At Yahoo, I write: Seven myths of buying pre-construction apartments
Buying a house that will be constructed in the next few years is perhaps the only way a few of us will be able to afford to buy, but the process isn’t entirely without roadblocks. Here are seven points you hear in favour, and my take on them.
Disclosure: I may be biased – my father booked an apartment in 1980, and was only given possession in 1991.
1. Prices are ridiculous but they will get more ridiculous.
Real estate prices never fall, they say, and if you can’t buy now you’ll never be able to get on that train. But when a train’s going way faster than sane speed limits, do you really want to get on? Sure, prices in India have gone only one way in the last 20 years – bar a few years in the 80s and 90s, and perhaps one year in 2008. When Japanese house prices crashed in the 90s (they still remain depressed), people in the U.S. thought that could never happen to America; 10 years later we see a U.S. housing bust of Japanese magnitude. Just because we haven’t seen enough doesn’t mean we’re immune. Of course, if you choose to live in the apartment it doesn’t really matter.
2. I know how much I’ll pay, and I’ll pay in steps
When you buy a ready house, there’s usually a final price tag – inclusive of everything. With a new house it’s a moving target. The cost of construction is usually fixed, as is the amount you pay per “slab” as the building progresses. But there are additional points you might not have accounted for: electricity and water deposits may substantially increase, the builder may decide to charge club access fees separately or there could be changes in the cost of registration – upto 2x in a few cities recently – which dramatically change your grand total. The “only 10% down” can be attractive, but what if eventually you pay 25% more?
3. I can get a “teaser” interest rate loan.
With an 8.5% loan for two years, can I go wrong? Yes, I can. If in two years the interest rates I will get are 14%, I will pay about 40% more in two years. Considering interest rates are already at the 11% level, we might actually see EMIs increase dramatically. Oh, but if it’s too bad, I’ll just sell, you might think. But that’s what they thought in the US too when they got teaser loans in 2005 (which incidentally was when prices peaked). As interest rates rose, housing prices started to fall because people just couldn’t afford those mortgage payment spikes and tried to sell instead. A teaser rate is only useful if you can still afford the payment a few years down – but it’s difficult to predict the invisible.
4. I don’t want to pay rent to my landlord, if I can pay EMI instead.
Would you rather pay much more rent to the bank? A house worth 1 crore rents out for Rs. 25,000 today; but the EMI on a loan for that house – say 75% of it – would be at least Rs. 65,000. Along with the interest lost on the down payment, you pay just one-third of your EMI in equivalent rent. On top of that, for the first few years, most of your EMI is interest; and even with rents going up 10% a year, it will take a long time for rents to be equal to a mortgage payment. People quote the tax saving nature of the interest paid – but you save tax on rent as well in India. Finally, you still pay rent – apartment maintenance costs are of the order of Rs. 2 per square foot nowadays (that pool, that gym, that diesel generator) which can add up to Rs. 3,000 per month for a 1,500 square foot apartment. Add to that your annual taxes and routine maintenance every few years and you find your annual extras come to a reasonable “rent” that you were supposed to not pay.
You’ll have to pay rent where you live until the house is complete anyhow. That means rent plus your mortgage payment. To ease this, you may be asked to pay only a pre-EMI – just interest – until you occupy the house, but this can seriously damage your finances later. You don’t even get the tax benefit of ownership – or the money you pay back prior to occupation – until after you take possession.
5. It is such a fabulous investment.
In my view, the house you live in is largely an expense, like the car you drive. You spend money to keep it healthy, you pay taxes on it, parts of it keep breaking down and you have to fix them. The fact that it appreciates in value gives you little other than a warm fuzzy feeling. If you sell your house, you’ll want to buy another one which is likely to cost nearly the same. If you want to upgrade your house for the same price, you are likely to move out to a farther suburb, which offsets the additional value of the new swankier house. But one reason your house could be an investment is that you can borrow against it while living in it – either as a “top up” loan or, if your house is fully paid up, a loan against your house.
6. I know exactly what I’m going to get.
Builders are known to alter the plan during construction, including internal layout, parks and common areas. Even large builders have been known to suddenly increase the “super-built-up area” (of which you see 60-75% in your flat) without any impact to the actual flat layout. Some builders increase maintenance charges, others cut costs on nailing down door frames. Common complaints are that construction quality was shoddier than the “sample” flat shown years ago, areas smaller than expected and extras not quite worth the price tag. “The kitchen sink is so small” is an argument a little too late.
In certain cases, builders dilly-dally about starting work and then cancel the project.
7. It makes me feel good.
This argument I will not refute. Owning an asset with such a big price tag is an ego-booster, even if you’ve mortgaged your soul to pay for it. If you rent, your landlord can ask you to move – they rarely do, but even once in a few years is a pain. When you own a house, you feel more participative in community issues – such as getting together to protest a dumping yard close by, or requesting a nearby factory to increase the height of its chimneys. Renters can only vote with their feet, and somehow it seems much nicer to rent an apartment where most people own theirs!
The warm fuzzy feeling of homeownership is a hugely political positive – which some in the US view as a reason why the politicians will not cut housing subsidies, from government agencies guaranteeing home loans to offering tax rebates for homeownership.
As for me, I’d prefer to build up reserves till I can buy a house for immediate occupation, or, if somewhere on Mars opens up, buy a piece of land and build a house on it. And it’s an emotional decision, not a financial one; from a purely financial perspective, renting is the way to go.
Let me stop here and say “Happy Diwali”. I’ll light my diyas in a phenomenal house that I can’t afford to buy, but am perfectly happy to rent; importantly, Diwali is just as fun!