Buying a House Is Not An Investment
If you have thousands of dollars to spare and are reading this article, you may choose to skip to the next article. This may not be for you. :)
Buying a house is never an investment
Buying a house is a significant financial decision that can give you peace of mind or wreak havoc on your financial stability for the next 20 years. Many still believe buying a house is a sign of prosperity and social norm that agrees that you are well settled. That is as far away from the truth as it can be.
Always consider the inflation rate
Your parent’s or grandparents’ house must be worth many times compared to the purchase value 50 years ago. Over the long term, the value of the house would’ve appreciated only slightly above the inflation rate.
E.g., A house purchased 50 years ago in 1970 for INR 1 million will be worth INR 42 million in 2020, which is a 4171.25% increase at a 7.64% annualized inflation rate. That is also applicable to any commodity you purchase, a 1 kg bag of rice valued at INR 2 in 1970 will cost you at least INR 85 in 2020.
Inflation stands true for any economy; in the United States, a $10,000 house purchased in 1970 will cost $67,843 in 2020, which is 578.43% cumulative inflation at an annual rate of 3.94%.
Markets are unpredictable and uncontrollable
Investing in a property is considered as one of the most stable investments — over time, the value will increase and will give you a considerable return on investment. However, that is only true if you have bought a property in an upmarket or high growth region.
I have known friends who have bought houses as an investment in a high growth area; however, due to a change in government policies, the growth never materialized. Today, thousands of apartments lie vacant. The property purchased eight years back has seen a 0% increase in value against cumulative inflation of 68% during the same time frame.
Do the maths
This is an area where most individuals chose emotions over maths. Buying a property is a significant financial decision, and like all investments, it needs extensive research to support your decision.
Your house is not a cash cow. It will eat your resources like an elephant. The following are vital considerations you must evaluate before investing in a house.
- 20% downpayment — Considering you are planning to purchase a two-bedroom apartment in an average area of a tier 2 city like Hyderabad for INR 5.5 million, assuming it covers all charges and applicable taxes. You will have to manage a downpayment of INR 1.1 million.
- 4.5% registration and stamp duties, i.e., INR 247K
- Annual maintenance of INR 60K
- Mortgage payment of INR 408K in year 1
Even if we ignore the cost of setting up the house, the way you would like, which can be roughly around INR 250K — 500K on an average. The initial sum of money you are investing in year one will be approximately INR 1.8 million.
If you invest your mortgage payment of INR 60K per year for 20 years (similar duration of your loan tenure) in a diversified mutual fund, you will receive a payout of approximately INR 44 million, which will be considerably higher than the property value.
Suppose you can pay INR 1.8 million today without impacting your lifestyle and future goals, like studying, vacation, etc. It is worth buying that house.
Your house will never be an investment
An investment is called an investment when you receive a considerable financial return and at the time of your choosing. A house that is your primary shelter will not meet these criteria.
Unlike an investment, you cannot choose to sell your primary accommodation at the time of your choosing, e.g., when the real estate market is booming in your area of residence. However, you may be forced to sell it at a lower cost to make ends meet. Something that happened to the majority of house owners in the 2008 financial crisis.
Typically, when you invest, it does not need additional fund dilution periodically. A house does, which in turn increases your total ownership cost. These fund dilution can be mortgage payments or EMIs, periodic maintenance, taxes, insurances, etc.
This largely disqualifies a house as an investment.
This does not mean that you should never buy a house. You should if your finances permit you to spend that extra cash you have stashed away. Buying a house should never impact your current and future lifestyle, financial goals, or emergency funds.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Consult a financial professional before making any significant financial decisions.
