Now is the time to buy the house. This ancient pearl of wisdom, it seems, is fast losing currency these days among home buyers in big cities. With property prices almost hitting stratospheric levels and interest rate showing signs of inching upwards, manqy potential buyers have given up plans to buy a home immediately. Most of them are also a bit wary of huge EMIs that could consume more than half of their income. And, it’s not because they don’t want to compromise on their lifestyle. The scary spectacle of job losses during the economic downturn has made many people look at their monthly outgo towards repaying various debts they have accumulated over the years.
Ramesh Iyer, a marketing executive, was all set to buy a house a year ago, just before his marriage. His idea was to buy a flat close to his parents and brother in Andheri, a western suburb in Mumbai. However, when he started looking for a flat, he found that the prices were much higher than he had imagined. His brother bought a flat in the same vicinity five years ago for `30 lakh, but now the price for a similar house was more than twice the amount. That is when he decided to abandon the idea of buying a flat. “I wasn’t comfortable with the idea of a huge EMI.
Even after including my wife’s income, we would be just scraping through our monthly budget. I wasn’t prepared to live like that in the first few years of my marriage,” he says. He rented a house in the same locality for `15,000. He plans to invest as much as he can for the next five years and build a large corpus for the down payment which, he believes, will bring down the to a comfortable level.
Rajesh Sharma, an HRD professional, prefers to stay on rent for a totally different reason. He has been staying in and around the city centre in Mumbai for the past seven years. He says he just can’t think of moving to any suburb. “I always get this free gyan that I should move to the suburbs and start saving money for a house. Everyone points out the futility of paying around `30,000 per month, but I tell them I don’t mind it,” he says. He says he knows he can’t afford to buy a place in South Mumbai. “It would cost at least a crore. I can’t imagine ever having that kind of money, but I can afford to pay the rent. As long as I can do that, I will stay here.”
In fact, many people are quietly abandoning their plans to buy a place of their liking because of similar reasons. Even financial advisors are advising people not to rush with their house-buying plan if it stretches their finances beyond a point. Especially after the economic downturn and job losses, advisors are asking their clients to be mindful about the liabilities they want to take. “It is true that people are not ready to buy houses at the current prices.
If you look at the sales figures in large cities, you will realise that there is very little buying happening,” says D Sundararajan, investment consultant, Trendy Investments, a private wealth management firm in Mumbai. “It is true that earlier everyone was encouraged to buy a house immediately because of sentimental reasons and the tax advantage. But these days the idea does not work because of very high property prices,” he adds.
Financial experts also say that most individuals find it difficult to take care of huge EMIs because they already have several other EMIs — car, LCD, home theatre and so on — to service every month. “Earlier, most people would have a maximum of two EMIs for a house and car. These days it is not the case. Some of my clients have many EMIs for various tenures. They also run up huge credit card bills every month... mostly, our first effort is to clean up the debt before getting into savings and investment advice,” says a wealth manager, who declined to be named.
Ramesh Iyer, a marketing executive, was all set to buy a house a year ago, just before his marriage. His idea was to buy a flat close to his parents and brother in Andheri, a western suburb in Mumbai. However, when he started looking for a flat, he found that the prices were much higher than he had imagined. His brother bought a flat in the same vicinity five years ago for `30 lakh, but now the price for a similar house was more than twice the amount. That is when he decided to abandon the idea of buying a flat. “I wasn’t comfortable with the idea of a huge EMI.
Even after including my wife’s income, we would be just scraping through our monthly budget. I wasn’t prepared to live like that in the first few years of my marriage,” he says. He rented a house in the same locality for `15,000. He plans to invest as much as he can for the next five years and build a large corpus for the down payment which, he believes, will bring down the to a comfortable level.
Rajesh Sharma, an HRD professional, prefers to stay on rent for a totally different reason. He has been staying in and around the city centre in Mumbai for the past seven years. He says he just can’t think of moving to any suburb. “I always get this free gyan that I should move to the suburbs and start saving money for a house. Everyone points out the futility of paying around `30,000 per month, but I tell them I don’t mind it,” he says. He says he knows he can’t afford to buy a place in South Mumbai. “It would cost at least a crore. I can’t imagine ever having that kind of money, but I can afford to pay the rent. As long as I can do that, I will stay here.”
In fact, many people are quietly abandoning their plans to buy a place of their liking because of similar reasons. Even financial advisors are advising people not to rush with their house-buying plan if it stretches their finances beyond a point. Especially after the economic downturn and job losses, advisors are asking their clients to be mindful about the liabilities they want to take. “It is true that people are not ready to buy houses at the current prices.
If you look at the sales figures in large cities, you will realise that there is very little buying happening,” says D Sundararajan, investment consultant, Trendy Investments, a private wealth management firm in Mumbai. “It is true that earlier everyone was encouraged to buy a house immediately because of sentimental reasons and the tax advantage. But these days the idea does not work because of very high property prices,” he adds.
Financial experts also say that most individuals find it difficult to take care of huge EMIs because they already have several other EMIs — car, LCD, home theatre and so on — to service every month. “Earlier, most people would have a maximum of two EMIs for a house and car. These days it is not the case. Some of my clients have many EMIs for various tenures. They also run up huge credit card bills every month... mostly, our first effort is to clean up the debt before getting into savings and investment advice,” says a wealth manager, who declined to be named.
Sundararajan also says that people are happy enjoying the tax breaks on rent. “If your house rent allowance is 50% of your basic salary, with some planning you can get tax benefit on your entire HRA amount,” he says. Then there is also the concept of ‘cheaper rent.’ Sure, rentals have gone up lately, but if you look at the figure in relation with the capital value of the property, it is still very negligible. “It’s hardly 4-5% of the capital value,” says Sundararajan.
That brings us to most people’s idea about “aggressively” investing the difference between the possible EMIs minus the rent and build a huge corpus to make a big enough down payment to bring down the EMIs to a reasonable level. (Some experts believe your EMI should never be more than 30% of the income, but these days people seem to be comfortable with even 50% and above) For example, Ramesh Iyer is planning to invest the difference between his EMI (had he bought a house) and the rent in a mutual fund scheme through a systematic investment plan. (see table) The exercise, he believes, will help him create a corpus in a few years, which he can use to make a down payment to bring down his EMI eventually. He is also hopeful that he can take advantage of a price correction sometime in future.
However, stock market pundits want investors to have realistic expectations from the stock market. “When we are speaking about higher returns, the choice is always the stock market. But the market is at a very high level. The upside from here can’t be very quick,” says a wealth manager with a bank. “Sure, the market can still touch a historical high, but one should proceed with caution.” Sundararajan says investors should aggressively save and then invest a part of it regularly in the stock market.
“One should not invest money in a large chunk at the current level. It should be systematic investment plans (SIP) in three or four different mutual fund schemes. You should also have different dates for the SIPs,” he says.
However, if you are postponing your plan to buy a house, you should be prepared for a few possible scenarios. The real estate market always defies logic — you can almost never predict the correction in prices, especially in Mumbai and Delhi. Also, there are chances that prices would have moved up when you are ready with your corpus for the down payment. “The idea of building a corpus and buying the property when there is a correction of 20-25%, which I think is highly possible, is sound. But the only problem is that nobody can predict the property market,” says Sundararajan.
That brings us to most people’s idea about “aggressively” investing the difference between the possible EMIs minus the rent and build a huge corpus to make a big enough down payment to bring down the EMIs to a reasonable level. (Some experts believe your EMI should never be more than 30% of the income, but these days people seem to be comfortable with even 50% and above) For example, Ramesh Iyer is planning to invest the difference between his EMI (had he bought a house) and the rent in a mutual fund scheme through a systematic investment plan. (see table) The exercise, he believes, will help him create a corpus in a few years, which he can use to make a down payment to bring down his EMI eventually. He is also hopeful that he can take advantage of a price correction sometime in future.
However, stock market pundits want investors to have realistic expectations from the stock market. “When we are speaking about higher returns, the choice is always the stock market. But the market is at a very high level. The upside from here can’t be very quick,” says a wealth manager with a bank. “Sure, the market can still touch a historical high, but one should proceed with caution.” Sundararajan says investors should aggressively save and then invest a part of it regularly in the stock market.
“One should not invest money in a large chunk at the current level. It should be systematic investment plans (SIP) in three or four different mutual fund schemes. You should also have different dates for the SIPs,” he says.
However, if you are postponing your plan to buy a house, you should be prepared for a few possible scenarios. The real estate market always defies logic — you can almost never predict the correction in prices, especially in Mumbai and Delhi. Also, there are chances that prices would have moved up when you are ready with your corpus for the down payment. “The idea of building a corpus and buying the property when there is a correction of 20-25%, which I think is highly possible, is sound. But the only problem is that nobody can predict the property market,” says Sundararajan.
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