Article

Myths on House Purchase
January 30 , 2013

Myth 1: I have just started earning and have no stability yet. I will buy a home later and live on rent now

Fact: The earlier you purchase a home, the better. If you live on rent, the rentals keep increasing over the years with inflation, while you have no asset you can call your own. If you buy the house and start paying EMIs, you benefit from appreciation of house value, while your loan stays constant. Even if EMIs appear daunting initially, it is often a great way to discipline yourself. If you have too much surplus when you are young, you anyway tend to spend it away. You would rather use this to build an asset for a lifetime.

There is no mathematical 'proof' to this - it is more behavioural and empirical. Stories abound of people who have lived on rent in initial years. They have got pushed farther into the suburbs over the years by skyrocketing rentals, and only manage to buy a house in distant suburbs. Early buyers, on the other hand, often start at the suburbs and manage to buy a house closer to the city centre later. The time around your marriage is a good one to buy a house, however humble it ends up being.

Myth 2: Real estate is the best investment

Fact: This traditional 'wisdom' is hard-wired in several communities. Without doubt, real estate is a great investment. Probably the biggest positive is that it locks up your money, and thereby prevents you from ending up spending it away. In India, real estate invariably seems to go up, unlike the stock market, which seems to be very volatile.

However, three caveats are in order: one is that real estate entails huge transaction costs compared to equity - it is not as easy to buy or sell when you please. Second, the Indian real estate market has several issues ranging from cash economy to unclear land titles. So you need to do far greater homework before putting money in real estate. Finally, real estate is by no means a clear winner over equity in long term returns. So the good old advice of not putting all your eggs in one basket is still very valid here!

Myth 3: The house I buy for living in is similar to one bought as an investment

Fact: This is a common mistake people make. You need to think of the two things very differently. The house you live in is not an asset - it is a consumption item, much like your car or TV. It is not bought to give you returns.

However, any additional real estate you buy is very much an asset, and you should be looking at its risks and returns.

Myth 4: Property values always go up

Fact: Property prices are supposed to increase at a rate above that of inflation like you would expect for any consumption asset. But since property also has an investment facet to it, appreciation of real estate value does not happen evenly in all locations. A host of factors affect property prices. Some of them are 1. scope of economic activities which can be gauged from upcoming industries, business hubs, 2. infrastructure development as measured by connectivity, water supply and undisrupted power supply and 3. political stability. India being a developing economy, real estate investment in any of the big cities would turn out to be rewarding. However if the above factors are out of favour property prices may not only be stagnated for long periods, they might even turn negative due to inflation.

A classic example of negative growth in real estate market is Kochi. Many NRIs who invested in properties here during 2002-2007 period are sitting on negative returns. So don't be tempted to buy and hold property indefinitely. If your property has given you annual returns of around 15% for the last 4-6 years you can exit it and identify another real estate investment.

Myth 5: My agent knows best

Fact: Agents make money when people buy or sell through them. Real estate agents are very good sales guys and would try to talk you into buying the property giving them bigger commission. Know your requirements and what you can afford before seeing properties.

Due diligence is very important. Especially if it is for investment purpose don't think it is as easy as scanning glossy newspaper ads about new building projects.

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