Typically, the biggest purchase we make in our lives is our home. Buying a home has many benefits. We get to call the place our own and the EMI we pay goes to build a long-term asset that you can sell later. With this, consider the tax rebate and it all adds up to a great investment decision, right?
Not an investment Not really. The flaw in this reasoning is that we have misunderstood the term, “investment”. Paying a monthly instalment and getting a tax rebate doesn’t automatically make something an investment. An investment is something which costs a certain amount of money to acquire, generates regular returns or returns in the form of appreciation (say resale value) and can be liquidated without affecting your daily life/livelihood.
True, if you consider real estate as an asset purchased, rented it out and then sold at an appreciated value, you would call it an investment. Self-occupied homes, however, do not fit this description. Let’s look at it another way. If you got yourself a fancy car (on loan via a corporate lease plan), used it, paid an EMI, got a tax rebate (because of your corporate lease plan) and sold it at some resale value, would you consider it an investment? The car is not an investment because you would have to sell it at a fraction of its purchase price, you argue.
Now, the argument usually put forth is that a house always appreciates in value. But the value of the home depends on the state of the property market and various other micro-issues related to the property.
A self-occupied home is an asset used by you, just like a car or a timeshare, transaction size being the only difference. So before you embark on a house purchase, make sure you are buying it for the right reasons.
Rent vs buy It is for reasons mentioned above that purchasing a house for self-occupation should be compared to the alternative of living on rent, based purely on costs and benefits.
This rent versus buy decision rests on the total cost of ownership of property.
In the long term, most purchased assets are held on to as long as the rent doesn’t outstrip the cost of ownership. And with a house, you can dispose it at a considerably appreciated value as well, which is not the case with other assets such as your car. So where’s the catch?
It lurks in the cost of financing what is often an overpriced asset.
When a property purchase is financed through a loan, the high costs (largely paid as interest) invariably push out the period of break-even. Lower rental yields (because of a property glut in major cities) make the lock-in (to actually benefit from a purchase over renting) prohibitively long for a workforce that needs mobility.
Further, you need rapid appreciation (difficult in a market where the property is already overpriced) and the ability to really close a sale quickly (something real estate doesn’t lend itself to easily).
So, is the house you live in really an investment? Hard evidence suggests not. But some will reply, ‘Yes’, because they have been lucky over the past decade. For those who weren’t the early birds, renting may be the better option in hindsight.
The writer is Co-Founder & COO, BigDecisions