Till the late 1980s, it was the standard middle class dream to be able to somehow cobble enough money to buy one's home. You scrimped and saved for many years, sold some family jewels and borrowed from friends and family. Overtime, you somehow paid back friends and family.
The script changed in the 1980s with the arrival of home loan companies, pioneered by HDFC. Now, instead of borrowing from friends and family, you could take a home loan. The only difference is you have to begin repayment immediately and pay back on a regular basis till eternity (or so it feels). Given the easy availability of home loans, the number of people who can buy their own home has multiplied exponentially. This has resulted in the rent-versus-buy debate arriving on Indian shores as well, as has been agitating financial literates in the West.
Does it make sense to buy your own home or to stay on rent? There are quite a few calculators (ranging from the basic ones to fairly sophisticated ones that include increases in rent, municipal taxes, capital gains on property and tax treatment, etc) used by proponents on either side to portray their case. The results almost always show that staying on rent makes more financial sense, unless you take very aggressive assumptions about the rate at which home prices will increase in the future. Contrary to popular perception, the average long-term return (10 years plus) on residential real estate in India barely touches double digits and if you factor that into account, the rent-versus-buy calculators give very much the same results in India as in the West.
Strictly financially speaking, it makes sense to stay on rent rather than buy your own home. I can show these results to anyone interested but can confirm we have taken into account the tax benefits on home loans (the most asked question) before arriving at this decision.
Yet, I have always advocated that people buy their own home as soon as they have made a commitment to stay in a city and have the necessary down payment as well as the future repayment capacity to pay off the home loan. The reason for this supposedly contradictory stance is explained below.
In most Western countries, conforming to social norms is not such a big thing as in India. In fact, Western norms emphasise independence rather than conformance. It is the social norm In India to own your own home (even with a fat loan) and it is difficult to defy this norm by emphasising you are doing this because your calculations show that staying on rent is better. The look in your friends' or family members' eyes will confirm they think you have come up with an innovative excuse for inability to buy a house. The social expectation is so high that the cost of not conforming to it becomes high in terms of the insecurity it causes in your (or your spouse's) mind.
Conversely, the sense of stability derived by owning your own home (even if it entails EMIs till eternity) is a big benefit. None of the calculators takes either this cost or benefit into account since, it is not really quantifiable. Also, most people argue (justifiably so, in my opinion) that the calculator assumes the monies saved by renting your home will be invested, which unfortunately rarely happens. We love the forced savings that is inbuilt in the loan EMI repayment and most people would just end up spending the money saved by renting the place, rather than investing it in alternative options.
For all these reasons, I universally recommend to my clients to buy their own homes (of a value they can afford). This recommendation obviously does not cover buying a house as an investment or for renting out. That is a completely different story.
Do you agree with my reasoning? I welcome your comments.
The writer is director, Apnapaisa
