Home Truths. Don’t home in too early

Kumar and Joseph regularly meet in the park and talk. “My son has been working for nearly three years now. He spends all his salary, and has no savings. I told him to buy a house. He will be then compelled to pay EMIs and build an asset,” said Kumar.

Joseph, who analyses investments rather than go by popular views, said he can give seven reasons as to why this is not a good idea.

Low returns

“One, returns from residential properties have been low in the past decade. For instance, Bengaluru averaged returns of 3.6 per cent annualised in the last 10 years, based on data from NHB (National Housing Bank) Residex index. Gurugram and Noida only gave 1-2 per cent returns, and even best performers such as Chennai, Mumbai and Pune gave only 11-13 per cent. Contrast this with mutual funds where you can find many schemes that returned over 15 per cent in this period,” he said.

A return of 12 per cent versus 15 per cent on a regular monthly investment over a 10 -year period gives a 16 per cent lower overall return, due to compounding, Joseph pointed out. He added that while buying a house may have been a good idea in the bull run — from 2000 to 2011 or so — the trend has been reversing.

“Two, risk tolerance is higher when you are young, as there are more years to make up for any setbacks. Higher risk lets you invest in products that can give higher returns. But you are limiting it by buying a house,” he said.

“Three, your actual return is reduced after considering all the costs — maintenance, taxes, commission for sale, registration charges and stamp duty. If you take a loan of, say, ₹50 lakh at 9 per cent interest, you pay an interest of ₹25 lakh over 10 years, plus the cost of home insurance.

“Four, rent is seen as an avoidable expense and ownership as an investment. But a 2017 ‘buy vs rent’ report from ArthaYantra (an online financial planner) noted it is better to rent in most cities, based on the cost of owing vs renting. It also takes many years to save the down payment required to buy,” Joseph said.

“Why not buy an under-construction property and sell it in three years when it is completed?” asked Kumar. Joseph noted: “That was a way to higher returns in the past. But with RERA (Real Estate (Regulation and Development) Act), risks in completion are somewhat reduced, and that will lower returns. Importantly, you can buy properties cheaper in the secondary market. And given the huge unsold inventory of completed property, betting on an under-construction property is not worth it.

“Also, tax benefits from home ownership are better when you invest at a higher salary level, improving post-tax returns. For example, deductions for an interest of ₹2 lakh saves ₹20,000 in taxes if you are in the 10 per cent income tax bracket, but ₹60,000 in the 30 per cent tax bracket.”

Joseph then spoke about the non-financial limitations. “Five, early on, a person’s career is not settled, and getting into a loan restricts their choices. They may want to do higher studies, start a business or move abroad, but may have to stick to their job due to the EMI burden.

“Six, they may only be able to afford a lower priced home. This may not be in a convenient location for work, adding to commute. If they decide to stay closer to work or take up a job in a different city, there is the hassle of renting out.

“Seven, their EMI may leave them without much cash to handle emergency situations such as sudden expenses or job loss. Borrowing to manage such situations adds to the stress and interest burden.”

Other options

Kumar said: “As a parent, I emotionally prefer home ownership. One option may be for me to jointly buy a home with my son and split the loan. That way, many of the hassles you mention can be reduced. Another option is buying land; rental yield is anyway low for a house, and land costs less. With a long time-horizon, it can provide diversification while giving returns.

“There are pockets of opportunities worth considering. For example, those who prefer lower risk — as their other income is from risky sources such as equity market-linked work — can consider a real-estate asset.I realise it is important that the younger generation learns about financial products and the need to build a portfolio early. Unlike a few decades ago, there are now more investment options. I will, maybe, ask him to start with an RD to get into the regular saving habit, gain some knowledge of products, and then start SIPs in mutual funds. This can be used for any purpose, even towards down payment for a house.”

Joseph said: “Take a portfolio approach to your investment and allocate a percentage to different asset classes, including real estate.”

The writer is an independent financial consultant

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