Less than a year ago, an apartment dwelling nearby, rented to a nuclear family, was vacated on the orders of the owner.

Betting on the post-Covid-pandemic demand, the owner wanted to sell the apartment for Rs 85 lakh.

A little over 1,200 square feet in carpet area, the apartment was located in the 70x region, one of the densely populated areas in Noida, and one of the better societies in the city.

Six months later, the apartment was back on rent, to a new family, for the asking price was laughed off my potential buyers.

For the owner, however, there was a silver lining. As the urban workforce gets back to the economic centres (Pune, Noida, Hyderabad, Bengaluru, Mumbai, Gurugram, etc), the rents have now exceeded the pre-pandemic levels.

The apartment in question is now witnessing a rent inflation of more than 25 per cent. As per this Economic Times report, average rents across cities are witnessing double-digit inflation, between 12 and 17 per cent. In the prime locations though, the percentage can go as high as 30.

The monthly installments for home buyers have also gone for a toss. Inflation, driven by external events, have put the monetary tightening into a hyperdrive, forcing the central bank to increase the interest rates.

Thus, an EMI on a home loan of Rs 50 lakh, for 30 years has gone from Rs 33,000-odd (at 7 per cent) to 42,000-odd (at 9.5 per cent). The increase has come in less than a year.

The total interest paid on the loan assumed would have increased from about Rs 70 lakh to more than Rs 1 crore, forcing buyers to extend loan tenure or increase EMIs.

One of the reasons why owning an apartment in the metro cities is beginning to not make sense is the absurd rent-to-EMI ratio.

Assuming the apartment nearby (priced at Rs 85 lakh) was picked up with the buyer putting 20-odd per cent as the down payment and availing a loan of Rs 65 lakh (at an average rate of interest of 8 per cent), their monthly installment would be close to Rs 48,000 for 30 years, and Rs 54,000 for 20 years.

The problem is that the same dwelling is available to rent for anywhere between Rs 24,000 and Rs 26,000.

Rent Vs EMI: No Right Answer

A routine calculation used to estimate the worth of a house is if the asking price is 20x the annual rent.

Thus, at a monthly rent of Rs 26,000, the 20 years rent would amount to Rs 62,40,000. The asking price in this case however, was Rs 85 lakh.

Another Economic Times report documents this rent-EMI ratio absurdity. For the dwelling price assumed between Rs 45 lakh To Rs 50 lakh, an annual rent between Rs 120,000 to Rs 160,000 the price/annual rent ratio comes in excess of 35. Clearly, the prevailing rents do not justify the ownership.

However, there is a great sentimental value attached to the idea of owning a house, and therefore, for some buyers, even a price/annual rent ratio at 30 may make sense, but there’s another hidden component at play here; the interest paid on the loan.

For the same Rs 65 lakh loan availed, the interest over 30 years would be around Rs 1.06 crore and over 20 years would be over Rs 65 lakh. Thus even at 8 per cent, for 20 years, the interest amount would be at least double than that of the home price.

If someone were to buy the same home today, at 9.5 per cent interest rate, the interest component alone would be around Rs 1.3 crore, and for 30 years, would be around Rs 80 Lakh for 20 years, to begin with.

Since the interest rates are assumed to be averaging out over a long period, the real interest paid on the loan availed could be less.

Assuming the best case scenario for the buyer where interest rates remain at 7 per cent for 30 years, the interest would be Rs 90 lakh, and for 20 years, would be around Rs 55 lakh.

However, most buyers are comfortable with the interest component even, assuming that they would either complete the loan tenure early, or would at least end up with a tangible asset.

Many base their ownership decision on the rent they would have otherwise churned out over the same period. For instance, for an annual rent of Rs 300,000 for the same dwelling (priced at Rs 85 lakh), with an annual rent inflation of 5 per cent, a tenant would end up paying at least Rs 1.5 crore over 30 years. From this perspective, ownership looks justified.

What about the costlier properties though, say one that exceed 1,800 square feet in carpet area?

This is where it begins getting complicated. For one of the nearby dwellings, around less than 1,600 square feet in area, the going rent is Rs 32,000, but the ownership cost is Rs 1.2 crore. Assuming a loan of Rs 1 crore, the price/annual rent ratio works out to be 26, but the difference between the rent and the EMI (for 20 years) is more than Rs 50,000 and Rs 40,000 for 20 years.

The hidden component; the interest payment consequentially also goes up. For 20 years, a loan of Rs 1 crore, at 8 per cent, would warrant an interest payment of more than Rs 1 crore. For 30 years, the interest payment alone would be Rs 1.64 crore.

As the property gets costlier, exceeding Rs 1.5 crore, the burden falls on the buyer. In the worse case scenario, quite like today, where the interest can go as high as 9.5 per cent, the difference between renting and owning can mean a monthly difference of Rs 60,000.

The difference between the rent and the EMI, over a period of twenty-thirty years, is what actually hurts the buyer, for they could have had multiple assets instead of one, if they were a little wise with their investments.

The Holy Grail

The problem is not of ownership and the costs attached to it, but the demand that they lock up.

Why not try out an alternate idea instead.

If someone is willing to invest the difference between the rent and EMI for the same duration, where will they end up post-30 years, around their retirement?

Here’s an interesting number; Rs 30,000 invested monthly in an SIP, with expected rate of return assumed to be 12 per cent, would fetch the investor over Rs 10.5 crore at the end of 30 years. At 8 per cent, around Rs 4.5 crore.

The answer, clearly, lies somewhere between renting and owning; in investing.

Renting alone is not the answer, but ownership alone is no guarantee of intelligent investment.

For instance, even a difference of Rs 10,000 between EMI and rent can yield Rs 1.5 crore in the safest investment in the market over 30 years.

If one is willing to extend that amount to Rs 50,000 by renting their dreamhouse instead of buying it, they can easily get a return of more than Rs 17.6 crore (at 12 per cent annual return rate) and more than Rs 35 crore (at 15 per cent annual return rate) in 30 years.

In between somewhere, ownership can happen, easily and more importantly, safely.

This could also open up the demand for other sectors, given a lot of expendable income for the middle class ends up in debt servicing.

While renting would warrant strict fiscal discipline on the part of the individual when it comes to investing or saving up for retirement, it would lead to more purchasing power, less debt stress, and more flexibility when it comes to moving around for work.

The pandemic also ushered this thinking, given the first consequence of salary cuts and job losses was people defaulting on their primary installment; that of the home.

Why People May Not Want To Buy Homes Anymore, As They Once Used To

If it all boils down to owning an asset, why not invest the difference between the rent and sky-high EMIs and create multiple assets?

Investments in gold are also expected to yield better returns in the next 10-15 years.

Of course, investment returns can also be made for diverse investments (risky to safe) and varying amounts over varying periods.

Four other factors justify investments over ownership in the long-term when it comes to apartments in metro cities, beyond the artificially inflated prices.

One, the quality of the asset in question. Now, this is builder specific and region specific.

In Noida, for instance, societies that gave possession less than a decade ago are in shambles. Build quality was clearly compromised for profits, and many would warrant redevelopment in the following decade.

In the author’s society, for instance, already a maintenance project is underway to repair all the balconies for the cement used was of such inferior quality that the iron rails started coming apart, resulting in a safety crisis.

Two, the workforce’s love-affair with urban centres may come to an end. Many may want to move back to their hometowns or second or third tier cities nearby for a better quality of life.

Urban heat islands, water shortage problems, air and water pollution, smog (NCR-specific), and many such factors may push people away from the idea of owning houses in urban centres.

Rental yields will increase, clearly, but no guarantee that a similar inflation trend will continue when it comes to ownership.

Three, the fluidity in professional choices. For many, the opportunity cost linked to buying an apartment is often huge, for it ties them down to one place, or even locality.

For instance, for many owning a home in Gurugram, moving to Noida for work is a difficult decision to make.

In an age where people migrate to new cities more often and more freely than they did two decades ago, the question remains if the new-age workforce would be as interested in owning apartments as their parents were.

Four, the basic assumption that house prices will always go up is an economic fallacy. Already, in the last decade, the price jump in home prices has witnessed a sharp decline compared to the 2000s. In NCR alone, for instance, the average price change was in excess of 30 per cent in the 2000s, before coming down to less than 20 per cent in the 2010s.

Similar trends were witnessed in all other metropolitan cities. As the ownership remains a challenge, given inflated prices and high interest rates, the change in home prices is expected to further slow down.

Final Word

From a pricing perspective, residential real estate is becoming a gamble of long-odds for the middle class in India.

The gamble is being made on the assumption that house prices will always go up, as they did in the last 20 years, but the supply is fast exceeding the demand.

The lifestyle, thanks to the pandemic and millennial thinking, is witnessing a significant shift away from the convention, but that is doing nothing to cool down the artificially inflated prices of dwellings across metro cities.

Probably it is the sentiment, inherited from the previous generation, that makes many pick this gamble over the stock market. Also, it is a personal choice at the end of the day.

However, it would be better for the new generation to not place all their eggs in one basket, and instead, invest in the Indian growth story, most visible on the stock markets.

Yes, there would be risks and the occasional shocks, as they would be in real estate.

Therefore, the holy grail is that one must rent and invest until they can actually own, without being burdened on the expendable income and interest payment front.

Be driven by the idea of maximising the value of every rupee, not by sentiment.

Home Owners

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