Is it the right time to a buy a house? Or is renting a better option? The answer, like most things in economics, is that it depends on what you want of the house. Do you want to live in it? Or are you looking at it as an investment? Mint takes a detailed look.

Should you buy a house or rent one?

The rental yield on housing is largely 1.5-2%. Rental yield is the annual rent on the house divided by its market price. On the other hand, the interest paid on a home loan is 8-8.5%. Hence, financially, renting a home is almost a no-brainer. The rent on a home is likely to be around one-fourth of the EMI. Having said that, there are advantages to owning a home. It gives the homeowner a permanent address, something that seems to be becoming more and more important in the times that we live in. Also, if children attend school in a particular locality, changing homes every few years doesn’t make sense.

When is the right time to buy a home?

If one plans to live in it, then buying a home, as long as one can afford it, is never a bad idea. For example, you want to buy a home priced at ₹50 lakh. Typically, you will need to make a down payment of ₹10 lakh or around 20% of the home loan. The bank will be willing to lend you the remaining ₹40 lakh. At 8% interest and a tenure of 20 years, the EMI works out to ₹33,458. It is best that this EMI should not be more than 40% of your take-home salary. If the home loan EMI works out to be greater than 40% of your take-home salary, then you will be stretched for money sooner rather than later.

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How about buying a house as an investment?

Buying a house as an investment is best avoided. Returns on homes have been mediocre of late. The National Housing Bank’s housing index Residex tracks housing prices in 50 cities. Between June 2013 and June 2019 (the latest data available), Residex has given a 4.8% return per year. This is an average of the returns in all 50 cities over the six-year period.

So, real estate returns have been low?

A return of 4.8% a year, when even savings bank accounts earn a return of 6-7% every year, is barely enough to compensate for the risk involved in owning real estate. Also, owning real estate involves other expenses. Property tax needs to be paid to the local government every year. Over and above this, maintenance charges need to be paid to the building society for general upkeep. In buying under-construction property, there is always the risk of the building not being completed or the builder disappearing after some time.

What about the taxes saved on a home loan?

For a few years interest paid on home loans beyond the first self-occupied house could be totally deducted from the taxable income, if notional rent was declared. This was a huge tax arbitrage available and was exploited by corporate executives earning a high salary to trim their tax liability. Currently, a deduction of up to ₹2 lakh can be made from the taxable income for interest paid on all home loans. That’s one reason less to buy a home as an investment.

Vivek Kaul is an economist and the author of the Easy Money trilogy.

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