Right Time to buy your Home

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Dear Friends,

Nowadays you can observe that graduates just out of college, joining some big companies with fat pay packages, immediately investing in a home. This is one of the reasons for the housing prices to increase steeply in NCR, Chennai and Pune. Among all cities in India, Chennai seem to have appreciated the maximum according to Residex (National Housing Bank’s index for tracking prices of residential properties. www.nhb.org.in). The prices in some of key locations are given below with 100 as the baseline value in 2007.  These are location averages and within the location there would be price variation. For example in Chennai city, Anna Nagar and Kilpauk are   at 748 as per the latest published value (Mar 2015) while Adyar and Mylapore are at 430.

Location Residex Value as on Mar 2015
Delhi 190
Mumbai 238
Kolkata 212
Chennai 364
Bangalore 115
Hyderabad 97
Pune 251

Is deciding the home immediately after taking up a job, the right move?

The person might not have even be married and also does not have a clue of his family size (kids).So, whether it’s a 1 BHK or 2 BHK or more is a tough decision to make. Assuming that he has 2 kids, if the person has bought 2 BHK flat, it might  turn out to be insufficient for the family once the kids grow up and prefer individual rooms for themselves (I am personally experiencing this:)

The person tends to think of a home in terms of his current salary. So, a person earning 25K per month (net ) will be able to get a loan of only 60 times or 15 lakhs (or 85% of the value of the property with monthly EMI not exceeding 40% of net salary). Based on the loan eligibility you tend would go in for a smaller home or one at a remote location, away from the city center.

Is the place where you have bought the property, the home that you would settle?  Many people migrate from one city to another or a foreign location as part of their job.

The commuting distance from children’s school and office needs to be taken into account. 

Among Real Estate as an Asset Class, investment in an Apartment provides the least ROI. Independent house is the next and maximum returns are from Land (Risk is least in an Apartment followed by independent house and land (encroachment issue)). There could be slight variations to this depending on the location, builder etc. So, buying an apartment to let out and earn income is not a wise decision (Annual rental values in India are typically around 1.5% to 3% of Apartment price).

So what is the ideal time for buying a home?

The right time in my opinion would be when the person is in mid to late 30’s, married and have decided on the number of kids. Typically the salary would have reached a significant level and you can afford to buy a spacious dwelling. This is the time when the kids go to school and most of you would have decided on the final location to sette.

Use the period until mid to late 30’s (10 plus years) to accumulate wealth by investing in growth oriented Mutual funds. This will come in handy when you have to make the down payment of your home.

One might ask, can I invest in a house (please refer to dictionary for the difference between a house and home:) until then? I would say that is not a wise investment as the income from letting a property is low and house as a physical asset cannot be liquidated easily.

People looking to buy a residential property in Chennai need to be extra cautious as the prices have risen steeply from 2007 and reached very high levels. Looking for big capital appreciation (like past 8 years) from this price point is difficult. 

 <Blog # PenguWIN 1036 – Right time to buy a house>

4 comments on “Right Time to buy your Home

  1. Very sane advice Sendhil. I think mid to late 30’s is the time when apart from getting married and deciding on the number of children, one may also have decided on the city (may be area too) to settle in. Also a much higher pay compared to starting years increases the budget for the apartment. That is the time one should buy an apartment to live in.

    In terms of investment to earn in rentals, as per present market conditions, I think it is better to invest in commercial spaces as part of a group of investors. I think rental income from offices will be much higher than residences in the immediate future. With startups booming office space absorption should be high. Location though will be key. As a middle class person most probably you would not be able to buy something by yourself but if you pool together with like-minded people you may be able to get such an asset.

  2. A very good advice Sendhil. I am having the same experience, bought a house that I could afford 8 years back. But now looks very smaller to my needs. Do not want to go back another one now, though this is the age I should have got one.

    A very good write-up!!

  3. Sendhil,

    What about Real Estate Funds ( I hope I am using the right word). I hear thats’s high growth. There is a point of view that it provides liquidity and de risks quite a bit from traditional real estate investments.

    • Dear Vidhya,
      Real Estate Investment Trusts(REIT) for Retail investors has been give a go ahead by SEBI but no one has launched a REIT fund yet. Unlike MFs REITS is a different ball game and the team has to be different than MF Managers. The minimum investment amount fir Retail is 2 Lakhs unlike rs. 500 for MFS. The Funds can invest only in certain properties, mostly in Commercial RE and finished properties earning income through Rent. Commercial rentals in India is about 8-9% (houses/ Apts is only around 3%) and the RE market in India is struggling which might be one of the reasons why no one launched a fund yet (DLF and HDFC showed interest). With exposure mainly in Commercial properties where Capital appreciation is less than Houses/Apts I am not too sure if Investor will be keen on REIT.

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