Do I Need to Buy A Residential Property ?
The answer to this question is more difficult than it is believed to be. The statistics in India vehemently suggest ever growing housing needs. It is often linked to the growing population. Yet we see slumps in the property market almost every 5 to 8 years. The present slum has lasted even longer this time. Instead of growth, the property market even saw a negative swing post demonetisation, which does not seem to be showing any signs of recovery. The prices are not moving upwards even at the pace with which money would grow in a typical fixed deposit or beat the home loan interest. So, purely in terms of financial calculations residential property as an investment option has at best shown break even.
Since the late nineties the property market saw a boom practically for a decade. Almost everyone jumped into property market to reap maximum gains. In true senses a majority could not recover or reap before the bubble burst. Even professionals or those permanently and in full time in property business due to their compulsions of maintaining a ready inventory suffered diminishment in returns on the unsold part.
Majority of the people had invested in residential property and were not end users. The biggest chunk of investment was in apartments and a smaller component in residential plots. Both the types have end users who are middle and upper middle class. The situation was that it was either the middle class or those with black money who were trying to earn through an ultimate end user which too was the middle class. It was like the high tide in the sea which was bound to restore to its normal level in a matter of time.
Do we open sweet’s shops or sell fire crackers during Diwali festival? Well, the answer for most of us in in the negative. Why then most of us suddenly jumped into the property trade when it was not our line of earning? We suddenly became supplier when we had always been the consumer of the property sector. Supply outgrew the demand manifold and the bubble just burst with stock piles of blocked inventories and negative returns.
If one is not connected with the property trade as builder, broker, developer or land owner it is best to simply close your eyes to the investment aspects of the constructed residential property. In India, presently most apartments or constructed houses fetch not more than 2% annual rental yield. Commercial properties which fetch almost 12% annual rentals if occupied through- out the year. But occupancy rate of such commercial property does not cross 50% on an average in a cycle of 5 years. Simultaneously with the construction of residential apartments and houses where population adds newer commercial properties also come up in the close proximity and the earlier commercial centres of trade and business see diminishing returns in coming years after their short years of zenith. Really lucrative and all time viable commercial properties rarely come up for sale and if they do investment or capital cost increases due to adding up of opportunity and premium costs of such a property.
Our income and expenses vary during our varied stages of life. So, it is most logical and obvious that we invest at the first opportunity in fulfilling the most basis need of every human being which is having your own roof. Even though discussed elsewhere also in the web site we find it worth a repeat the following aspects of investing a substantial part of your life’s earnings in a residential property. The biggest question and uncertainty here is about committing in a particular city and location where one may not be able to reside in his subsequent years due to factors which are governed by a variety of uncertainties.
Most persons purchase residential property during their work spans of life. They get comfortable with the city, become part of a social circle and tilt their decisions in choosing the same for settling down and purchasing the residential property. This tilt is obvious, natural and mostly logical too. There are however a few other aspects which need consideration. These are about the suitability of the place for life after retirement and in the age which everyone most crucially wants to spend in good health, safety and comfort. During the work life span, earning and children education holds vital importance. But as children graduate to higher education and ultimately settle down into their own professional and married lives, they are bound to separate from the parents for a substantial period until dependency due to old age reunites them under the same roof. Even in this scenario, it is the parents who would have to leave their own place and move in with the children since they can’t leave their workplace and shift grand children’s education.
It can safely be deduced that while choosing the place for investing in a residential property, post retirement life holds equal importance. Prices of most apartments do not increase beyond a particular point. It would prove to be the best decision if one could live in the self- owned apartment during work life and continue in the same post retirement. It has manifold benefits:–
Tax savings on the interest components of the EMIs paid.
Benefits of HRA if in a job.
- Saving of repeated brokerage, transfer, registration and stamp fee etc.
Escape the harassment and financial loses in repeated jobs of interior, modifications, readjustments and renovation work.
Above all, feeling of settling down and accumulation of good memories in the same abode.
The benefits listed above far surpass the investment benefit outlook. One should rather decide on the basis of suitability of a place rather than financial growth outlook in the area. The whole process and puzzles of changing residence take substantial time, effort and energy and are therefore best avoided if possible, no matter how much the quantum of lure of financial benefit.
But if it is not possible to arrive at a decision and there are uncertainties and indefiniteness about finality of staying in a place or city, it is best to invest in plots and agricultural land. It may be safely deduced that overall plots are a better investment options since they do not require much maintenance except for time limitations to start construction and a nominal non-construction annual fee. Plots also do not attract property tax which are levied on constructed property in most cities. There are however a limited number of cities, mostly metros, where rental values are higher than interest returns and one gets more worth of the capital in terms of ever rising prices due to stable and consistent demand higher than supply. Besides this, most metro residents don’t normally leave them due to work opportunities in one filed or the other. There is always enough work with minor variation in financial gains to keep residents of a metro within the city and residential demand refuses to abate.
Requirement of a roof separates human beings from animals. During the low times of your life community kitchens can feed you for free and Government hospitals can treat you but it only provision of a roof which will enable to keep your self- respect and honour. If the prices appreciate you already have a roof before your grey and tough days. Plot can be sold to buy a smaller apartment or if savings are left construction costs are usually lower than the cost of acquisition. In my wisdom the following general principles are relevant and material guiding factors.
This suggestion is applicable to purchase of the first plot/apartment. When life allows one to save money, do not hesitate to invest in purchasing a plot or apartment for this basic and most fundamental need. Go for a plot or apartment which is priced according to your estimated income atleast 7-10 years from now. Property and plot upgrades with increased income are not an easy option. Everyone likes to live in the community, locality and quality according to his financial and social status which constantly keeps rising for most of the people. A higher than capacity investment in arrangements for your first roof pinches one initially but in a longer run it is worth the pain.
If life is allowing you to make further major financial savings beyond arrangements for your first roof, do not jump to committing in another residential property as an investment. One needs liquidity and some spare ready money to live and enjoy other aspects of life such as vacations, freedom from performance targets and excessive dependence on professional & financial growth. Find time for a hobby, spending time with family and friends, do some charity and social work.
Only thereafter further investments then be considered after attainment of objects mentioned in paragraph (b) above. These necessarily not be in property especially not in another residential property. Commercial properties normally yield higher returns but also need more management time. Unlike the popular belief in India second investment in property is rarely a good option. Property by its very nature lacks liquidity. In case of urgent needs it invariably sells below market price. In case of smaller financial needs, one could rarely part sell it.
In my view fixed deposits in safer banks despite their lower rate of interest, are best investment option after you have already made arrangements for your first roof. Constant availability of FDs offers immense protection and security to your first roof and eradicate chances of its distress sale. As a thumb rule, one should have at least 25% of the value of the first roof before one should think of any other investment.
Once this is achieved and maintained in a step wise and prioritised manner, only then one could venture into other high risk and return based investments to strike at a right balance in life so that your money and property support your life rather than the other way around.