Not enough incentives

While the government is offering subsidy and builders are constructing affordable houses, one should still wait.

Earlier this week, the headlines of most newspapers talked about the finance minister’s measures to pump the housing sector. For the aam aadmi, the big announcement was the one on a 1 per cent interest subsidy for loans up to Rs10 lakh for a year, provided the purchase is up to Rs 20 lakh. Several questions come up on whether the aam aadmi can really benefit from such measures based on the current situation in the real estate industry.

Let’s consider an example. Ram Joshi, earning a salary of Rs 5 lakh a year (working in Nariman Point, at the tip of South Mumbai) is hardly enthused. Here is why: He has been looking for a house for quite some time and unable to find one for his budget of Rs 20 lakh. Four years back, a 1 BHK house even in Andheri was possible for Rs 20 lakh. Now even a 1 BHK sells at more than Rs 55 lakh. He has been unable to find any decent accommodation for this budget till Virar. Some that he saw were low on amenities, not so great construction, and at places away from schools and train stations. He wondered what impact a 1 per cent subsidy will would have on his purchase. In pure monetary terms, Ram would probably save around Rs 500 or so per month in the first year. The total savings will not exceed Rs 6,000 and this will hardly matter for a budget of around Rs 20 lakh (0.3 per cent of Rs 20 lakh).

Considering Ram’s takehome of around Rs 34,000 per month and monthly expenses of around Rs 15000, he can manage an EMI of Rs 12,000-15,000 (considering Rs 4,000-7,000 is allocated for investments and insurance). However, the challenge today is that prices are extremely high and he is unable to get a decent dwelling for the EMI he can afford. Additionally, most of the properties built are 2-bedroom and upwards, which takes the budget of most properties to at least Rs 60 lakh. At the same time, banks are expecting him to put a higher margin upfront on the property he has liked in Mira Road. He currently lives in a rented property in Andheri for around Rs 10,000 per month in a decent society and is contemplating whether he should really move far away just to own a house. Tired of finally unable to get anything decent in his budget, he has taken the wise decision of staying on rent.

There are several such families, not just in Mumbai but across the country, who are unable to afford houses. A lot is being talked about affordable housing but what is affordable is beyond comprehension, as even a person who is earning Rs 5-10 lakh cannot afford houses today. The story is repeated for folk earning more than Rs 15-25 lakh, as most people earning more than Rs 25 lakh would prefer to stay in affluent locations.

So, what should be done? If you are contemplating an apartment and unable to get one for the budget you have, it makes a lot of sense to rent, as there are several other parameters besides ownership that one must consider. What is the proximity to my place of work? Are there good schools in the neighbourhood? What about the surroundings, safety, traffic, closeness to railway station and avenues for entertainment? Equally important are things like amenities on offer , quality of construction , maintenance and so on.

Low interest rates, low asset prices and increase in income led to good demand in real estate between 2003 and 2006. Currently, we are just witnessing low interest rates (although not as low as in 2003-2005). However, real estate prices are still high and builders have again started to raise prices, as they believe things have changed for the better because of stock market upmoves and also because most of them have raised easy money in the markets in the past several weeks. This is an extremely stupid thing to do. At the same time , bank home loan credit offtake still remains low and people are cautious to take on more debt, considering job stability and uncertainty of future income. If real estate prices go further up instead of down, you will be better off living on rent, as sooner than later we will witness a massive correction (because of demand erosion), as real estate is and will continue to be beyond reach of most home buyers.

The author is director, My Financial Advisor