BUY or RENT a HOUSE ?
.
Right Criteria to Buy or Rent a House
Buying a house, an accepted practice by many Indian families who wish to settle down in life, may not always turn out to be a beneficial proposition.
Tax sops and capital appreciation that come with the purchase of a house notwithstanding, there are situations where renting a house is advisable as against an outright purchase.
Depending on the location of the house, the prevailing rent in that location, the home loan rate, and the possible appreciation in rent and value of the house, ET Intelligence Group arrives at the conclusion that it is advisable to buy a house in upcoming locality as against established and well-developed locations in the heart of the city.
Staying on rent would be a better option in city centers if one were to consider financial planning. This is because capital appreciation in the form of rise in value of the property would be higher in suburbs as against the city centres.
In fact, savings (the difference between EMI saved and rent paid) together with the down payment, when invested in other instruments would fetch higher returns at the end of the loan period in case of properties located in city centres.
Let’s look at a 2BHK flat in a prime location in Andheri, Mumbai which may cost around Rs 75 lakh, assuming that the down payment is 25%. To calculate EMI, we have taken take the average rate of interest of the five biggest lending institutions like SBI, ICICI Bank, HDFC, LIC Housing and Canara Bank. Annual increase in rent in such posh location is taken to be 10% per annum.
We have also given the effect of the returns foregone on the deposit given for a rented home. In case where the property is bought, we have also considered maintenance expense, which could be as around 5% of the EMI, and may by 5% every year. Since the area is well developed, scope for any major development is less.
As a result, we have assumed 8% per annum capital appreciation in property value in such locations. For investment purpose, we are assuming a mix of debt and equity instruments, which would average out to a modest 12% annualised return over a 20-year time period. Calculations for this scenario show that the net value of investment at the end of the given time period would be higher than the capital appreciation on the property (Look at the adjoining table). On the contrary, smaller towns, suburbs or upcoming localities where it is easier to buy apartment flats ranging between Rs 10-30 lakh, the value of the house would show higher appreciation when compared to the returns generated from an alternate investment.
This is because the scope for development in such upcoming centres is higher. Besides, the rate of borrowing, the increase in rent and also the return on alternate investment can have a dynamic effect on the whole equation.
In fact, even the much talked about tax benefits available on buying a house are nullified by the housing rental allowance (HRA) that is available with renting an apartment. Moreover, a high capital base can be used later for buying a resale property where upfront money needs to be paid.
Having a larger corpus widens the options across new and second-hand housing markets, especially when property prices are not shooting high.
Yet, one must not forget that buying a house is more of an asset creation. In a scenario where property prices are not rising and interest rates are low with net costs of owning being slightly higher than of renting, the case for buying a house becomes irresistible.
As long as prices keep rising sharply, homebuyers will do much better than renters. But it is in times of high interest rates, and particularly when the market is expected to stabilise a bit, that the renting option deserves a look in.
.
Right Criteria to Buy or Rent a House
Buying a house, an accepted practice by many Indian families who wish to settle down in life, may not always turn out to be a beneficial proposition.
Tax sops and capital appreciation that come with the purchase of a house notwithstanding, there are situations where renting a house is advisable as against an outright purchase.
Depending on the location of the house, the prevailing rent in that location, the home loan rate, and the possible appreciation in rent and value of the house, ET Intelligence Group arrives at the conclusion that it is advisable to buy a house in upcoming locality as against established and well-developed locations in the heart of the city.
Staying on rent would be a better option in city centers if one were to consider financial planning. This is because capital appreciation in the form of rise in value of the property would be higher in suburbs as against the city centres.
In fact, savings (the difference between EMI saved and rent paid) together with the down payment, when invested in other instruments would fetch higher returns at the end of the loan period in case of properties located in city centres.
Let’s look at a 2BHK flat in a prime location in Andheri, Mumbai which may cost around Rs 75 lakh, assuming that the down payment is 25%. To calculate EMI, we have taken take the average rate of interest of the five biggest lending institutions like SBI, ICICI Bank, HDFC, LIC Housing and Canara Bank. Annual increase in rent in such posh location is taken to be 10% per annum.
We have also given the effect of the returns foregone on the deposit given for a rented home. In case where the property is bought, we have also considered maintenance expense, which could be as around 5% of the EMI, and may by 5% every year. Since the area is well developed, scope for any major development is less.
As a result, we have assumed 8% per annum capital appreciation in property value in such locations. For investment purpose, we are assuming a mix of debt and equity instruments, which would average out to a modest 12% annualised return over a 20-year time period. Calculations for this scenario show that the net value of investment at the end of the given time period would be higher than the capital appreciation on the property (Look at the adjoining table). On the contrary, smaller towns, suburbs or upcoming localities where it is easier to buy apartment flats ranging between Rs 10-30 lakh, the value of the house would show higher appreciation when compared to the returns generated from an alternate investment.
This is because the scope for development in such upcoming centres is higher. Besides, the rate of borrowing, the increase in rent and also the return on alternate investment can have a dynamic effect on the whole equation.
In fact, even the much talked about tax benefits available on buying a house are nullified by the housing rental allowance (HRA) that is available with renting an apartment. Moreover, a high capital base can be used later for buying a resale property where upfront money needs to be paid.
Having a larger corpus widens the options across new and second-hand housing markets, especially when property prices are not shooting high.
Yet, one must not forget that buying a house is more of an asset creation. In a scenario where property prices are not rising and interest rates are low with net costs of owning being slightly higher than of renting, the case for buying a house becomes irresistible.
As long as prices keep rising sharply, homebuyers will do much better than renters. But it is in times of high interest rates, and particularly when the market is expected to stabilise a bit, that the renting option deserves a look in.
.
