After a hibernation that lasted nearly five years, home buyers are once again planning to go shopping. More than 60% of the respondents to an online survey say they were likely to buy property in the next 12 months. The survey was conducted last fortnight after the RBI cut rates and got 1,181 respondents. More than 16% of them say they plan to “definitely buy” real estate in the next one year (see graphic). “Many fence-sitters have realised that it makes sense to buy a home at this point in time, when prices have not risen too much,” says Anuj Puri, Chairman & Country Head, JLL India.
The bullishness is more pronounced in some cities such as Hyderabad and Pune, while buyers are not so keen in Delhi NCR and Bangalore where high prices and huge inventory levels have dampened demand. Despite the bullishness, buyers are not rushing in with eyes wide shut. They are acutely aware that in the coming years, returns from real estate may not be able to match those from other asset classes. “Over the next one year, the appreciation of real estate prices will at best be inflation linked,” says Samir Jasuja, Managing Director and CEO of realty portal PropEquity.com.
The returns from real estate also tend to be jerky. There would be no big appreciation for years and then suddenly prices may shoot up if some infrastructure project is announced. Therefore, investors should not go for property if their investment horizon is less than five years. Our survey shows that more than half (53%) of the respondents will buy property only for own use, and only 19% will buy as an investment. Of course, there is another 18% who will buy for own use as well as for investment.
How will property prices move in next one year?
Not a good idea to pay 9.5% on a loan to buy an asset that will grow at 4-5% in a year.
Figures are percentage of respondents in different cities. Total respondents: 1,181
Buyers are also mindful of delays in projects. Faced with a severe cash crunch, real estate developers have not been able to complete projects. Delays have ranged from 1-2 years if you were lucky to up to 5-6 years. This is why a large majority (66%) want to buy ready-to-move-in property, and only 22% are willing to consider under-construction flats or pre-launch offers. Even though the Real Estate Regulation Act 2016 has been passed, not many people are aware of how it will make a difference. Barely 35% of the respondents feel that the Act will protect the interests of buyers.
Real estate is normally the largest investment by an Indian household. Seeing the surge in buyer interest, we reached out to experts to know what people should keep in mind when they purchase property. We list out smart moves that can help buyers get the maximum bang out of their bucks. Read on:
How will you utilise the property?
Wary of delays, most buyers are looking for ready-to-move-in property.
Figures are percentage of respondents in different income brackets. Total respondents: 1,181
RENT OR BUY
Before you embark on your plans, do a thorough rent versus buy analysis. In many cities, the property prices are very high but rentals are affordable. “Most people can’t afford to buy a house but everybody can afford to rent one. You may not be able to find Rs 80,000-90,000 for the EMI of a Rs 1.5 crore house, but you can afford to pay Rs 25,000-30,000 a month as rent for the same property,” says financial trainer P.V. Subramanyam.
Younger people will find renting a better option because it gives them the freedom to relocate to another city or area within a city. As the job market becomes more competitive, a person who is tied down to a property by a mortgage may end up sacrificing emerging job opportunities in other cities. However, in some cities the property prices have not run up too much. For instance, in Hyderabad and Pune, prices are still within reach. “If the EMI is not significantly higher than the rent one is paying, the person should buy the house,” says Rishi Mehra, Founder of Deal4loans.com. He points out that while rent is paid to the landlord, the EMI payment also helps create an asset for the borrower.
Why aren’t you planning to buy?
For most people, interest rates are not as big a hurdle as high property prices.
Figures are percentage of respondents. Total will not add up to 100% because of multiple reasons.
What will make you buy property?
1. Increase in tax benefits on home loans- 7%
2. Healthy rise in income by at least 20%- 12.8%
3. Home loan rates cut by 2%- 12.9%
4. Property prices decline by 10%- 57.2%
5. Attractive payment option from builder- 5.6%
6. Other reasons- 4.5%
If property prices decline, there could be a surge of buyers as most are waiting for a correction.
How big a loan will you take to buy the property?
1. 70-80% of property value- 52%
2. 50-70% of property value- 27.9%
3. Less than 50% of property value- 15.6%
4. No loan required- 4.5%
Most people plan to take the maximum loan available to them.
CONSOLIDATE YOUR FINANCES
If you have decided to buy, consolidate your finances and figure out how much money you can raise for the down payment of the house. Remember, the bigger the down payment, the smaller is your EMI and the lesser is the stress on your monthly budget. However, in your attempt to enhance the down payment amount, don’t dip into investments meant for retirement and other critical goals such as your child’s education and marriage. You also need to assess how much loan are you eligible for. Lenders typically keep the EMI at 30-40% of the net take home pay of the individual.
You should also obtain a credit report from the credit bureaus. The RBI has mandated that a person should get at least one base-level credit report free in a year. “Check your credit score before you borrow so that you don’t get a nasty surprise when you apply for the loan,” says Ranjit Punja, CEO and Co-founder of Credit Mantri. If there is something amiss in your credit history, it may take some time to repair it. “If your credit history is not clear, your choices shrink,” says Manavjeet Singh, CEO and Founder of loan aggregator portal Rubique.com. Experts say it is a good idea to not revolve credit card dues and keep expenses low for 10-12 months before applying for a loan.
Do you expect the project to get delayed?
Most of the buyers are willing to factor in interests. project delays into their calculations.
Does the Real Estate Regulation Act protect interests of buyers?
1. Don’t know/Can’t say- 36.7%
2. Makes no difference- 28.4%
3. Buyers somewhat protected- 24.1%
4. Consumer interest well protected- 10.8%
A lot of people are not sure if the new law will protect their Most of the buyers are willing to factor in interests.
Some people even say that one should take a pre-approved loan so that there is very little paperwork left after you have found a suitable property. But Adhil Shetty, CEO and Co-founder of Bankbazaar.com points out that pre-approved loans are valid only for 6-8 months. “If you are not able to finalise the deal within that period, you will have to apply afresh and pay the loan processing fees and charges all over again. As a rule, the banks will not extend the validity of the pre-approved loan,” he says.
START RESEARCHING OPTIONS
Experts say bargains are everywhere, because investors are desperate to get out of real estate. Many investors are offloading property bought 2-3 years ago, which has led to a massive supply of ready flats for sale in the secondary market. “Some of these investors are exiting at a 0% gain while some are even willing to take a haircut,” says Jasuja. But buyers will have to do a lot of research to find the bargains. “It is certainly a buyer’s market but cherry picking is critical,” he adds.
Don’t be tempted to buy outside your city because the rates are lower. In many cases, buyers who are not familiar with the reputation of the builders in another town, get stuck in the wrong project. On the other hand, it may be a good idea to buy in the suburbs to avoid the bustle of the city yet live not too far from the place of work.
An expert agent with a good reputation can help in identifying properties that fit your requirements. He will be able to locate the properties, have preliminary talk with the owners and even bargain on your behalf. A small fee of 1% of the value of the property is not too much for these services.
How much loan can you afford?
Your net monthly income decides how much loan you can take. Lenders also take into account your income from other sources and other loan repayments. These calculations are based on the following assumptions:
Interest rate: 9.5%
Loan tenure: 20 yrs
Loan amount: 70% of house cost
Income from other sources: Nil
Buyer plays safe but does not fully leverage his finances. He will either have to settle for a smaller house or make a bigger down payment.
The ideal situation where the buyer can comfortably repay the loan and also fulfil other financial commitments. But he must avoid taking another loan.
Borrower is close to the upper limit of his ability to leverage. If interest rates rise, the EMI will go up, making it difficult for the borrower.
This is dangerous territory, where the borrower is forced to neglect other goals to pay EMI. Sudden change in financial situation can prove disastrous.
GET READY FOR EMIs
Apart from properties, you also need to zero in on the best loan provider. Loan aggregator portals act as matchmakers between lenders and borrowers. Take a loan that you can comfortably service without impinging on other goals. More importantly, assess whether you will be able to afford the EMI. One way to assess your repayment capacity is by putting away an amount equal to the EMI in a recurring deposit or a short-term debt fund. This will not only get you into the habit of saving that amount every month but also help you accumulate a bigger down payment.
CONSIDER COMMERCIAL REALTY
If the purpose of buying real estate is purely investment, a better alternative could be commercial property where things are looking up and one can expect superior returns. But here too, one should go for Grade A assets, not Grade B or C. “Go for the assured rental option in commercial property only if a long term lease of 6-9 years has been signed with a tenant,” advises Jasuja. The rentals should be in line with the prevailing market rate. Don’t get tempted to buy if you are offered a very high rental for 1-2 years. “That may be an artificial hike and after the lease ends, the rent will fall sharply. In some cases, the buyer won’t even find a tenant,” he cautions.
GROSS INCOME VS NET INCOME
Lenders do not consider gross income while calculating your ability to repay the home loan. Your take-home pay, after tax and other deductions, is a better indicator of how much you can repay. Lenders also look at other repayments such as car and personal loans.
WILLINGNESS TO PAY VS ABILITY TO PAY
Housing finance companies say and financial planners agree that debt repayments should not exceed 30% of the borrower’s net income. This ensures that the borrower is able to comfortably repay his loan without impinging on other financial commitments.
When rates rise, lenders automatically extend the tenure. This is not possible in case of long-term loans (20-25 years). Instead, your bank might ask you to deposit some money upfront or raise the EMI. This can be a problem if you have already stretched your repayment capacity to the fullest.