We have learned that there are three most essential elements to lead a content life. Roti, Kapda aur Makaan. In other words, healthy food, good clothes and a house to stay. While all three are necessary, spending on food and clothes is small-sized and usually non-discretionary. So, for now, we will focus on the last one. ‘House’ is certainly a costly affair, a big commitment, and must be planned well.
The current situation. People have spent extended time at their homes recently, and their perception of homeownership has significantly changed. Demand for a bigger house due to work from home (WFH) is on the increase. In addition, low interest rates and government push on housing makes home investing lucrative. However, with COVID still around, is it a good idea to buy a house during the pandemic?
Housing demand is back, and trends are changing
As per reports, home sales across the major cities in India have witnessed significant recovery. The market has almost reached the pre-covid levels. Low-interest rates offered by banks, incentives offered by developers and stamp duty reduction by the government has helped the residential sector make a thrilling comeback.
Several companies have announced complete or partial work from home permanently. With that, more and more office goers require home-office and proper space to conduct office work. This phenomenon has led to higher demand for a bigger house or upgrade the existing dwelling.
Many employees have moved to their hometowns with the imposition of the lockdown in early 2020. And, they still live in their hometown given the flexibility to continue working from home. This phenomenon has led to increased demand for houses in India’s Tier II and Tier III cities. This trend is unusual where the housing demand in metros is lower compared to smaller towns.
Here are some more reasons to assist you in deciding on whether to invest in a house or not.
Availability of tax benefits
The income tax laws allow deductions from income pertinent to outflows on account of house ownership.
Section 80C allows a deduction of Rs 1.5 Lakh (maximum) on home loan principal and stamp duty charges. Section 24 provides the homebuyer with a tax benefit of up to Rs 2.0 Lakh on the interest paid.
The government is highly promoting its objective of “housing for all” for smaller houses. Accordingly, the government provides an interest cost exemption of up to Rs 1.5 Lakh under section 80EEA. The deduction is conditional to the fact that stamp duty value of the house must be less than Rs 45 Lakhs. The exemption is available to first-time homebuyers, provided the financial institution sanctioned the loan before March 2022 (as per the current legislation). This deduction is in addition to section 24.
Lower interest rates
Repo rate reductions by the Reserve Bank of India (RBI) have resulted in record low home loan interest rates. In other words, interest rates that are currently hovering around 7% p.a. cannot get any better for house seekers.
For fresh investors, the demand side is an enabler. The property prices have softened a bit as an outcome of pandemic and housing stock availability has increased. For instance, inventory pile-up in specific pockets has led to a reduction in value of houses. On the other hand, good projects are holding on to the prices but are offering lucrative schemes, i.e. more value for the same price.
Real estate is a stable asset over long-term
Notwithstanding the short term hiccups, real estate is a safe investment. The volatility is significantly low compared to equities asset classes.
House is just another type of asset class
All said and done, from a financial planning perspective, investing in a house is like investing in any other asset. In other words, buying a home must fit into the overall investment philosophy and asset allocation criteria.
We have discussed asset allocation strategies earlier. Broadly, there are two types – diversified and consolidated. We prefer the former, and property is one of the asset classes. Others being gold, equities, bonds, cash, etc.
Asset allocation is always situational and dependent on several factors. For example, existing assets and obligations, investor’s age, income, number of dependents etc., play a critical role. In other words, there is no straightforward formula to derive an optimal asset allocation. For example, if you already own a house, the income and asset allocation only applies to the new asset acquisition.
There are some ground rules to guide your decision making. Firstly, the mortgage EMI should never be more than a third of your net income. Secondly, from an additional investment perspective, the allocation to property shall not exceed 40-50% of the total asset portfolio. Thirdly, in case of a mortgage, the property value should not be more than 3-5x of your gross income. And finally, you must purchase insurance equal to the value of your mortgage to cover any unexpected circumstances.
Exercise caution if you choose to buy a house during the pandemic
To purchase a home now is not optimal if the view is short-term and you expect capital appreciation. Investors must have a long investment horizon to reap the benefits. Further, rental income is low due to increased supply. In some instances, it is getting difficult to even find a suitable lessee.
Salaried homebuyers must make their purchase decisions based on clarity on their job security. Further, the economic environment and trends have drastically evolved during the pandemic. Therefore, entrepreneurs must holistically evaluate their situation before committing to buy a property.
Shortage of labour, delay in supply of construction materials, and uncertain demand situations have led to delayed project delivery. In addition, the timely handover of projects is dependent on the financial stability of the developer. Therefore, one must act with caution and be selective in purchase decisions.
The current low-interest rates might lure buyers, but investors must be cautious as the interest rate cycle will reverse. Home loan tenures are typically 15-20 years long, and buyers usually witness several changes in interest rates.
In other words, to move from a high floating rate to a low is always dear. However, buyers can expect home loans to become costlier as the interest cycle reverses, mainly because we are on the lower end of the interest rate spectrum.
Now is the right time to purchase a house for the reasons stated earlier but with ample caution. If there is uncertainty around how the future is shaping up, the suggestion is to wait until there is clarity and stability. It is always better to be late than sorry.
In addition, if you are not sure if this is the right time to invest in real estate during the pandemic, it is advisable to take professional help. A financial advisor can guide you to make an informed decision.
About the author
The author is a senior finance professional with over fifteen years of work experience in corporate finance. He has an affinity for matters relating to personal finance and investment management. Through his writing, the author wants to share his knowledge and understanding of the subject.
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