There is never a ‘best time’ to buy a house

The other day, I was speaking to a friend who was mulling over whether to buy a property in this market. The discussion was not new; this friend was actually indulging in it with me for around the 15th time in the last three years.

He had never hit upon that “good time” to buy a house, since the markets were never perfectly at the bottom for him.

I was at pains to explain to him that markets are never perfectly at the bottom and that moreover, it is only in retrospect that you know whether a market was at the bottom or not. And the absolute truth is that you are never aware of the bottom while one is in it. At that point of time, you are panicking (if you have property) and expecting the market to go further down and are prepared to wait (in case you wish to buy).

So, how does one actually go about pur chasing a property? There are several aspects to consider, the experts will say. The four main ones are:

Are you going to stay in the property?

Is your rental outflow substantial enough at this point of time to fund a loan installment?

What is your choice of city or town for residence?

What is the rental yield of the property that you are considering?

These are questions that you will come up with in any discussion concerning the purchase of a house. And these questions, in my experience, are interminable and only end up in confusing the person rather than seriously assisting in decision making.

In my opinion, the only way to buy a house is to say a little prayer and take the plunge. The more you dither, the more you lose out on one of the best investments available today.

This is especially true for salaried people in India. Salaried executives generally tend to feel that their salaries are never enough to cover the EMIs for a home loan. This is a common-enough feeling, but something one has to live with. The only way to alleviate the situation is to increase your income, which in most cases, if you are young and well-qualified, happens as a matter of course.

Consider the situation of my friend who is now 35 and is yet to purchase a house. The table below illustrates the potential savings that he has lost by not investing at 25.

If he had invested in a house of Rs 25 lakh with an income of Rs 30,000 in the year 2000, he may have struggled in the early years, but even at a modest growth rate of income at 5% (refer assumptions), his net savings would be nearly the value of the property today. Truly, a considerable amount of savings!

Additionally, he could have saved more under Section 80C by including principal under the same. However, since the deductions under this section are utilised for PPF, ELSS, insurance and other instruments by most people, it has not been considered as part of the savings.

In sum, if you do not wish to be like my friend, take the plunge. Some points to guide you on this journey as you attempt to swim in these waters:
Set a firm deadline for the purchase of the house regardless of whether it will be self-occupied or purchased for investment

A good (read: low) price is not that critical if you have a long term view of at least 5 years. The price becomes less critical if the house is for self-occupation

Tax rules permit the purchase of a house outside your city of residence and the claiming of deductions on them

In case you have not purchased the property for self-occupation, rental earnings from the same can be set off against the interest paid

You get a standard deduction of 30% on your rental income (something not available even on your salary)

For those who have already taken the plunge, if you have an affordable EMI and some extra cash, do not be in a hurry to prepay your loan, since you may lose more by virtue of the tax deductions

Ignore the draft Direct Tax Code for the moment. According to the DTC, these tax benefits will be removed by March 31, 2011. However, the finance minister has gone on record to state that he will reconsider the housing benefits

The writer is an associate professor at School of Business Management, NMIMS University and can be reached at sreeram.s@nmims.edu