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Should your first asset be a house?

by Money Puzzle   ·  June 28, 2019   ·  

Should your first asset be a house?

by Money Puzzle   ·  June 28, 2019   ·  

Photo by from Pexels

Roti, kapada, makaan – the name of a 1970’s Bollywood multi-starrer hit movie, has left and inexpungible impression in the minds of millions.

Undoubtedly these are essentials that one needs for survival. Roti and kapada are the two variables which are easier to source with enough choice. When it comes to makaan or a house, there are many combinations that one has to explore and closing that deal is not quite that simple.

Thankfully, behaviour has evolved in the last 40-50 years. The response from a survey I conducted among young earners in the age bracket of 20-30 years, showed that almost an equal number of respondents chose/were inclined to choose a rented house versus an owned house as their first home.

Back in the 1970s rentals were not all that popular at all. The ‘makaan’ variable in the equation had to be owned. You were not just building/buying your own house but creating an asset and preparing a legacy for the next generation.

Owning a house today no longer has the same significance that it did back in the 1970s and for good reason. Here are three such reasons for you to ponder on:

There is access to other assets too if you want to grow your wealth pool

Until about 25 years ago, there was limited access to financial assets for individual investors and the average working individual was right in turning to gold and real estate as means of creating assets.

Gold acted as a good store of value, accumulating it took care of the kgs needed in marriages and it had utility in the form of jewellery or could be pawned (kept as collateral in a more refined sense), when one need funds urgently.

Owning a house (or two) was the only other asset that made sense. It secured a roof over your head (so important to own that roof) and acted as your estate to be left behind. The sooner you could own a house, the better it was because property was also like an insurance in the event that the chief earning member died, the family had a house (or two), to live in or sell as required.

This made perfect sense then.

Today, there are many parallel ways of creating wealth, building your legacy and catering insurance for your dependents in case something happens to you. There is easy access to financial products which can create long term wealth and you can buy a term life policy that will pay out well to take care of your family in the event of your untimely death. Honestly, the next generation is really adept at creating their own legacies rather than looking to inherit that large property from you.

Land and cost of building was relatively cheaper

As population has literally exploded, land costs have too. Which means that it is no longer affordable for most citizens to buy a plot of land where they reside and build a bungalow on it. Firstly, with many immigrating to cities, there is hardly any land left. Builders are vying for whatever small plots they can find. Mass buying of land by builders through 1990s and the first decade of 21st century has pushed up land prices in metro cities. It has also brought in the concept of apartment living. Jobs too have become flexible and people move about easily from one city to another. Clearly, there is a need for more compact living quarters as cities get crowded and borders shift into nearby tier II towns. I mean Panipat is now part of National Capital Region or NCR; one of the outcomes is rising property prices.

Today, its less viable to buy and hold the property for two reasons, one major inflection point of price rise has already happened as this urbanisation shift happened in India over the last three decades and the costs are high for buyers. Secondly, behaviour has changed, when one is ready to buy, they will look for a new house rather than a second hand property, hence, selling that property for capital gain might be harder than you imagined.

Lastly, as children grow up and go about their own employment or venture, its highly likely that their choice of city or location may not be the same as where you bought the property.

There was no organised rental market

The market for rentals has also grown and become organised as these changes took place in our growing economy. There are intermediaries like brokers who help you find a place and assist you in doing up a good agreement with the landlord. The broker also looks out for other small issues like gas connections, initial repairs and so on.

You can get online on a website to browse availability even before you reach the city. These conveniences mean that getting a place of your choice on rent is an easy task today, at the same time you can safeguard your interest in a well drafted agreement with the help of a broker.

Moreover, rental costs in most cities are much lower than the EMI costs you are likely to pay out. This happens thanks to the high housing loan rates prevalent today. Put in your rent and whatever you save on the potential EMI can be invested in a long-term asset like equity.

What should you do?

It’s also true that back in the 1970s mostly people were able to afford a house close to where they went to work. Which we know is no longer true at least for metro cities and to some extent tier II cities. Buying a house makes sense if you know that you will surely live in it. Even then its more likely an emotional purchase. There is a high chance that you will end up travelling at least an hour or more to your place of work.

Rentals are affordable and flexible, if you do your homework well you can ensure that the landlord is amiable too.

You might consider rentals as an irrecoverable cost, but think of the time you spend in travel just to own that property, that’s time away from family and from leisure; I would say that’s an irrecoverable cost.

Add to that the interest you are paying the bank or finance company and the taxes involved, the cost of owning a house is burgeoning these days. The only hope is that property prices rise at a fast pace, unfortunately, you don’t have much control over that.

To answer the question we began with,

you definitely should not consider property as your first asset. Market linked financial securities like stocks and mutual funds let you invest smaller amounts in a flexible manner to achieve long term wealth creation.

Do that to begin with and later when you have more certainty about where you will like to settle down, use the accumulated savings and wealth to buy your dream house.

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