If you are waiting for the housing market to become favorable in the coming months, this article is for you. With interest rates unlikely to cool off until the end of this fiscal year, experts believe now is the right time for home seekers to buy their dream home. Analysts predict property prices will increase in the upcoming years, sending a cautious note to those who have postponed their real estate investments, expecting prices to drop.
The current housing market environment has left many aspiring homebuyers in a dilemma: continue renting or buy a new house. Recently, the drastic jump in rental costs has shifted tenant behavior. For many, homeownership has emerged as a more financially prudent option than paying expensive rent since it allows them to convert rent into monthly EMIs. According to the NoBroker Annual Real Estate Report 2023, the number of first-time homebuyers increased from 62% in 2022 to 68% in 2023, largely due to rising rentals.
If your credit score is robust, you have a stable job, and you have adequate savings to cover the down payment and closing costs, investing in real estate seems to be a smart move now. However, a final decision should only be made after considering crucial factors such as opportunity cost and market situation.
However, if you are still struggling with daily expenses, do not have a stable job, or lack funds for a down payment, buying a house is a big “No” for you. In such cases, we advise you to continue renting and consider buying a new house later when your financial health is more stable. Renting is also suitable for those who do not have a permanent work location and may need to relocate.
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Besides, this option is ideal for those seeking capital appreciation and who are in no hurry to buy a new house until they find one that meets their preferences and budget. Renting offers flexibility to upsize or downsize sans the high transaction costs of buying and selling.
Santhosh Kumar, Vice-Chairman of ANAROCK Group, says, “Renting makes sense if one lacks the required funds for the down payment and taking on the responsibility of a home loan. This is often the case with young people who are just starting their careers or those in lower-paying jobs.” There are other factors to consider as well.
Opportunity Cost and Market Situation
Opportunity Cost
Opportunity cost is the potential profit lost due to a missed opportunity—the outcome of selecting one available option over another. There is an opportunity cost associated with renting; these are the advantages you forego by choosing not to purchase a home.
Your monthly rent payments will not contribute to homeownership. However, if you use this money for regular home EMI payments, it will eventually result in owning your dream home outright. Moreover, homebuyers can take advantage of various tax deductions that can save money.
The formula for calculating opportunity cost is:
Opportunity cost = FO − CO
FO = Return on the forgone option
CO = Return on the chosen option
When purchasing a house, non-recoverable costs include stamp duty, registration, brokerage, property tax, and maintenance. If we consider the opportunity cost of both options, it is advisable to choose the option where you gain more by investing the non-recoverable costs. Before making a final decision, do the math for both rental investment and real estate investment.
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Understanding the Market Situation
In the last two years, property prices across the top eight cities in India have increased sharply by almost 20%, according to a report by Credai, Colliers, and Liases Foras. In the January-March quarter of this year, house prices in Bengaluru, Delhi/NCR, and Pune jumped by 19%, 16%, and 13% year-on-year (YoY) respectively. There are anticipations that property prices will continue on an upward trajectory in the coming years.
According to an Economic Times report citing a JLL report, “In 2024, we are likely to see a renaissance with affordability levels expected to improve as macroeconomic fundamentals support a repo rate reversal and, thereby an interest rate reduction which could provide another fillip to the residential sales market.”
For individuals who do not have the requisite funds to buy a house, staying in a rented home is advisable because the potential rise in property prices may offset any gains from a drop in interest rates in the coming years. However, if you have adequate funds and want to build an asset and stay permanently in a particular location, now may be the time to buy a house.
Also Read: 10 Things you should Consider Before Applying For Home Loan?
Renting vs Buying: Key Considerations
When Renting is Wise:
- You cannot afford the costs of homeownership, including registration fees, stamp duty, brokerage, down payment, and monthly EMIs.
- Your EMI outgo exceeds 40% of your salary.
- You are not ready with a 20% down payment as lenders can only finance up to 80% of the house’s value.
- Your job requires frequent relocation.
- You cannot afford to purchase a house in a posh locality or a housing society.
When Buying Is A Smart Decision:
- Your salary increment is less than rent hikes.
- Your rent amount is the same or higher than your EMI payment.
- Loan rates are low.
- You have surplus funds to invest in an asset.
- Your job does not require frequent relocation, and you have a permanent work location
