House: Buy or Rent?
For a minute forget all the math of buying or renting. It makes sense to buy rather than rent. Yes I know that this is against all the ‘renting is better than buying’ gyan that I have dispensed with!
Why? What happened suddenly?
Was the math wrong? No.
What went wrong was the human attitude towards some payments. When a guy (or a girl especially the wife!) make a SIP payment or make an EMI payment – the attitude is completely different.
When I say ‘rent’ and use the amount saved to buy equities, the person does not maintain the SAME discipline. When they are making the EMI payment, they are worried that the lending company will take away the flat, or they will be thrown out, …etc.
However when it is a SIP – they have the following questions:
– the market is going down should we stop the SIP?
– the market is going up should we stop the SIP?
– it is my sister’s marriage, can we stop the SIP for 4 months?
– my father is not well, can I stop the SIP?
———a million questions where they actually want to hear YES.
So is all this theory? No. Not really. For many of these people who I met their networth of X is made up of their HOME. The value of their home is say Rs. 3 crores, and their networth is Rs. 3.4 crores – or say Rs. 5 crores.
For most of these people, their one home is clearly MORE THAN 50% of their net worth, and obviously this has happened by inflation.
So suddenly if you tell them that their net-worth has gone up by inflation (and not by their savings growing in any asset class) they do not like it too much. However this is obvious – and when they sit with their LESSER EARNING COLLEAGUES or cousins, it hurts and hurts like mad! Simply because the net worth is a function of how much their houses appreciated, NOT how much they contributed to the SIP.
So based on a nice half baked survey that I have done, for most (most is not all) people buying a house has made more sense.
This is not because of any mathematical reason, just the fact that people are not as committed to SIP as they are to EMI.
Sad, but , true…
pattu
Many are not even committed to their EMIs. They seem desperate to close out their loans asap, interrupting compounding in their other investments, simply because they don’t like debt! Beats me.
Milind N
I agree with Subra .As subra rightly said ..Most is Not All .There are people who are renting and Investing the diffrence between EMI and Rent religiously in Equity SIP since Many years irrespective of Indices at 8k to 20 k .YES ITS MINORITY !
Clsoing Loans ASAP is Indian Mentality ,nothing wrong in that. THis may ensure that House Owners become REAL OWNERS at the earliest( As till LOAN is ON,real owners are lenders) Once they are Loan free completly ,and if it is at earliest ,they will have ample time to commit to SIPS.They should then convert ATLEAST EMI= SIP to create Meanigful wealth .
As for those in Minority ,Renting is better than owning ,if they are not giving any excuse for Stopping their SIPS.THank You SUBRA !
sujatha
Did not stop any sips..don’t plan to too.
But when faced with negative outlooks and opinions from different quarters, it helps to ask the expert. :-)(esp for one’s peace of mind)
Sambaran Mitra
One of the non-financial factors against renting is the possibility of forcing to vacate the house at owner’s demand. It is an unpleasant feeling to change home. It is very difficult to put a cost to this unpleasant feeling of changing home at somebody else’s behest.
Sambaran Mitra
@Pattu,
Sometimes people may like to close out home-loan to have one less tracking-headache in life.
Srikanth
as usual eye opening blog. How about high end property and investing over Rs 2C in a re-sale flat (for living not an investment). which is wise. stay in the rental place or own a resale flat. Is that market is saturated already or will it be appreciated in 5 years time. Can i able to sell it again with higher price. there are various odds. i think it is purely depending upon the price investing in buying house, worthiness and after all affordability in settling the loan if any.
pattu
@ Sambaran Mitra
Intentions are obvious. My point is that it should not be done at the cost of other financial goals. A mortgage is a good debt to have.
One should streamline investments for all financial goals, then and only then prepay the loan each year in small chunks.
You can use my “invest for retirement or foreclose loan” calculator to see that for a normal retirement is it always beneficial to let a home loan run and focus on investments.
Sridhar
Thanks Subra ji.
I am entering my 30’s (in s/w) and wondering to buy a Flat (pressure from family) and decided that I will not.
For
a. Pressure of having a loan (Cant get good sleep in a 60L flat, If I think EMI).
b. Math says “doesn’t look like Asset”.
c. EMI Hinderance, cant take risk, if needed.
d. Can’t scale down my life style. (Social pressure, Ex: Has 1Cr flat just has a Alto.etc, etc)
e. Discipline is a Big deal to acquire, If acquire, its better than Wealth 🙂
Krish
Deepak of capitalmind ran a nice recent article on NIFTY returns including the inflation adjustment. It is an eye opener and depressing for equity investors. In USA, owing a house and car made it sort of necessity. These physical tangible assets score high over anything else.
It should not be seen as different in India. Owning a house to stay is kind of necessity. Both retirement and mortgage need to be planned in early part of the career perhaps at the same time.
Given the resources (land, building materials and wages) getting expensive each year, personally I believe, property is likely to outclass equity by long distance. Any statistics or ones own example from near by kith and kin would confirm this reality. If one has to chose between mortgage or equity as a starting point, I would say it is mortgage. Common man should not trust the paper currency and paper assets.
Anand
Buying works out if you decide to stay in that house till you are 80 years old. It is better to pay EMIs somehow for 10 to 15 years. Then you need not worry about the makan part of your basic needs. Only roti and kapada remain, which you can tackle.
Please note that rents will keep on increasing year on year (remember it is an 11-month contract). Can you pay the rent when you are 75 years old? Have you calculated the future rent?
Remember that along with home, you are also buying peace of mind. Nobody can give you a call and say please vacate the house within next 15 days or 1 month. It is very difficult to find another house (with similar facilities you have) in same or another locality. I have gone through all that. My conclusion is buying works any time. Forget the society pressure. Buy because you believe that is a right decision. No need to buy 1 crore house. Buy within your limits.
Satish
Stay in a rented house and invest the balance amount in equities. After 10 years using the appreciated money in equities to buy a house.
Mira D
I’m not too sure on this one, Subrabhai…I rented 1997-2011, and most of the surplus went to MF/ direct equity, some wisely, some not so wise.
I stayed in only two homes, still count the landlords as my friends.
But what I could have bought for maybe 15 lacs in 1997, I ended up paying 80 L + stamp duty + brokerage in 2011. 80% self financed, rest @11%.
Maybe a minimal sq footage in 1997 would have been smarter.
Pravin
house v equities is speculation if inflationism will continue to proceed. in an ideal world,houses should fall in price as more technology and new construction comes up along with wear and tear while companies that earn cash should see their shareholders getting wealthier.but add hyperactive central banks and easy money loving govts to the mix and all that nice logic goes out of the window.the answer becomes ‘it depends’
Sarang
My father was State Government Employee and had a transferrable job for 35 years. I have moved all around Maharashtra through 24 transfers of my father from very rural and backward villages to Mumbai.
We mostly lived in govt. quarters of all shapes and sizes, and occasionally lived in rented houses. There is a lot of market research available to state how your car represents your personality. But I have hardly seen anything like that for a house. I personally believe that house is better representation of an Indian family’s collective personality than a car.
For so many years everything we bought in the house needed to be ‘folding’! You never knew the size of the next house and if this thing would fit in there. It was a habit to retain all the packing material on some loft that came with everything. Despite of all efforts, each transfer would cause some damage to our belongings. So it used to be hard time to find all similar looking cups to offer tea to visiting family of 4 along with my parents, the hosts.
I believed everybody who rented a house did it because of transferrable or temporary job or because you could not afford to buy one.
After I settled in my own job and bought my own house, I for the first time realized that you could have beds, tables and chairs that do not shake, as they no longer need to be ‘folding’! You could get rid of excess packing material to save space and actually could have a tea with family and friends in identical looking cups!
On the other hand, if you had a neighbor you did not like, you are stuck for life! If for some reason, your bathroom leaks, it will continue to do so even after a year if you don’t own up to fix it!
In short, if you can afford (too reletive a thing to decide), and if it is for own use and 1st house, I would suggest to buy it for psychological reasons. Anything beyond this, economics should take over!
Sambaran Mitra
@Sarang,
Completely agree with you. Your final statement is a beauty.
Finance/economics are applicable from 2nd house onwards. It is incorrect to ‘judge’ the first-house (the house to live-in) in terms of dollars and cents (rupees and paise if you wish). First house for me is all psychological (nothing to do with peer-pressure/status).
girish
But for SIP thing, the article makes sense. I agree that, EMI is not good. But what does one do with the saved money?. blindly investing in MF’s thru SIP wont do any good. If one doesn’t understand direct equity, then unfortunately there is no good product for investment.
Vince
I agree with Girish. Right now, there isn’t much we can do in terms of investing in anything , that can match the rate in which real-estate has grown over the years. 🙁
Ramesh
@girish @ Vince
1. What exactly have been the returns provided by Real-estate in the past years? And how do they stack up with equity returns?
2. Will they continue to be that in the future?
girish
1. I dont know about the returns of real estate since its not transparent. as for equity returns, you cant generalize with sensex or nifty returns. however, if one is stock specific, it will beat the rest hands down.
2. personally, i feel real estate will undergo correction or time based correction.