Living under-a-roof that you own is a dream come true.
Interestingly, real estate has also slowly transformed into a buyer’s market. Residential housing prices have marginally fallen in the major cities ever since the pandemic hit us, while government-led sops have encouraged a further drop.
Recently, the Central Government allowed builders to sell property up to 20 per cent (earlier it was 10%) lower than the going (circle) rate without having to pay taxes on the differentials. Furthermore, in cities like Mumbai, stamp duties were reduced making it cheaper to own a house. Not the least, interest rates on home loans are currently hovering near 10-year lows.
Should one use this opportunity to buy a house in these times? While all seems hunky-dory, a potential buyer should realistically evaluate the following factors:
Real estate prices have come down in certain areas, while low-interest rates, in turn, have further improved affordability for those looking to buy houses in India.
However, along with the real estate prices, incomes of many households have also come down. Salary cuts initiated by many companies are yet to be reversed as uncertainty looms as regards the future income and jobs for the employees.
Buying a house is not just a function of current income but also of the expected cash flows over the next 10-15 years. Under these circumstances, it is prudent to avoid taking a long-term loan that will require a big financial commitment.
Interest rates on home loans are about 7 % p.a. and definitely near all-time lows. It is perhaps the best time to lock-in at these low rates. However, all home loans are only partially fixed in India – say for the initial two or three years. After that it becomes a floating rate loan and thus susceptible to fluctuations in the interest rates in the economy.
At these levels, the odds are certainly stacked in favour of a rise in interest rate, which in turn could increase your EMI or elongate your loan tenure. This is a financial risk that one shouldn’t take, especially in these times.
Need for liquidity
While vaccines are on the way, the crisis is far from over. Economy and businesses are yet to fully recover and register robust growth rates like before.
You need to therefore bump up your emergency fund to provide for any emergency such as a job loss or a medical emergency that could hurt your finances. These are times to prop up liquidity. Buying a house would only exhaust your liquidity and expose you to financial vulnerability.
The Atmanirbhir Bharat 3.0 package of the Government has indicated that the 20% incentive for house buying up to a value of Rs 2 crore is valid only till June 30, 2021. Similarly, the affordable home loan incentive that gives deduction of up to Rs 3.5 lakh for payment of interest in a financial year is only for those loans sanctioned till March 31, 2021.
Moreover, some of the effects of initiatives like reduced stamp duty rates have already been partially reversed through a hike in circle rates (ready-reckoner rates) in cities like Mumbai.
It is very likely that the above-mentioned incentives for house buying might not be extended beyond the deadline or done away with once things normalize.
What to do in these times?
If you are on rent, it is prudent to continue and start saving more towards the house down payment. While most banks ask for 20% down payment on the property value, you should work towards double (40%) of that. Equity mutual funds are likely to get you there fastest especially if you start early enough.
Are you really fed up moving from one rented house to another? Then, why don’t you consider buying a small house instead of a big one. It will be lighter on your pocket, while also giving you an opportunity to upgrade to a bigger house whenever your finances are ready. In fact, the Government is giving financial incentives for buying ‘affordable homes’.
Also it is safer to buy a ready-for-occupation flat than those under construction. Moreover, buying an under-construction flat will mean providing for rent as well as EMI. All said, stick to reputed builders and properties with the necessary RERA registrations and titles.
While real estate might have become a buyer’s market, there is also uncertainty regarding the future. These are times to prop up liquidity and saving more instead of making long-term financial commitments.