. This leaves limited room to pursue other investment objectives. So, if you believe that you can pursue only one objective during the initial years of your career, which will you prefer to do first—buy a house or save for your retirement? In this article, we show why the decision is not always easy!

Residential asset

There are several reasons why your first investment objective should be to buy a house. For one, a house provides you shelter. You may also argue that your home generates return because you save on rent! But such an argument may not always hold water for reasons mentioned in the next section. Your house can, however, be an attractive investment during your retired years. How? You can reverse-mortgage your house to generate cash flows that can supplement your pension during your retired years. Of course, this would be possible only if the value of your residential property is significant and your children do not quarrel on your decision to reverse-mortgage the house.

For another, buying residential property provides more satisfaction than investing in a financial asset because of the touch-and-feel factor attributed to physical assets. Besides, the urge to own a house comes early in your working life because of family and peer pressure—if your friends have already invested in a residential property, it is highly likely that you will want to do so too! This factor is driven more by our culture than by risk-return benefits; it is typical for individuals to buy real estate and gold without much consideration about the return on such investments. So, why then should you consider saving for retirement if there are compelling reasons to buy a house first?

Retirement savings

There are two reasons why buying a house should not be your default choice. One, your job requires you to continually transfer your work location. If you do not live in your own house, you will typically rent it. Now, given the low rental income relative to the high initial outlay, it is moot if your investment in a house will be attractive. And if you believe that you can increase your returns through low down payment and higher borrowing, remember that the monthly installment on your mortgage can be otherwise used to accumulate wealth in your retirement account.

Now, a portfolio consisting of stocks and bonds in your retirement account typically outperforms investment in real estate. And if you believe otherwise, do not be carried away by the returns that real estate has generated in the last 10 years! And even then, how can you consider any increase in value of your residential property as part of returns, considering that your intention to buy a house is to occupy it, not to sell it at a higher price and profit from the transaction?

Two, you should consider saving for your retirement first when renting is cheaper. This would apply to you if you live in a smaller city or in the outskirts of the metros where rentals are lower but land prices are higher, making initial investment in a house unattractive.

Conclusion

Your decision to choose a house first can be attributed to the present bias—our tendency to typically prefer near-term rewards to future rewards. Buying a house gives us happiness now whereas saving for retirement generates happiness only at retirement. But beware. Buying a house first need not be an obvious choice.

(The author is the founder of Navera Consulting. Feedback may be sent to knowledge@thehindu.co.in)

(This article was published on April 3, 2013)
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Comments:

nice article

from:  sandheepkumarnj
Posted on: Apr 3, 2013 at 12:14 IST

Great Article

from:  chirag
Posted on: Apr 3, 2013 at 13:49 IST

I have seen people who have invested in property and became wealthy on
it's sale but I have not seen any body which includes me, who have
become wealthy by investing in bonds/shares which can happen only by
trading activities . I can share my own sorrowful story of investing
in mutual funds/stocks/bonds and those investments have generated
negative return by eroding the capital. I advise property as the best
tool of investment which have the twin benefits of tax
benefits/appreciation in the property is inflation adjusted and above
all mental comfort of the investors.

from:  GEEBEE
Posted on: Apr 3, 2013 at 15:26 IST

Really good article.Considering the unstable performance of share
market, Does returns from investments in stocks and bonds are more
compare to real estate???
It is cheaper to buy a house than staying in the rental house because in
metros, first we cannot get house for rent easily; second even if we get
it will not be comfortable to stay; third and important is, the rent
will be very high; Instead of paying that rent we can pay payment for
housing loan.

from:  Yamuna Pandurangan
Posted on: Apr 3, 2013 at 16:08 IST

d

from:  muan
Posted on: Apr 3, 2013 at 22:43 IST

Why on Earth THE HINDU is publishing such articles with very little sense. This is not the place for cheap articles. These people who are writing Finance related articles need a lot of training .
The author tried to BALANCE his view, but what the use? Navera Consulting? My free advice is take some training from Transcend Consulting, aka Financial Express. The Businessline seems to be lowering its standards day by day.....
Regrets

from:  Murty
Posted on: Apr 4, 2013 at 09:58 IST

Thank You Businessline, for making my comments public.
I believe that the Housing Phenomenon is nothing but a long term slavery.You are a slave to the BANK, you are a slave to your employment, you are a slave to the idea of "ownership" of your house.
You pay 100% extra in interest and inflation, and you think you saved on tax, you never thought of the lost opportunities, what you leave behind is nothing but a depreciating asset!

from:  Murty
Posted on: Apr 4, 2013 at 12:48 IST

What is the meaning of this article. the writer himself doesnt know.
people are confused as mentioned by some one that real estate
investing has given returns while bond/shares have been so volatile
that 80% of the people have made losses. This article is making people
more confused by indicating that u may not buy house and go for
stock/bonds. My take is that if you manage to buy a house, even if it
doesnt grow you will get shelter at least but in case you loose in is
invested for retirement and erodes, neither you will have house nor
investment. Where will you stay or surivive after retirement when many
of us are pension less in this generation. Dont mis lead people with
such superficial/callous article.

from:  sanjeev
Posted on: Apr 5, 2013 at 09:30 IST

I believe that the place where the house is located is very important
.We are witnessing near panic selling in states like Kerala where the
effect of repatriation of our brethren from gulf region is being felt .I
would thro this letter like to caution all investors to be careful
before grabbing any discounted offers

from:  ram
Posted on: Apr 5, 2013 at 09:36 IST

Ram,
I think those who did both of them and is regretting, can start Consulting, like the author did. Lets not get too personal.
The first statement of the artcile is "The largest liability that you will typically have on your personal balance-sheet is your home loan". This illustrates that the author realized only after expericencing it! And it is more than 40% of his Salary.
People speculate a lot, either in case of Shares/House Purchase, whatever, and do not understand the reality. If you do not agree with their line of thinking, they will be upset, and become angry. I do not intend to demean anyone, but just to remind you that Warren Buffet stayed in a rented house for years together, before he purchased the same. He never gone for a HOME LOAN!

from:  Murty
Posted on: Apr 5, 2013 at 12:44 IST

Man is born free, but bounded in chains.... ALWAYS! goes the saying. It is our EMOTIONS that should be in total control, otherwise, we will be dancing to the tunes of others EMOTION 1: PRIDE of Having a OWN HOUSE and thinking that it is an ASSET, but as per the author, it is the BIGGEST LIABILITY(probably he read the ROBERT Kiyoski of Late).Is it an asset or liability? that depends on which side of the coin you are on. There is lot of tussle between the haves and the have nots.....Who is the winner? EMOTION 2: GREED of expecting more returns from the STOCKS you hold, where you should actually be contented with some level of returns.....But wait, those who have purchased Infosys on 1990, today are millioanaires, if they held them that long!!!!!, Or if you fall prey to the likes of the ads for KARUTURI GLOBAL NETWORKS, you are still expecting the 3 rupee share to become 300...

from:  Murty
Posted on: Apr 5, 2013 at 16:05 IST

The views expressed in the article does not clarify properly for the reader to arrive at a learned decision as such. Without any statistical data to prove otherwise it is better to leave the decision making to the individual based on his requirements, financial capabilities/liabilities. I had invested in all the said avenues and I am not fortunate to live in my own dream house even after reaching 50 years age.There are always reasons for not living in our own houses and we choose houses on rent due to children education, job placements and medical considerations. The other avenues like gold and stocks have also proven to be not so rewarding in the long run due to so much volatility. Mutual funds and bonds return yields do not meet the inflation as people are not always able to choose the right options. Hence, I feel that all those options can be justified only by individual experiences and lessons learnt and we can not generalize what is the best.

from:  Ethiraj
Posted on: Apr 5, 2013 at 20:30 IST

Agree with Murty. Equities give the highest returns in the long term. Real estate has several disadvantages like big ticket investments, potential legal issues, low rental yields and high EMIs. Its only advantage seems to be the tax benefits. Someone of the author's calibre should not have written this one sided article. Indians are already over invested in real estate. We need more investments in financial instruments like equities/MF and not a real estate bubble.

from:  Garry
Posted on: Apr 7, 2013 at 07:20 IST

Excellent article and I whole-heartedly agree. I would like to make two points: 1. People generally make assumptions about their future life based on the life of their parents. But there is a fundamental difference in the life now. That is, more probability of migration to other cities/countries/locations. I have personally seen people move within localities in the same city, from their *own* houses because of nearness to schools, offices, water problems, health/pollution reasons. These people get 2-3% or lesser rental returns on their "investments". 2. Real estate prices will always go up is a big fallacy. People generally tend to compare the price of a new apartment close to their own old apartment and assume their own apartments has "appreciated". But that is never the reality. Nobody will buy your old creaky and leaky apartment at the price of a new one. The maintenance cost of an old apartment just keeps increasing.

from:  Ashok
Posted on: Apr 7, 2013 at 09:38 IST
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