Affordability improves, but housing in India continues to be expensive

Young couples should avoid this obligation if it puts them in a tight liquidity position

A recent study by real estate consultancy JLL India has found that housing has become more affordable across India’s major cities between 2011 and 2018 (see table). While the situation has improved relatively, housing in India continues to be expensive in absolute terms. Hence, potential buyers need to be mindful of the risk of over-leveraging.
 
Three factors are responsible for the improvement in affordability. “Over the past five-six years, home prices have declined marginally, stagnated, or increased by at most 2 per cent annually. Over the same period, average household income has grown at a higher pace. Interest rates on home loans have also declined from 12-13 per cent in 2012-13 to around 9 per cent now,” says Samantak Das, chief economist and head of research & REIS, JLL India. In recent years, developers have also reduced apartment sizes to make them more affordable. New projects are also being planned in the suburbs to keep the price reasonable.
 
Potential buyers should not, however, overlook the fact that while affordability has improved, real estate in India continues to be expensive. “If you look at per capita gross domestic product versus the cost of owning a house in one of the major cities, India is still expensive,” says Nitin Vyakaranam, founder and chief executive officer, ArthaYantra. One way to decide whether to buy or rent is to consider a few financial parameters. “If the EMI is close to the rent, it’s a no-brainer that you should buy. Your EMI will remain the same while the rental will increase year-on-year. Over time the price of the house will also appreciate,” says Rachit Chawla, chief executive officer, Finway, and Sebi-registered investment advisor. But in India the EMI can exceed the rent by two-six times. In such cases, consider deferring the purchase. “If the gap between the rent and EMI is more than two times, start an SIP in mutual funds dedicated to this goal, rather than take a loan, and purchase on a down payment basis after a few years,” adds Chawla. Instead of paying an interest of 9 per cent on the home loan, you can earn 11-13 per cent by investing in mutual funds, thereby reducing your financial outlay dramatically.
 

Potential buyers may use another rule of thumb. Make sure that the EMIs on all loans do not exceed 50 per cent of your net savings (take-home salary less expenses). “The key is to avoid over-leveraging, so that you don’t end up in a situation where you face a liquidity crunch for the next 10 years,” says Chawla.
 
To avoid falling into a debt trap, Das suggests compromising on locality and travel time, to some extent. But of course, if living in your own house means an intolerably long commute, ask yourself if you are prepared to make that trade-off.
Factor in the down payment you will have to make. “In the case of costlier properties, where the down payment is higher, we have seen people bend over backwards to put together this sum. Many are forced to take loans from their family, personal loans, and so on,” says Vyakaranam.
 
You should consider whether you will settle down in that city for good. “Buying and selling property is not easy in India,” says Vyakaranam. Many people say they will live in the house for three-four years and give it on rent when they move, but they should bear in mind that the rental yield in India is an abysmal 1.5-2.5 per cent.