Buying dream home- Really worth?- The untold complexities and reality

Every individual in his/her 30s and having a steady job forces pressure from family and peers to buy a home. Owning a home is deemed like ‘having settled in life or having secured a roof over head’. But home buying in India has dozens of hazards that no one wants to talk about openly. Everyone hopes that when they buy a home these things don’t happen to them. But the harsh truth is that buying a home may not always be a wise decision. It has its share of risks which we should be aware of and be ready to face if it surfaces.
1. Apartment is NOT a lifetime investment.
Most apartments have a lifespan of 40 years approx.. After that there may be need for redevelopment or extra investment is needed to upgrade the interiors etc. For redevelopment consensus is needed among all owners in the society. So the idea that buying home is a life long investment is not true. 40-50 years is the practical lifespan for a flat, may be a decade or two as bonus if built with good quality and well maintained but certainly don’t expect it to last for generations. Whatever you’re investing in an apartment should make economical sense/prove its ROI within this 40-50 years.

2. Apartment values do not always appreciate.
Apartment value appreciates only under following conditions
  • It is in city centre, absolutely no space for new development and people are willing to pay a premium for an existing home
  • The area is very close to major facilities (like IT parks) and there’re buyers willing to pay a premium n buy an existing property than wait for new apartment projects get to completion.
  • Even if the value appreciates a bit, the chance of it appreciating more than 2-3 times is very low (on 50 lakh loan you'll be paying 58 lakh interest, so to make profit property must appreciate 2.5 times or more)
In most cases above doesn’t happen. There’s always new projects coming up nearby or unsold apartments in existing complexes, there won’t be a need for a buyer to spend on second hand flat. All metros have unsold inventory of few lakh apartments all over city [source] and new projects constantly come up. So if you’re thinking of buying a home n selling it for profit in short term, re-assess your prospects. Value of a property may even drop substantially depending on surroundings and other incidents such as
  • Due to high unsold inventory builders are cutting price for new homes
  • Issues like waterlogging, lack of amenities etc reduce popularity of a location, thereby value of apartments there.
3. Project Delays:
Delays in construction projects are very common. Few months to few years, resulting in home buyers having to pay both EMI and rent, plus the mental stress involved in follow up with the builder etc.

4. Builders going bankrupt.
Chairman of Marg Group was arrested recently in Chennai as the company failed to complete several projects. [News] Jaypee group in North India is also facing similar issues [News]. A builder will appear very prosperous and credible during launch phase of project but various things go wrong over time- almost impossible to predict and play safe at the time of purchase. Many builders announce mega projects without proper approvals and funds and hope that approval will fall in place in time and project can be funded through money paid by initial set of buyers. Often this doesn’t happen as expected, forcing builders to either compromise on quality or worse, bring the project to a standstill, causing heartbreaks to those who’ve paid lakhs of rupees and await possession. Many builders have nexus with underworld, politicians and bureaucrat- often manage to protect their personal wealth in case of a crisis and don’t care what happens to the customer who paid their lifetime earning with a dream of buying a home.

There were instances of building collapse during construction- those who’d paid for homes yet to get any refund from builders. Of course not everyone has to go through this and may get their homes within reasonable time, but if you happen to be among those unlucky few, the long stressful legal battle will be very straining on your time, energy and money.

5. Locks you to the city & locality
Buying a home sort of ties you to the city and locality where you’ve bought the home. With a rented home you’re more flexible to move around. What if you wanted to quit your job and travel the world? Or you get a work permit/PR in some other country?

6. Total Cost of a home
Everyone says home is an investment. They quote the amount they paid to builder (say 50 lakhs) and NOT the total amount they will be paying (including interest paid to the bank, total cost of an apartment will be two to three times more. No one gives you real picture. For a 50 lakh apartment, bought on a 20 year loan, you’ll be paying over 58 lakhs in interest. A total of 108 lakhs will have to paid over 20 years. Property tax, maintenance and other expenditures add to few more lakhs. Plus this amount will be post tax income, meaning to spend 1 crore you’ve to actually earn around 1.3 crores.  What is the probability of your 20 year old home appreciating to 1.3 crore rupees? Very very low. Rental will cost about one third to half of EMI amount, with very high degree of flexibility. So I don’t see home as an investment. I might as well spend 30 lakhs on rental and use balance 90 lakhs on something else- say world tour.
#
Factor
Buy
Rent
Rent for 40 years

1
Purchase cost, approx. Small 2BHK city outskirts
50,00,000 INR
15000 INR per month
72 lakhs + 20 lakhs for renal increase over time
Rental increase risk can be mitigated a bit by shifting to cheaper locality or lease etc
2
Interest paid on 20 year loan
58,00,000 INR


EMI 45000
3
Maintenance, repairs and property tax
12,00,000 INR
1500 INR (maintenance)
7.2 lakhs

4
Total Spend
1.2 crores INR

1 crore

5
Potential Resale value for 40 year old apartment
30,00,000 INR

-
Resale value can vary depending on dozens of factors
6
Net spend
90 lakhs

100 lakhs

7
Stress factor
High

Low

8
Flexibility
Very low

Very High

Numbers for illustration purpose only. Please recalculate for your scenario with the amount you feel realistic for you.

7. Things that can go wrong, which they usually do!
There’re several things that can go wrong once you decide to spend all your earnings on that one apartment
  • The location may not develop as expected
  • Problems of flooding, garbage dump yard etc occurring nearby, reducing value of property
  • More apartment complexes come up nearby, reducing demand for old homes as a buyer would prefer newly built property
  • Infrastructure problems that can deter potential buyers-water shortage, bad roads, poor public transport etc
  • Your job may take you to other cities, putting you in a dilemma to sell/rent your current home
  • Even within city, you might find the location inconvenient- because your office shifts to far away location or kids/spouse have school/office far away. You might be forced to stay in current place and undertake long commute every day, instead of renting a home closer to work
  • The sea view/lake view you had might get interrupted by another building that comes in between
  • The lake next door might be froathing chemicals
  • If you can’t get along with your neighbors/apartment society more stress everyday
There is no way to predict above at the time of buying. So it is a great risk and gamble trying to select right locality to buy a house.

Many cities in India are already showing various signs of major problems- Bengaluru is said to face water problems in 5-10 years. Delhi suffers major pollution problems. All other metros have their share of problems. There is very high chance that you might regret your decision to buy that flat. It may be a good idea to retire early, buy a small, cheap property in a village and lead a comfortable life there.

8. The real estate price game
Real estate prices were supposed to fall after demonetization. But builders are trying to maintain artificial scarcity and keep prices high. Need to see how long this lasts. Just like how different passengers in a plane would have paid different price for same seat, different buyers in same apartment complex would have paid different prices depending on how much the builder could trick them into paying more.

Also one should be aware of several ways builders cheat or trick the pricing- like including common areas (like corridor) to every apartment, varying price based on floor#, extra charge for club house, parking etc, using several design tricks in model apartment to create a spacious and airy feeling and so on.

There is also no single government agency, whose approval would mean everything is fine with the project and no issues will arise in future. After say 15 years, one fine morning a corporation officer can land in front of your gate with a bulldozer, claiming your house is violating some rule or law-this despite having collected property tax for decades without any concern. Common man always have to run from pillar to post in India.

9. Gift to your children?
Not sure how this will pan out. You buy an apartment in your 30s, you can possibly live there till your 70s or 80s. Will your kids also be able to stay here through their life? In most probability their job/career aspirations will take them elsewhere and also the house will need major redevelopment if it has to last another generation. A home that is deemed luxurious and ultra modern will look so outdated 30 years from now, it may not be very inspiring for your next generation to spend in- they might prefer a new, latest home from their earnings. So rethink this angle

10. Spend on experiences, not things
Today’s generation is more aspirational. They have bigger dreams than just owning a house, they want to travel the world or try build a startup company or make  a name in music/adventure or something else. A home loan could be a big barrier to many of this. It prevents one from taking any risk (like starting a new company) and forces them to stay put in their job for decades so that they can pay their EMIs every month. Imagine all the travel and adventure and activities you can undertake by not buying a home. The previous generation’s measure of success- Job, Home, Family, Car- doesn’t necessarily be same for current generation. Home buying has been an emotional decision than a financial one, as everyone is pushed by the thought that owning a home is essential and a roof over head will provide lots of financial security in long run. Salaried class spending on home purchase keeps lots of people busy n employed- banks, land sharks, construction companies, government departments and workers etc, thus everyone try to maintain it is very cool to buy a home, while harsh reality is different. 30 years from now, will you be happy that you sacrificed on a dozen dreams just to own a house or you’ll be glad you enjoyed your life to its fullest but without the security of a own roof over your head. You have to decide for yourself.

Note: You may wish to avail services of home plan guru for professional assistance in buying right property. Some builders like UrbanTree organize reguar customer meets for their ongoing projects and are deemed more reliable and accountable. Please use your discretion.

Do you agree? Did I miss any points? Do share your opinion.

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10 comments:

  1. There couldn't have been a more right time for this article Anna. There's one more catch in buying a flat in a good locality from a very good builder with a fat loan. Once you start living there, you'll be part of elite community and your expenditures will go high just to be one among the co-residents there. Your children will long for the things that their peers possess. These all can add to already existing financial burden on you causing more stress. Choosing a right community as per your lifestyle is more important than just buying a big flat to show it off to people.
    Sharing your article to many more.

    ReplyDelete
    Replies
    1. Thanks Ravishankar.. yes, peer pressure is applicable even in rented homes, so I didn't stress on that.

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  2. It is more elaborate no doubt, what you have calculated about rent is Rs.150000 for 12 months x 40 years Rs.72 lac. Which is not practical, rent can not be constant for next 40 years. it will increase by 5% every year, which is not factored in the calculation.

    ReplyDelete
    Replies
    1. Agree. Will factor a few more lakhs to that effect. But one can always shift to a cheaper place further away or downgrade from 2BHK to 1 BHK or opt for lease etc to save on rental.

      Delete
    2. I agree with Murthy, 15 years back, we were paying 3k per month, now for the same appt we are paying 15k. You need to consider time value of money and inflation - which is missing here.

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    3. If you calculate every year 5% raise then total you would have paid end of 40 years is Rs.1.2 crore

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    4. Of course calculations can vary.. there is also interest from money not spent on buying- which should offset this. One can take a lease or negotiate with owner not to increase rent or move out to a cheaper alternative...

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  3. With rental yields as low as 3% in big cities, it makes sense to rent than own an expensive apartment,where you have additional stress of paying ypur EMIs which is much higher than rent what you pay for a normal house.I feel as a hedge against inflation , one can buy a plot in a upcoming locality or the place of their choice for retired life.When you retire you can have the choice of constructing the house as per your requirement or sell the plot at a good price & use the money to lease or rent a house.

    ReplyDelete
  4. Yes, I have added now a buffer for rental increase over time.

    ReplyDelete

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