Why You Should Not Buy a House in India

Buying a house in India is a waste of money and time. With the current mix of property prices, rental yields and bank interest rates, buying a property makes sense only under very few circumstances.

For the sake of this post, we will be talking only about residential properties.

Let’s take a look at the various factors a prospective buyer would consider before purchasing a house.

Property Prices – The Affordability Factor

In absolute terms, property prices are ridiculously high in India compared to average income. It is very difficult for a salaried middle class Indian living in Delhi or Mumbai to spend Rs. 2-3 crores on a house. While there has been a dip in prices over the last few years, they are still nowhere near the range of affordability for large sections of the middle class.


Even if you could afford to buy a house, in most cases it just would not make sense to purchase one outright. On financial parameters, in most cases renting a house is a more viable and logical option.

Rental Yields & Bank Interest Rates

Rental yields in most metro cities in India are 2-3% at most. This means if a property is valued at Rs. 1 crore, the annual rent to live in such a property would be about 2 to 3 lakhs. (Rs. 18,000-Rs. 25,000 per month).

It’s important to note that these would be the total outgoing costs while renting a house. However, while buying a house, the EMI is not the only expense. Society maintenance and property taxes are big costs that are often not thought about while deciding to buy a house.

Buying a House Outright

Assume you had Rs. 1 crore cash lying in the bank. It would make more sense to put that money in a Fixed Deposit earning 7 lakhs (@7%) a year and pay rent of 2 to 3 lakhs annually than actually putting the 1 crore in an illiquid asset such as a house. The 1 crore would earn Rs. 58,000 (pre-tax) per month. Assume you pay Rs. 25,000 as rent, the balance Rs. 33,000 is a surplus that can be reinvested.

The Home Loan Option

If you are instead considering taking a loan to buy a house, and you put a down payment of 40 lakhs for a house that costs Rs. 1 crore. The EMI on the 60 lakh loan for 15 years at 9% would be Rs. 60,856. Whereas in the rental option the rent would be between Rs. 18,000-25,000.

Also in the home loan option, a whopping Rs. 49.5 Lakhs would just be interest paid to the bank over 15 years on a loan of 60 lakhs.

Additional Expenses-Maintenance, Registration, GST & Property Tax

These are several hidden costs that most people do not consider while deciding whether to rent or buy.

Maintenance

For properties in metro cities, monthly maintenance can be quite high especially if the building has a lot of common facilities like a gym, swimming pool, etc. This starts at 5000 and some new buildings have charges of about Rs. 30,000. These charges are paid by the house owner/landlord.

Registration & Stamp Duty

While buying a house and registering the agreement, there is a registration and stamp duty charge which varies depending on the place of purchase. Both registration and stamp duty combined can range from 4 to 8%. On a property of 1 crore that comes to 4 to 8lakhs. This could be rent worth 2 or 3 years.

GST

For buyers purchasing an under-construction property, there is a GST of either 1% (for affordable homes) or 5% (for all other properties).

Property Tax

This is the tax paid to the local municipal body. Again, while renting this is not applicable because the landlord pays the property tax.

Property as an Investment

In India buying a house is still considered an investment. If you plan to live in that house, then it’s not an investment because you will not be selling it any time soon. On the other hand, you may consider buying a house to rent it out or gain from the appreciation of the value of the real estate.

Rental Income

As seen in the math above, with low rental yields of 2-3% it does not make any financial sense to buy a house just to rent it out.

Property Price Appreciation

Those who bought houses in the 80s and 90s have indeed seen the value of their real estate go up multifold. However, it is unlikely for those times to return. In the last 5 years, property prices have fallen 20-30%. And given the situation of large amounts of unsold inventory the prices are not running up any time soon.

Buying a House Outright to Live In 
  
Price of HouseRs. 1 Crore
Amount earned from Bank FD at 7%Rs. 58,000 per month
Amount spent on rent for a similar house (@3%)Rs. 25,000
Monthly savings if RentingRs. 33,000
  
Buying and Renting out the House (Without Loan) 
  
Price of HouseRs. 1 Crore
The amount earned from RentRs. 25,000
Monthly MaintenanceRs. 5,000
Net earnings Rs. 20,000
Earning if the amount was instead invested in an FDRs. 58,000
  
Buying and living in the House (With Loan) 
  
Price of HouseRs. 1 Crore
Amount spent on EMI for 60 lakh loanRs. 60,000
Monthly MaintenanceRs. 5,000
Total OutgoingRs. 65,000
Earning if Rs.40L downpayment was put in an FDRs. 23,000

Non-Financial Considerations

One of the biggest arguments for buying a house is that you will not have to keep looking for a new place when the lease expires or the landlord chooses to unreasonably increase the rent. While this is a valid argument, there is a flip side.

With the current way of haphazard growth in our cities, a neighborhood that is quiet and peaceful today may tomorrow not be the same. Renting a house gives you the flexibility of choosing the best neighborhood at that given point in time. This is very difficult if you own the house given the illiquid nature of Real Estate.

Takeaway-Rent or Buy?

Living in a rented house in India is unfortunately looked down upon in society.

If you can choose to ignore that and focus on the basic finances, renting a house will come across as a more practical and liberating option in which you will not have to deal with the stress that accompanies a bank loan.

Along with that, the money saved can earn a regular income just by investing it in a Fixed Deposit.

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