Home is where the heart is.
Having a home is financially and psychologically important. However, there have been a set of changes in the way we buy houses in recent years. These have created some risks that we need to understand.
There is a school of thought that states you should buy a home as soon as you can afford it. Some believe that to achieve this financial goal it makes sense to get into debt.
SenSage believes that buying a home for living is a necessity and one should try to discipline himself by initially saving at least 50% of the cost by way of Systematic Investment Plan. Thereafter one may choose to take a debt, again only to be repaid in 5-10 years.
There has been a huge reduction in the age at which people are buying houses or rather flats. Two decades ago, the standard pattern used to be to buy a plot, build a house in one’s forties and fifties, whereas now late twenties is practically a norm. This has been driven by 3 factors:
- The concept of joint family livings is slowly but steadily becoming a thing in the past.
- Much lower interest rates
- The relentless rise in real estate prices
Rising real estate prices have created a pull by making a house look like a viable investment, as well as a push to buy before price rise even more.
In fact, the only question one tends to ask in context with home buying is whether property prices and interest rates are amenable at that point in time or not. On the surface, this makes sense. However, not all surfaces are reliable mirrors.
From an investment point of view, buying a house is often likened to buying gold and putting it in the bank. That is true to some extent. Investments in real estate, historically, have given very good returns, if held for a long period. Buying plots for the purpose of investment need to be considered with a time horizon of about 10 years. In other words, buying property today does make a certain amount of financial sense.
Buying a house means security, and security is important to any family of any generation. It is one of the few long-term investments with practical utility – after all, you are not going to put the flat in a bank while it appreciates in value. You are going to live in it. But the fact that investment in property needs to pay off good returns should be kept in mind.
The financial prudence path is:
- Not to buy too early and not to buy too much.
- It does not make much sense to commit more than about a third of your free income to a house EMI
- Evaluate your work profile to check for the stability in cash flows which should be judged not by take-home income but by potential consistency
- Consider buying a plot in cities where the amount required is reachable instead of a flat. Remember plots appreciate and flats depreciate.
If you ask SenSage about whether the time is ripe to buy a residence, we will probably raise only one point: will you be able to keep the property long enough to make it pay as an investment?