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 …