Why NOT to buy a house - I

If you are living in Bangalore (or for that matter any Indian urban city), everyone would be telling you to buy a house (in case you haven’t already done). I talked about this earlier.


Last month I met my old friends from IIT-K. Some of them are still unmarried and the priority for them is to change their marital status. For those who are married, they are thinking of either buying a house or already have booked one.


One of my friend ‘S’, is at the stage of becoming father and he recently bought a house worth Rs 40 Lakh in Bangalore. Despite the steep price it is just a 3BHK apartment, and the home loan costs him more than Rs 40K for next 20 years. Recently with the interest rate rise, the tenure increased to 25 years and EMI by Rs 600.


I am not questioning his decision, since it is a personal one, but if we look purely in financial terms, it is a double whammy, an exorbitant EMI outgoing every month and the expenses of fatherhood. It is a different matter that he is very cool about it. But for a paranoid like me, it is like choking yourself.


A 3BHK apartment in say close to your office would not cost more than 15-18K, while the apartment not being in so close to your work location increases the travel cost. With EMI of Rs 40K + Petrol Expenses would be humongous.


Ofcourse there are lots of argument for and against it, let me think through it :


1) Buying a house is like building an asset


Has anyone thought why we want to build an asset? My father worked as professor in a little known town “Indore” for almost 45 years. He started at a meager Salary of Rs 400 per month and reached to Rs 10K after so many years. The pension he receives now is Rs 5K per month. In such a small amount he built two houses, but all his children, no longer want to stay in Indore, since more opportunities exist in other cities. My parents spends most of year with each of us, and hence the two houses he built are of no use to any of us. We sold one and he is earning interest on that amount.


So how does the “asset” helped him? I guess rather it deprived him of the much needed “extra” money he might have used during his younger years.


So for sure, the “asset” can not be for your children. Also I would rather not believe that our children would be “emotionally attached” to the house. Bollywood funda “Es ghar ke saath hamari bachpan ki yaadein judi hai”. I guess, most of their formative student life will be spent in hostels in India or abroad.


2) Buying a house gives you security


This asset takes months to sell off, so in case of emergency, it is of no use as a liquid asset. If you are salaried, then you will rarely come across situation where you would need so much money (Rs 40 Lakh etc) to sell a house (unless some medical emergencies come, but then medical insurance should help rather than the house).


It also cannot give you security if you loose your source of income. The logic people have is that if you loose your job, you don’t have to pay the rent, but don’t you have to pay the EMI? Try not to pay your EMI for 2-3 months and then see the volte-face of the same bank who pestered you into getting that loan. So till the time your loan is over, in next 20 years/25 years, you better not loose your job.


3) Buying a house is like investment


If you have investment in mind while buying a house, then why not stock markets. Everyone agrees that investment in stock market has overshadowed any other form of investments over a long horizon (say 10-15 years). So why not build a corpus based on stock markets. If you really had all the time in world to buy a house and sell it after 2-3 years, then I think you should go ahead. But may be you better do it on a full time basis. This can only help if you buy just before the booming time and then sell if after 2-3 years. With markets saturating in Bangalore, it does not make sense, if at all you want it as an investment, then focus on emerging areas like Mysore, Pune etc.


4) Buy a house now before it is unaffordable


I simply don’t understand this logic. The assumption here is that your salary will never increase. I think many of us came from smaller cities, and because of lucrative money we came, so even many years from now, you will get opportunity and if you grab it you will earn much much higher than you do today. Also if the assumption is that salary will not increase, you anyway cannot survive with a house loan. Interest rates can go up based on many external factors and assuming salary remains same for next 15 years, won’t you be expanding your family, kids & their education etc etc. So I guess the equation remains same, but the perspective of how you look matters. Mumbai is considered saturated in terms of real-estate, but even now you can buy a decent house (after so many years of saturation). I know because my brother recently bought an apartment in Mumbai.


To be continued …

14 comments:

  1. Nice Post !!

    Your post lists all the valid points for "Buying a house after taking homeloan at very high interest rate". But one point is missed - taking a house a investment and selling it after making decent profit and in process accumulating some fund.
    Consider the case of old people ,whose children,for somereason OR childless people, can not take care of their ailing parents -- these house investments serve as great investment and survival money-pots --sell a house and live on the interest of that money OR simply put the house on rent. I believe that ,for people who are not in pensionable job, buying a right house (investment in property) is good deal...Long live is ahead and to survive,we need money.

    ReplyDelete
  2. I share the same thought as yours. Well written article.

    No one becomes rich by following the masses. If everyone is buying a house, better stay away from that activitiy...!!

    ReplyDelete
  3. Buying a house is a serious decision. It is the largest purchase one has ever made in his life. It is not an easy task to find an ideal place to live. Recently I have come across one interesting service http://climate.fizber.com/ With the help of climate watch homebuyers can check what the climate is like in another town or city before they move there.

    ReplyDelete
  4. Hi,

    Buying or building a house definitely means you are building an asset.

    I disagree with your conclusion that if you are not staying in a house, it is not an asset.

    An asset is something that has a residual financial value. Thus, shares are assets, even if you can not "use" them for anything!

    Similarly, a house is an asset.

    And it is a great asset, because its price would always increase in the long term. Here are the reasons:

    1. population is always increasing. So, demand always rises.

    2. Supply of land is finite and limited.

    3. With rise in incomes, demand for good housing would only increase further from people moving up the chain.

    Thus, purchase of a house is purchase of an appreciating asset.

    I have some more thoughts on it on my website. You can see them at:

    "Settle" early in life - buy a home when young

    Real Estate Investment

    I would love to see comments from you if you agree or disagree with me.

    ReplyDelete
  5. Excellent post!

    I don't think even buying in Pune or any emerging City(as by definition it is known to a common man as emerging it is expensive already!) makes sense. As Pune things are getting worser with infra not coping up with growth and prices are already touching sky with no sign of coming of down at least in near term.

    cheers
    Sandeep
    http://spadhye.blogspot.com

    ReplyDelete
  6. RaagvamDatt, I dont agree with you generalization, especially,

    The price of house should always increase because:

    1. population is always increasing. So, demand always rises.
    2. Supply of land is finite and limited.
    3. With rise in incomes, demand for good housing would only increase further from people moving up the chain.


    If this is true, then why the prices are still stable in cities like Kanpur or Kolkata. The housing price will shoot up only because:
    1) Some other industries are going up and people are migrating to that city.
    2) Due to input prices (steel, cement etc)
    3) If loans become cheap.

    Most of the cities where real estate prices are going up are the ones where other industries like IT or Retail are growing up. So if at all the industrial trend is reversed, then the prices may not only stop going up, but can actually stop declining. There are lot of places in US where this is already happening.

    ReplyDelete
  7. You also need to keep in mind that if you are not paying an EMI on a home loan, you are probably paying rent.

    From a financial perspective buying a house is always more profitable than paying rent in the long run. Here is a calculator that can help you compare the financial benefits of renting vs buying a house.

    http://www.persquarefeet.in/calculators/Buy_vs_Rent_Calculator.aspx

    ReplyDelete
  8. @PerSquareFeet, but you are not considering the emotional aspects. You are doing a cold-blooded calculation... add the trauma and issues of buying a house and then try to compare...

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  9. But investing such need isn't a bad idea after all. Some people nowadays, buy/invest houses to be sold with high value in the future.

    Just like when I found one at Property Sunshine Coast, where everything was perfect! I am now planning to migrate there!

    ReplyDelete
  10. Hi Xaja,

    thanks for comments..the problem is not making an investment, the real problem is the risk involved. It is a misconception that investing in house is low-risk high return. There are so many people get cheated everyday and does not get the realworth of money they pay. Why there is market regulator for shares (SEBI), market regulator for insurance products (IRDA), regulator for banks (RBI) but none strong regulator for housing market?

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  11. Anonymous6:37 PM

    This post describe your way of looking at a life.

    Following points i would like to summarize :
    1. You said that, your children are not emotionally attached bla bla etc. Does that mean, suppose take an example, you owe a house in a metro city at loan of 40Lacs for tenure of 20 yrs, you covered it with insurance, and you died in a metro major accident, then does your family survive through this, no, atleast they do have a thing to stay throught their life (n definetely they still love you emotionally !!!) thats called "My HOME", on the other side , If you rented a flat, assume what happen to your family when you died -- Assume a policy money is not efficient after 2 years of your death..

    Jagoinvestor!

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  12. Hi Jagoinvestor,

    If the insurance money is sufficient only for 2 years, wouldn't it mean that you were under-insured. Also house investment is not a alternative to insurance, and house is not a liquid asset with insurance money will go to bank leaving nothing to the family members.

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  13. Nice post bro! well put it. Going to read part-ii now. good one.

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  14. preetham10:06 PM

    Indian urban population is increasing .. so buying house is not bad idea at all...provided you have backup ... if you don't have backup, then buy piece of land...

    ReplyDelete