Planning to buy a house? Wait for further correction

Though property prices have declined, renting still makes sense in heated markets

For Nagpur-based Deepak Puranik, scouting for a house in Mumbai was the next step to being offered a job in the city. With his monthly salary a little over Rs 1 lakh, his home loan equated monthly instalment (EMI) would work out to around Rs 40,000 for a loan of Rs 35 lakh. But with a budget of Rs 50 lakh, he could only afford houses in far-flung areas of Mumbai’s suburbs, given high property prices.

“Buying a house in the suburbs would have meant long hours of commuting. I preferred renting an apartment closer to my workplace in Bandra,” says Puranik, who started at a rent of Rs 35,000.
 

TO BUY OR RENT… 

A CASE FOR RENTING

• If there is uncertainty about permanent stay in the city 
• If fulfilling conditions for availing of HRA benefits 
• If difference between property values and rent is wide 
• If purchase in different city is affordable & all property-related tax deductions available 

A CASE FOR BUYING

• If existing property and interest rate are affordable
• If you are yet to make your first property purchase 
• If there is enough scope for capital appreciation 
• If difference between rent rate and possible instalment is narrow

Buying a home
Despite the traditional bias towards buying a house, renting out homes seems to the only option, especially in heated property markets. According to data culled by stock brokerage Prabhudas Lilladher, lease transactions for Mumbai alone stood at 8,580 in November, showing a growth of 58 per cent on a year-on-year basis.

But, the Reserve Bank of India (RBI) has signalled a pause in rate raises and property prices across major cities like Mumbai, Bangalore, Chennai and NCR have declined by up to 10 per cent in 2011. So, is it time one can look at buying a home?

With capital appreciation being reason enough, purchasing a house was recommended even as average home loan interest rates moved up from 9 per cent to 11.5 per cent in the last 18 months. The logic behind this was that even if one starts paying high interest rates, because such loans are of long tenures of 15-20 years, there would be cycles when the rates would come down.

In fact, one such cycle is expected in the next few months, says Mohammed Aslam, COO, residential services, Jones Lang LaSalle, India. “Due to poor demand, developers are ready to give a discount of 15-20 per cent when a large upfront sum is paid. But once rates start moving downwards, the pent-up demand will come in, pushing prices up,” he adds.

That’s easier said than done. Typically, one can only avail a maximum loan of 80 per cent of the property value. You need to pay 20 per cent of it upfront to the developer. Though EMIs are restricted to 40 per cent of one’s salary, they could fluctuate if you have opted for floating rate loans.

Price comparison
Ideally, those with a transferable job should be renting property, unless they plan to buy a second home. According to Anand Narayanan, national director (residential), Knight Frank India, “One should also consider the gap between rental yields of the property you wish to rent versus mortgage interest rates.”

Rental yields are calculated from ‘annual rent outflow as a per cent of the property’s current capital value’. In Mumbai, while property values are high, rental yields are low at 1.5 per cent-3.5 per cent. So, renting a place is more affordable than the interest cost you shall pay to buy. In other major cities like Bangalore and Delhi, higher rental yields of 3.5-4.5 per cent, indicate higher rents.

Similarly, when the gap between home loan interest rates and rental yields is narrow, it means one’s rental outgo is closer to what he would be paying as his EMI. “Such a person may prefer buying a home. But, in Mumbai, the gap between the interest rate (11.5 per cent) and rental yield (1.5 -2 per cent) is wider (9 per cent), and so renting is easier on the pocket,” adds Narayanan.

Rents are likely to be raised by 10 per cent at the time of renewals each year, causing outflows to fluctuate. For instance, a 10 per cent raise in the second year saw Puranik’s rent being upped by Rs 3,500 to Rs 38,500. Puranik will end up paying Rs 42,350 next year. So, in the initial stages, though rent is much lower than his possible EMI, the gap between the rent and the EMI will eventually be bridged.

Tax benefits
There are tax benefits for both rented as well as mortgaged property. Subject to certain conditions, salaried persons can claim tax deductions for the entire year’s house rent allowance (HRA) amount. If one is residing in owned property, he can claim deductions up to Rs 1 lakh for the principal amount (Section 80C) and Rs 1.5 lakh on the interest paid (Section 24B).

So, had Puranik opted to buy a home on loan, his benefit on the interest amount would be limited to Rs 1.5 lakh, despite having paid over Rs 4.5 lakh as interest amount through the year. In contrast, he now avails deductions for the entire rent paid under HRA rules.

With property rates still affordable outside of the metros, individuals are advised to buy property there. This will ensure tax benefits, too, since current tax laws allow one to get HRA benefits while claiming deductions for both interest and principal on own property, as long as it is in another city.