15/04/2017 10:38 AM IST | Updated 24/04/2017 9:23 AM IST

Why Buying A House In India Today, Frequently Doesn't Make Sense

Just do the math.

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"Buy land, they ain't making any more of the stuff," the American writer Mark Twain is supposed to have once remarked. The closest Indian version of this American proverb is: "Roti, Kapda aur Makaan," which basically puts tremendous pressure on us Indians on owning a house.

Within a few years of getting a job, a person is expected to buy a house to live in. The trouble with this prevailing attitude, and with so much black money in the country, home prices over the years, have gone through the roof. Real estate has been the best conduit to hide black money, and up until a few years ago, it was also yielding fabulous returns.

High home prices partly explain why home sales over the last few years have come to a standstill. Reports brought out by real estate consultants point out that there are over seven lakh unsold homes in eight biggest cities in India, pointing to massive overbuilding. The supply far more than the prevailing demand.

In fact, a recent survey carried out by real estate portal Magicbricks found that nearly 78 per cent of the respondents preferred buying mid-priced homes. The maximum respondents wanted homes within a budget of ₹40 lakh. In the top eight Indian cities, which form the bulk of the Indian real estate market, the average home price is significantly more than ₹40 lakh.

So, there is a clear disconnect between what the real estate builders are building and what the prospective consumers want.

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Then there is the case of homes that have been bought and haven't been given out on rent because owners are afraid that the tenant will not vacate the home after the contract is over. This is a bigger problem in the northern part of the country.

Arjun Kumar makes this point in a research paper titled India's Residential Rental Housing published in the Economic and Political Weekly last June. As per the 2011 census, India had 2.47 crore vacant homes (or vacant census houses as they are called). Out of this 1.36 crore homes were in rural areas and 1.11 crore homes were in urban areas. In rural areas, the vacant homes formed 6.2 per cent of the total homes. In urban areas, the vacant homes formed 10.1 per cent of the total homes.

Between 2001 and 2011, the number of vacant homes increased by a whopping 56 per cent or 89 lakh, to 2.47 crore homes. The rural areas saw a jump of 45.1 per cent whereas urban areas saw a jump of 71.9 per cent. It is safe to say that since 2011, the number of unoccupied homes would have gone up further. Looking at the past trend, currently, the number of vacant homes should be over three crores.

A misguided belief

Many of these homes have been bought in the belief that home prices can only go up. That is a belief that has been shattered over the last few years. As the business lobby Assocham pointed out in a 2016 report: "The ticket price (of) three-bedroom, two-BHK and single room flats has seen correction by 35 per cent in Noida, 30 per cent in Gurgaon and 25 per cent in some key areas of Delhi but still, the demand stays subdued." If a business lobby is talking about a fall in prices, it needs to be taken seriously.

Even in markets where prices have risen the returns haven't been enough to pay for the maintenance charges that need to be paid to the society along with the property tax that needs to be paid every year.

Many of these homes have been bought in the belief that home prices can only go up. That is a belief that has been shattered over the last few years.

What hasn't helped in many cases is the fact that the builder hasn't completed the property on time and the prospective homeowners are stuck paying both the EMI as well as the rent. In fact, Liases Foras, an independent research firm points out that there are 1.45 lakh homes in the National Capital Region in and around Delhi that have been delayed for more than two years. In the Mumbai region, the number stands around 90,000 homes.

Roti, Kapda aur Rented Makaan

In this scenario, it is well worth asking, whether we should still believe in the old adage of "Roti, Kapda aur Makaan," or refine it to "Roti, Kapda aur Rented Makaan". The rental yield in much of the country stands at 2-3 per cent. The rental yield is obtained by dividing the annual rent of a home by its current market price. So, this basically means that a house which comes with a market price of crore can be rented at a cost of ₹2-3 lakh per year, depending on which part of the country you happen to live in.

Given the way the rental math works out, it makes tremendous sense to rent a house.

Of course, finding a reasonable landlord who lets you stay in one place for a few years, is not that easy. Rented homes come with their own set of problems, primarily that of insecure landlords who have their own stereotypical ideas about an ideal tenant.

Given the way the rental math works out, it makes tremendous sense to rent a house.

In fact, the governments can sort out a major part of the housing problem by cleaning up the rental laws in the country and encouraging landlords to give out homes on long-term leases instead of the 11-22 months leases that they seem to prefer. This will go longer way in the solving the housing problem in the country than building more new homes.