This is a very complex question, not only because it straddles an entire lifetime, but also because it has strong overtones of emotion, security and comfort which affect different people differently. Let me try to highlight some of the main factors for two groups of people – the newbie starting working life, and the oldie seeking peace after decades of toil.
First, the math.
Ownership generally requires a loan, the interest on which is around 8% nowadays. But hold on—there is a catch. This is not a lifetime interest rate. It is just the initial rate on a floating rate loan, which means that, years later ,it can go up and you have absolutely no idea of what the rate will be 10 years from now. If you want a fixed-rate loan, one in which the interest rate will not change during the entire payback period, you will have to pay around 12%, which means that banks do expect interest rates to rise in the future.
How much does rent on a flat cost vis-à-vis the price of a flat? Around 2.5%-3.5%. For simplicity, let’s take the average—3%. This means that if you rent a flat which costs Rs1 crore, you can expect to pay Rs25,000 per month (pm) on rent.
So, buying a flat costs 8% plus, while the rent costs just 3%. Hold on—there will be appreciation in the value of the flat. The income-tax (I-T) department publishes a cost inflation index for use in the calculation of capital gain tax payable when you sell a property at a profit. This index rose to 301 in 2020-21 from 100 in 2001-02, a three-fold rise in 20 years, or just about 5%pa. Since the I-T department is certainly not over-generous in giving relief on capital gain tax, one must assume that this number is conservative.
So, if you buy a flat, you pay 8% interest and get 5% appreciation, the difference is 3%, which is what you would pay on rent. Hence ownership and tenancy are Even Stevens, right?
Of course, there are nuances arising from various uncertainties—future interest rates are unknown, property market rise is uncertain, and rents go up too. But this is the ‘ball park’ comparison between ownership and tenancy, purely in terms of money.
Now let’s turn to the two groups I mentioned earlier—newbies and oldies—and look at the dilemma from their points of view.
“A young man in possession of a good job must be in want of a wife, and hence a house” (apologies to Jane Austen). Where does a young man starting a career live with his newly wedded wife, or a live-in girlfriend? Does he buy a flat?
The first issue – where? The days of living in the same city for 30+ years are definitely gone. The centres of business and, hence, employment, are constantly shifting.
In the 1950s, Calcutta was the business hub of India, but there are hardly any jobs in today’s Kolkata. Mumbai is increasingly unlivable, especially for a newcomer.
Besides, companies are shrinking or growing; new companies are emerging in different places; the entire business spectrum is changing. It is unlikely that you can expect to live in the city where you currently work, for the next 30+ years.
If you buy a flat here, what will you do when you move elsewhere? Sell it? Rent it to an unknown person while you live in some other city? Will your flat be looked after by the tenant? Will he pay the rent? Will you ever get your flat back?
The second issue – how big a flat? You can probably afford just a small one bedroom-hall-kitchen (1BHK) flat today; but soon kids will arrive and you will need a bigger flat. But you cannot buy a bigger flat today. Do you buy a big flat in the boondocks somewhere and commute to work for many hours a day?
The third is the most sinister issue—what if you lose your job? When I was young, people expected to join a ‘good’ company and work there for their entire lives. This doesn’t happen anymore. Companies go bust; downsizing happens; your skill-sets become outdated – many people in their 30s and 40s find themselves without the job on which they relied for paying the house loan EMIs.
Now for the oldies.
Consider a man, who has just retired after a secure job, which gave him living quarters. He has a nest-egg of a few crores of rupees and now needs to find a place to stay. Does he rent or buy?
Renting has one major drawback—lack of permanency. Rentals are usually on leave-and-licence basis for 11 months at a time. What if the landlord wants you out when you are 65? Where do you go? Finding another suitable flat, and shifting there, is difficult at an advanced age unless help is available.
There is also the emotional angle. In one’s ‘golden years’ one wants peace and comfort in an ‘apna ghar’, filled with all the familiar favourites. However, you may decorate a rented flat, it is never the same as your own dwelling.
Buying a flat gives permanency and a sense of ownership. But there are some hitches here, too.
At your age, and post-retirement, you will not get a housing loan. You have to dig into your savings to buy a flat. If you are going to spend only 10%-15% of your capital on a flat, it is fine. But if you have to shell out 40% or 50% of your capital to acquire a suitable flat, then you have a big problem—what will you live on?
Your capital will get you 6% or more, even from a fixed deposit. This is your ‘interest cost’ if you buy a flat with your own money. Throw in the capital appreciation of 5% a year, and your net cost is just 1%. But, dear oldie, appreciation is an intangible number. You have to live somewhere, and hence you cannot sell your flat and realise the appreciation. It will only benefit your children after you are dead. So your net loss in buying is 3%—the 6% fixed deposit (FD) interest you forgo, less the 3% you pay on rent.
The third problem is the unknown factor. If you have planned you retirement and booked a flat with a ‘reputed’ builder, hoping that it will be ready for you when you retire, you may be in for a big shock when the flat doesn’t get built at all. If you buy an existing flat, you should be prepared for other types of nasty surprises—defects and problems in the flat, nasty neighbours, water shortage, and goons in the mohallah – stuff that is hard to spot when you buy. What will you do if living in your ‘apna ghar’ becomes unbearable?
So, my friends, buy/rent is a dilemma which has no easy answers. All I can suggest is that you think things through, very deeply, before you decide.
(Deserting engineering after a year in a factory, Amitabha Banerjee did an MBA in the US and returned to India. Choosing work-to-live over live-to-work, he joined banking and worked for various banks in India and the Middle East. Post retirement, he returned to his hometown Kolkata and is now spending his golden years travelling the world (until Covid, that is), playing bridge, befriending Netflix & Prime Video and writing in his wife’s travel blog.)
