Tuesday, July 8, 2008

Buy your dream home now

Experts suggest that investors willing to buy residential properties should not wait. It is better to invest at current levels.

The inflation rate is ruling at quite high levels (above 11 percent) and is expected to remain high in the short to medium term. This means the rise in input costs of properties will continue and builders will be forced to raise the property prices in future.



Also, home loans attract income tax incentives for the borrowers. This means it is good to invest early in property.

However, investors should factor in some variables while going in for a home loan. As a home loan is a long term commitment from the borrower, it requires proper financial planning. Typically , a home loan tenure is 15 to 20 years.

Some factors to consider while availing a home loan:

Scheme: fixed or floating interest rate home loan

First of all, a borrower needs to decide on whether to go in for a fixed or floating interest rate home loan. Usually, the rate of interest is 1-1 .5 percent higher in fixed interest rate options. Borrowers with stability of income can go for the floating rate option while the risk averse should opt for the fixed interest rate loans.

Plan finances:

Due to the higher inflation rates ruling globally, the Reserve Bank of India (RBI) is bound to take tough monetary policy measures. As a result, interest rates might go up in the near future. Investors should factor in some interest rates hikes while calculating their equated monthly installment (EMI) outgo . Usually, banks absorb small interest rate increases by increasing the tenure of the loan. However, in case of sharp rises in interest rates (seems unlikely from current rates) investors can look for partial pre-payment and partial increase in the EMI outgo.

As a thumb rule, the EMI should not be more than 40 percent of the borrower's take-home income. Also, since a home loan EMI is a long-term issue (usually 10 years or more), investors need to plan other expenses like child's education, marriages in the family etc and adjust their outflow accordingly.

EMI:

Repayment of home loans is through EMIs (equated monthly instalments).

EMIs are the fixed installments a borrower needs to pay over the tenure of the loan - to repay the debt as well as the related interest.

Usually, the EMIs remain constant over the tenure of the loan. The loan amount plus the interest for the loan tenure divided by the tenure of the loan (in months) gives you the equated monthly instalment.

The amount of EMI to be paid depends on and varies with the amount of the loan, tenure of loan, rate of interest, and mode of calculation of interest.

One of the important parameters governing the amount of EMI is the tenure of the loan. Nowadays, you can avail loans for various tenures - between five and 20 years, and in some cases upto 25 years as well.

DETERMINING TENURE

Here are some factors that go into deciding the tenure of the loan:

1) Age of borrower:

If you decide to borrow early, at a younger age, you can opt for a longer tenure loan - like 15 to 20 years. This way, your monthly EMI payments would be less. Although the amount of interest paid would be higher as compared to other options, you can have the benefit of availing the loan for a longer period of time.

However, if you are borrowing at the fag end of your career, you may have to opt for a shorter tenure.

2) Income of borrower:

This would include the present as well as the expected future income of the borrower.

The borrower should be able to repay his EMIs without compromising drastically on his quality of living. The cash flows available after repayment of EMIs should not entail a dent in his living standards.

As such, a judicious planning of cash flows is required.

3) Tax benefits:

A borrower should try to avail the maximum tax benefits available under the Income Tax Act. Presently, interest up to Rs 1.5 lakhs per annum paid for housing loans is deductible from the taxable income of the person.

The borrower should structure the housing loan amount and tenure so that his annual interest component paid in the near future is Rs 1.5 lakhs per annum. Of course this would be contingent on other factors as well, like annual income and savings potential.

TENURE AND INTEREST RATE:

The longer the tenure, the higher will be the interest rate. This is due to the increased risk taken by the bank. The interest amount in absolute terms is higher , in case of longer tenures. However, the EMI is lower because the loan and interest are spread over a longer span of time.

The shorter the tenure, the lower will be the interest rate. This is because, in this case, the risk taken by the bank is reduced. The interest amount in absolute terms is lower because of the smaller tenure. However, the EMI is higher because the loan and interest are to be repaid over a lesser span of time. As the tenure of the loan increases, the interest rate also increases (to compensate for the increased risk element). Simultaneously , the EMI goes on reducing.

The last few quarters have been quite tough for the people dreaming of buying a home. The interest rates on housing loans have gone up from the 2004-05 levels. Many people thought that property prices will come down significantly due to the rise in home loan interest rates. However, contrary to expectations , property prices have never come down significantly, and in fact, have gone up in many areas.

So what affects property prices?

Some factors that dictate property prices:

1) Rise in input costs:

With the inflation ruling high globally (especially here), the prices of all basic commodities has increased quite significantly over the last few quarters. For example, the cost of labour, steel and cement has gone up quite significantly in the last few quarters. Due to higher input costs, builders cannot reduce property prices in their newly-launched projects .

2) Investments by foreign investors:

Many foreign investors believe that there is huge potential in real estate and the returns will be quite attractive. Foreign direct investments in realty projects has increased quite significantly over the last few quarters as more foreign players are investing in real estate projects here.
-The Economic Times

11 comments:

  1. Ravi,

    Looks like you started blowing air to bubble again.

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  2. @atul! Thanks, for the comment! Bubble? No! Enough of it. Now, this is actual users', end users' market. Home. Residence.

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  3. A nice summary of important terms - I remember having spent many days understanding these 5 years ago when I first purchased my flat in Pune. Now is a very interesting and delicate situation - you are right that builders will be hit by rising costs and even with demand falling - they will not be able to reduce cost significantly due to rise in construction costs. But ultimately - its the buyer - for a 2br decent apartment - usual price today is 45Lacs - which means an EMI of around 48k per month (20 Year Loan, 11.5% interest) - going by your 40% rule - requires a monthly income of 1.2Lacs - and thats where the current dilemma resides - there are not enough people making this kind of money ! And this 45Lac home is available for 10k rent - so every potential buyer is renting - either the prices have to correct or incomes have to rise - or this will continue - NRI's alone can't feed the frenzy forever!

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  4. Hello Ravi,
    Bubble bubble on the wall..

    Appreciate your efforts (to try and keep your and builders hopes alive), please take some more efforts and read following extracts from the same Economic Times:

    Rising crude prices put realty on the boil
    6 Jul, 2008, 0830 hrs IST, ET Bureau
    NEW DELHI: The stock markets are in a flip-flop mode and that's giving sleepless nights to investors. But if experts are to be believed, the heavy duty bad news could be coming from the real estate markets soon. SundayET has learnt that there's a further 15-20% dip in the offing in residential capital values, in a market that's steadily moving south.

    Link: http://economictimes.indiatimes.com/Markets/Real_Estate/News_/Rising_crude_prices_put_realty_on_the_boil/articleshow/3201657.cms

    Home sales in Greater Mumbai dip 70%, suburbs see 10-15% correction
    6 Jul, 2008, 0234 hrs IST,Abhiram Ghadyalpatil, ET Bureau

    The realty sector in Mumbai and its suburbs has seen a correction — both in terms of home prices and rentals — in the recent months. While home sales have dipped by almost 70% in Greater Mumbai, prices are still stable. But the suburbs have witnessed a 10-15% correction.
    Link: http://economictimes.indiatimes.com/Features/The_Sunday_ET/Property/Home_sales_in_Greater_Mumbai_dip_70_suburbs_see_10-15_correction/articleshow/3201755.cms

    The Real Story of the Real Estate Debacle
    By Dhirendra Kumar | Jul 7, 2008

    The consensus story—visible in the general as well as news media—is that real estate is in trouble because of the rise in interest rates. Real estate prices as well as the stocks of real estate companies are down in the dumps because the rise in interest rates is keeping people from buying houses and apartments and so on. The idea being that since property loans have become expensive, fewer apartments will be sold. It’s a convenient piece of reasoning, but it also happens to be only vaguely related to the truth.
    http://www.valueresearchonline.com/story/h2_storyview.asp?str=11593

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  5. Appreciate your efforts (to try and keep your and builders hopes alive) Thanks, anonymous!

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  6. Diwakar, thanks! Spot on...45Lac home is available for 10k rent... the prices have to correct or incomes have to rise ........ NRI's alone can't feed the frenzy forever!....

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  7. The argument that property prices should crash because rental yields are low is not sound economics. There are good reasons why rental returns are less than your typical fixed deposit returns. See the explanation at:

    http://rightadvice4u.blogspot.com/2008/07/price-of-property-vs-rental-income.html

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  8. These statistics make an interesting and very informative reading... however... the discussion here is - whether a buyer looking for a home should buy now or wait. And ground reality is that he can't afford to buy a 45L flat but can afford to rent the same flat at 10k.
    Mr. Boss - there are plenty of 3BR flats available in Wakad and nearby areas for as little as 12k - 17k is a blown up figure! I am sick of reading this - ' stocks and RE are long term investments - invest and forget for 10 years ' - 10 years is a very long time - entire world can change in this period - oil may be extinct after next 10 years - there might be another Google and another China - you must re-allocate and balance with every change in market scenarios - if you can't - invest in an FD and enjoy life.

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  9. Ravi,
    Frankly speaking there are 10 other stories which are speaking other side of Reality facing reality (actually there should 100!) and you are not highlighting even single! Pretty amazing...About economics times - its such paper which it seems comepletely run by PBPA. Looks like there are professional writers appointed to craft stories so carefully that it shouldn't look like an ad but people are smart enough and don't need any experts to see the desperate builders lobby. Its time to face some Reality! Property prices will certainly come down as the builders wouldn't like to declare bankrupcies. Good luck!

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  10. Frankly speaking there are 10 other stories which are speaking other side of Reality facing reality (actually there should 100!) and you are not highlighting even single! Thanks for the comment. Thanks for bringing it to my notice. I will search for what i am missing and blog it. But if you are talking about Pune real estate slow down then, let me tell you, it's old news. Please, read these:..1) Pune real estate slowdown- 1 2) Pune real estate slowdown- 2 3) Pune real estate slowdown-3 4) Pune real estate slowdown-4 5) Pune real estate slowdown-5 6) Pune real estate slowdown-6 I blogged these stories in the last week of March and 1st week of April. Means Pune real estate slow down is not news any more. Now people who want a home to live are booking their flats at their own pace. No more rush.......Property prices will certainly come down as the builders wouldn't like to declare bankruptcies. Property prices are already come down or not increased. Indian bankruptcy laws are not as good as USA laws so you will find less bankruptcies declared. As a real estate salesman i do not wish builders go bankrupt because i do not want my clients, Pune property buyers, to suffer. I also request you to give them your best wishes.

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  11. I certainly agree with "Mr.anonymous" on one point for sure
    --snip--
    About economics times - its such paper which it seems completely run by PBPA
    --/snip--
    I cannot comment on ET, but yes Times of India provides a supplement on (I guess) every Sunday that talks about Property Market. The interviews, the topics it covers , it feels that all these are totally crafted by PBPA fraternity.Anyway, I have stopped subscribing it.

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