Buy Vs Rent Research Report Bangalore-2013

01 April 2013 Written by 

 

 

Table of Contents

 

Summary 3 

1. Introduction 6 

2. Methodology 7 

3.Assumptions 8 

4. Findings

  • 4.1 Historical data of Real estate prices 9
  • 4.2 Property Cost vs Rental Value 10
  • 4.3 Down Payment 12
  • 4.4 Area 13
  • 4.5 Rent to Buy Ratio 14
  • 4.6 Break Even Horizon 15 


5 ArthaYantra Buy vs Rent Score (ABRSTM) 17 

6.Other Important Numbers 20 

7.Conclusion21 

8.Limitations and Concerns 21 

9. Appendix 22 


Summary 

Property cost vs Rental Value:The Residential Property prices in Kanakapur Road andTumkur Road are not being translated to their rental value. Though the average residential property values of Kanakapur Road and Hosur Road are identical, the average rental value is less by nearly 20%. The same case goes with Tumkur Road and Whitefield. Though their average residential property values are identical, their average rental values differ by nearly 50%.

Down payment:The years of saving required to afford the initial down payment i.e. 20% ofthe property price determines how sooner we can buy a house. In Mysore Road it takes 3 years to save for the initial corpus. It takes at least 4 years to save for the required corpus in Bellary Road, Hosur Road, Whitefield, Tumkur Road and Kanakapur Road. A professional will have to save for 5 years in Old Madras Road. In Indiranagar a professional has to save for at least 10 years to afford the down payment amount required.

Area:The average number of square feet per INR 1 lakh determines the amount you needto pay for the desired area of occupancy. The average number of sq ft of 33.33 per INR 1 lakh in Mysore Road makes it the place where you can get the highest area for the same amount of money compared to other 6 localities. This implies that for a given price one can get the largest space in Mysore Road followed by Hosur Road, Kanakapur Road, Whitefield, Tumkur Road, Bellary Road and Old Madras Road. Indiranagar offers the least in terms of space.

Rent to Buy Ratio:The ratio compares the monthly cost of renting house to the monthly costof owning the same place. The ratio undermines the necessity and urgency with which the house has to be bought. The rent to buy ratio of 0.40 shows that the rental values in Whitefield are higher and makes them an “immediately buy when you can afford” place. The ratio of 0.32 for Bellary Road and Kanakapur Road gives ownership of house an advantage over renting.

Annual out of Pocket Costs:The annual out of pocket costs in case of ownership include themonthly EMI being paid including the maintenance charges and the amount of tax being paid. The values have been calculated and compared across the average loan tenure of 15 years. The year at which the annual costs match determines the minimum stay period in the house. The minimum stay period is 11 years for Whitefield, 12 for Hosur Road, 13 for Mysore Road, 14 for Kanakapur Road, 15 for Bellary Road and Tumkur Road and above 15 years for Indiranagar and Old Madras Road. The tax benefits received under the HRA allowance dominate the tax benefits received in case of ownership over the period of 15years.

ArthaYantra Buy vs Rent Score:ArthaYantra Buy vs. Rent Score (ABRS) not only aids inmaking the rent vs. Buy decision but also explains the affordability and need to buy or rent in a given place. The three important factors on which scale is based are: affordability to rent, affordability to buy and a comparison of rent and EMI.

Bellary Road:The rent to buy ratio of 0.32 meant that the rental prices are moderately highand it is advisable to buy. A professional with a salary range of 8-10 lakhs is better of renting in this locality. A professional with a salary of 11-14 lakhs falls in the neutral zone and a professional with a salary range of more than 15 lakhs are advised to buy.

Hosur Road:The rent to buy ratio of 0.38 meant that the average rental value of residentialproperty is high compared to the average property price. This makes Hosur a place to buy. The moderate prices and decent number of sq ft per INR 1 lakh make it a place where in you need to buy a house as soon as you can afford it. The out of pocket costs is also in favor of buy with the breakeven being achieved at 12thyear (second fastest of the eight localities).

Indiranagar:The highest in terms of average property prices. The rent to buy ratio of 0.15meant that the average rental value of residential property is very less compared to its higher prices. The least number of sq ft per INR 1 lakh(among the eight localities) make it a place to rent. A professional with a salary of 8-25 lakhs cannot afford to buy in this locality, therefore renting is recommended.

Kanakapur Road:The rent to buy ratio of 0.32 meant that the rental prices are moderatelyhigh and it is advisable to buy. A professional with a salary range of 8-9 lakhs is better of renting in this locality. A professional with a salary of 10-11 lakhs falls in the neutral a professional with a salary range of more than 11 lakhs are advised to buy.

Mysore Road:The first most affordable locality for a professional. The rent to buy ratio of 0.36meant that the rental prices are moderately high and it is advisable to buy. The years required to save for down payment is 3 and one can get around 33.33 sq ft per INR 1 lakh. The affordable gross salary zone also starts from INR 10 lakh.

Old Madras Road:The second highest in terms of average property prices. The rent to buyratio of 0.27 meant that the average rental value of residential property is high, but can be considered less when compared to its higher prices. Renting is the best option.

Tumkur Road:A rent to buy ratio of 0.27 and moderately high property prices and cheaperrental values makes it a place to rent. A professional with a salary range of 8-12 lakhs should rent. The low rental prices also meant that though the professional with a salary more than 12 lakhs can afford to buy a house renting is a better option.

Whitefield:The rent to buy ratio of 0.40 meant that the average rental value of residentialproperty is high compared to the average property price. This makes Whitefield a place to buy. The moderate prices and decent number of sq ft per INR 1 lakh make it a place where in you need to buy a house as soon as you can afford it. The out of pocket costs also in favor of buy with the breakeven being achieved at 11thyear (fastest of the eight localities).


 

 

1. Introduction

Buying a home is one of the most important decisions in one's life. It is a tough decision to make and emotions cloud the decision making process. Often buying a home is given a high weightage by our family, friends and society at large. People associate the advantages of housing security, physical asset creation and property appreciation with home ownership. Renting is associated with expenditure. However, renting on the other hand gives flexible lifestyle options, high level of mobility and is easy on the purse when compared to the EMI to be paid.

From a personal finance perspective there is always a tussle between buying a home and renting it. Is it prudent to buy? Is there an upside to taking a place on rent? How the lifestyle is going to be affected? What is the impact of the locality chosen? There are numerous other Questions that crop up when this topic is discussed. This research paper tries to find the answers for these questions. As a part of this research we aim to objectively address the major factors which impact the decision of buying or renting.

The common assumption that the residential property always appreciates is inconsistent. The appreciation of a residential property is dependent on several factors. So one can't actually determine the rate at which the residential property is going to appreciate or depreciate. A school of thought supporting the rent argument says the amount invested in a home when invested in equities for the common horizon of 15 years, yields the same or better rewards. The real estate market scenario is similar to that of equity markets because it is unpredictable.

The other common assumption held is buying a home eventually results in increased tax savings. But provided the fact that the EMI payments accounting for principal payment of home loan come under the same section as Provident fund and required risk cover for self and family, one can't enjoy major tax benefits under section 80C. The tax benefits received under section 24B i.e. the interest payments made towards house loan can be matched up with HRA allowance in case of renting. So a professional shouldn't base the decision of buying a house on the tax savings he/she is going to receive.

So eventually the three factors which play a predominant role in making the decision are: Current Property price which determines the EMI to be paid, current monthly Rental value and the current gross income. Monthly rent or the EMI being paid shouldn't end up consuming most of the salary which in turn affects the lifestyle. It is not a good financial decision to buy if the rental value is low compared to the EMI to be paid in case of ownership.

As a part of this research we aim to provide a quantitative answer to the question of buying vs. renting a home. We analyzed the costs associated with owning a house and renting a house across eight localities in Bengaluru: Bellary Road, Hosur Road, Indiranagar, Kanakapur Road, Mysore Road, Old Madras Road, Tumkur Road and Whitefield.


2. Methodology

Property prices and rental prices of various residential properties were collected from multiple data sources to generate the primary and secondary data for the analysis. The public data sources including the data by National Housing Board (NHB) of India, data from various real estate reports and data from major real estate aggregators is collated. The primary research has been performed by collating information from over 100 real estate agents across the localities considered.

The methodology used for arriving at results considers various key parameters derived from the initial data collected: Price of the residential property and their rental value. Various important factors like the years of saving required for a professional to accumulate the corpus for down payment and the number of square feet per INR 1 lakh are derived from the average property price.

The main idea behind this research was to quantify the buy vs. rent decision from a personal finance perspective. The main factors which drive the decision are: how much more money does a professional need to shell out for buying a home compared to renting it? Can the professional afford this additional amount? ArthaYantra's Buy vs. Rent Score tries to address these questions and come up with a comprehensive scoring system. The scoring system not only tells whether it's better to buy or rent but also tells whether it's affordable to buy or rent.

 

3.Assumptions

  • The sale price and rental values are calculated for 1000 sq ft area ready to occupy residential property.
  • 20% of the cost of the house is considered as the required down payment to buy a house.
  • The loan tenure is 15 years.
  • The lending rate for the loan is 10.50%.
  • Average savings rate is 25%.
  • The minimum gross income required to buy a house is calculated by considering 50% of monthly take home salary= Monthly EMI to be paid.
  • The gross income of the professional increases 10% annually.
  • 1.5% of the property value is considered as the property tax to be paid.
  • 10% annual increase in rent is considered.
  • Property appreciation is not considered.

4. Findings
4.1HistoricaldataofRealestateprices


National Housing Board India's Residential Index (NHB Residex) tracks the movement of prices in the residential housing segment across India. Figure 1 shows the historical NHB Residex values since its inception in 2007.

Bengaluru's city index hasn't recorded any raise or decline meaning the average prices of the city cmae back to where it was in 2007. Only Zone C and Zone D recorded a raise in their residex value. Zone C has recorded the highest raise in the index value by 106%. Zone D followed up with a 29% raise. Zone E and F have recorded a decline when compared to the base year by 16% and 20% respectively. The real estate market in Zones C and D have outperformed city's average. The real estate markets of Zones E and F have underperformed compared to the city's average. Hosur Road represents Zone C. Old Madras Road, Indiranagar and Whitefield represent Zone D. Bellary Road and Mysore Road represent Zone E. Tumkur Road and Kanakapur Road represent Zone F.
It is evident that each of the zones has different real estate market and different expectations from real estate. The effort is to identify the places that are most affordable for a professional, given the current scenario. It is important to look at these graphs to get a high level perspective of the general movement of real estate in each of the zones. We delve into each zone's prospect in the later sections. The relative nature of the index hides many interesting facts.many interesting facts.


4.2 Property cost Vs. Rental Value
The graph compares the property price and rental value of 1000 sq ft ready to occupy house across eight localities of Bengaluru. The bar graph depicts the average property price in the locality and the line graph depicts the average rental value in the locality.

 

The most important thing that strikes out while assessing the current residential property prices and NHB Residex is the base effect. Hosur Road's property prices (INR 3,750,000) as per NHB Residex have grown two fold but still remains identical with that of Kanakapur Road (INR 3,750,000) which recorded a decline of 20%. Whitefield's property prices (INR 4,000,000) as per NHB Residex have grown by 29% but are still less than that of Bellary Road (INR 4,500,000) which has recorded a decline of 16%. This means that the property prices of Hosur Road and Whitefield were less compared to the other localities in the base year.


The most important factor that stands out from the rental value of the properties across the eight localities is the anomaly of the property values not being translated to the corresponding rental values. Hosur Road's and Kanakapur Road's average property prices are identical. But the Average rental value of Hosur Road (INR 12,000) is higher than that of Kanakapur Road (INR 10,000) by nearly 20%. The same case has been observed with Tumkur Road and Whitefield. Though their average residential property values are identical, the average rental value of Whitefield (INR 13,500) is higher than that of Tumkur Road (INR 9,000) by 50%.

 

 

        *On a scale of 1 to 7 with 1 being most affordable and 7 being least affordable based on the average property prices.

         Table 2: Locality wise ranking based on the affordability to rent and buy

The above table shows the affordability to rent rank and the affordability to buy rank based on the average property prices and average rental values across the eight major localities of Bengaluru. Mysore Road stands out to be the most affordable place to buy while Tumkur Road stands out to be the most affordable place to rent. Indiranagar stands out to be the least affordable place in both scenarios. Kanakapur Road is the second most affordable place to buy and Mysore Road is the second most affordable place to rent. Old Madras Road is the second least affordable place to buy and Whitefield is the second least affordable place to rent. Hosur Road takes the 3rdplace on affordability to buy and 4thplace on affordability to rent. Tumkur Road takes 4th, Whitefield takes 5thand Bellary Road takes 6thon affordability to buy rankings. Kanakapur Road takes 3rdand Hosur Road take 4thon the affordability to rent rankings. The 5thand 6thplace on the affordability to rent ranking is taken by Bellary Road and Old Madras Road respectively.


The rank of affordability to Rent does not match with the rank of affordability to buy in the case of any of the eight localities. This means that the high/low property prices of the eight localities are not translated to their relative rental prices. This signifies the fact that people of different localities have different expectations from their real estate markets.

4.3 Down payment
A critical decision in purchasing a home is the down payment required to make in order to avail the facility of housing loan. It is often a substantial amount of money to be paid upfront in order to own the house. While some of the professionals depend on their extended family to provide for this amount, often they do need to save for it. Assuming a 20% of property price as the down payment and saving rate of 25% for a professional with a gross income of 8 lakhs, based on the current average property prices, the time required to save the corpus determines how sooner one can afford to buy a home.

4.4 Area

The area of residential occupancy is an important aspect of life style. It determines the size of the home that is provided for the family. Figure 4 compares the average number of sq ft that can be bought for 1 lakh rupees across the eight localities.

Figure 5:Average no. of sq ft per INR 1lakh across eight major localities of Bengaluru

Indiranagar being the costliest locality offer a space of 6.67 sq ft per INR 1 lakh. Mysore Road being the cheapest locality offers a space of 33.33 sq ft per INR 1 lakh. This means for the same amount of living area, a professional who wants to own a house in Indiranagar has to spend at least 5 times the amount he spends in Mysore Road. Hosur Road and Kanakapur Road offer 26.67 sq ft per INR 1 lakh. Tumkur Road and Whitefield offer 25 sq ft per INR 1 lakh. Bellary Road and Old Madras Road offer a living space of 22.22 sq ft and 18.18 sq ft respectively per INR 1 lakh. Figure 4 attuned to the Affordability to Buy Ranking mentioned above.


4.5 Rent to Buy Ratio

The rent to buy ratio explains the additional monthly payments to be paid in case of ownership compared to renting. The ratio also helps in understanding whether the property prices are being translated to the rental value or not. The ratio is calculated based on the average monthly cost of renting i.e. monthly rental value + monthly maintenance and average monthly cost of ownership i.e. monthly EMI being paid in case of owning the house + monthly Maintenance charges.

Indiranagar has the least rent to buy ratio. This signifies the fact that the higher property prices of the locality are not being translated to the rental value in the locality. Renting is cheaper than owning a house by at least 85%. Tumkur Road and Old Madras Road also have low rent to buy ratios. Whitefield has the high rent to buy ratio.

The urgency to buy rank assigned signifies the fact that higher the rent to buy ratio, the sooner a professional needs to buy a home in the locality. With a rent to buy ratio of 0.40 and the average monthly out of pocket cost of Owning house being moderate, rents being relative higher Whitefield ranks 1 in the urgency to buy ratio. Hosur Road, Mysore Road and Bellary Road are also ranked high on urgency to buy rankings.


4.6 Break Even Horizon

Ignoring the price escalations of the residential property, one important question to be answered is the breakeven horizon i.e. how long a new home buyer would have to own the home to justify the decision of buying instead of renting in financial sense. Figure 5 shows the graphs of the annual out pocket costs incurred in case of ownership and renting based on the average property prices and average rental prices across the eight localities. The annual out of pocket cost in case of renting include the annual amount paid towards the rent, the annual maintenance charges paid and the amount of income tax being paid. The annual out of pocket cost in case of ownership include the annual amount paid towards the EMI payments of the house loan, annual maintenance and repair charges and the amount of income tax being paid.

The income tax being paid is considered in calculations because most of the professionals feel buying a home will do a world good for their tax savings. The idea is to compare the tax benefits received in case of buying a home and renting the home. The payments made towards the principal amount of the home loan are considered under section 80C. The payments made towards interest on home loan are considered under section 24b. In case of renting one can claim tax benefits under house rent allowance.

The provident fund received and required risk coverage for self and family also come under section 80C. These items do fill up most of the 80C part. Out of the EMI payments being made, in the initial years most of the amount accounts for interest payments rather than the principal amount. By the time the payment towards principal increases, one can also expect the salary of the professional to increase in turn increasing the Provident fund being received. So, the tax benefit under section 80C in case of ownership doesn't actually add much of advantage.

Though the tax benefits in case of ownership are higher during the initial years, renting the same place gives better tax benefits over the next few years. The benefits of renting are higher especially in the regions where the costs of ownership and renting don't match up during the average loan tenure of 15 years. The breakeven year i.e. the year at which the annual cost of owning house is equal to the annual cost of renting the same place is calculated over the average loan tenure i.e 15 years. The cost of ownership and renting matchup in Whitefield happens after 11 years. The costs matchup in Hosur Road, Mysore Road and Kanakapur Road happens at 12, 13 and 14 years respectively. In Bellary Road and Tumkur Road, it takes 15 years. The costs don't matchup in the case of Indiranagar and Old Madras Road. The planned length of stay in the house becomes an important aspect in deciding whether to buy or rent.

5 ArthaYantra Buy vs Rent Score (ABRS)

The property price and rental value of the place speaks volumes about why one should rent or buy the place. They have an impact on the amount of money being spent on the house (be it rent or EMI), the tax savings being received and many other important things. But one can't only rely on the rent to buy ratio and make the decision to buy without assessing his affordability. Similarly a decision to buy a house just because one can afford the EMI is not advisable. ArthaYantra came up with a unique scoring system called ArthaYantra Buy vs. Rent Score (ABRS) which is an effort to seamlessly integrate the above two aspects. We even added another layer of parameter, the rental value. So given a locality, based on the income of the professional ABRS describes a suitable action from wide range of options spanning from why one can't rent to why one has to rent though he/she can afford to buy to why one should buy.

As a part of this research report we have considered the average property prices and rental values of the localities and calculated the ABRS score across different salary ranges. In this research, the scope of the scoring system is confined to rental value and price of the corresponding property of the same region. It can be extended to compare the rental value of one region and property prices of a different region. This makes ABRS a powerful tool to logically gauze the pros and cons of renting and buying a house.

Bellary Road :A professional with a salary range of 8-10 lakhs is better of renting. A professional with a salary of 11-14 lakhs falls in the neutral zone i.e. he can afford to buy and it is advisable to buy but have to make few adjustments to the current lifestyle in order to afford the additional amount for EMI payments. The professionals with a salary range of more than 15 lakhs are advised to buy.

Hosur Road :A professional with a salary range of 8-9 lakhs is better of renting. A professional with a salary of 10-11 lakhs falls in the neutral zone i.e. he can afford to buy and it is advisable to buy but have to make few adjustments to the current lifestyle in order to afford the additional amount for EMI payments. The professionals with a salary range of more than 11 lakhs are advised to buy.

Indiranagar :The score of 55 for a professional with a salary range of 8-25 lakhs signifies that the monthly cost of renting is cheaper than buying by more than 70%.

Kanakapur Road :A professional with a salary range of 8-9 lakhs is better of renting. A professional with a salary of 10-11 lakhs falls in the neutral zone i.e. he can afford to buy and it is advisable to buy but have to make few adjustments to the current lifestyle in order to afford the additional amount for EMI payments. The professionals with a salary range of more than 11 lakhs are advised to buy.

Mysore Road :A professional with a salary of 8-9 lakhs falls in the neutral zone i.e. he can afford to buy and it is advisable to buy but have to make few adjustments to the current lifestyle in order to afford the additional amount for EMI payments. The professionals with a salary range of more than 10 lakhs are advised to buy.
Old Madras Road :The score of 55 for a professional with a salary range of 8-14 lakhs signifies that the monthly cost of renting is cheaper than buying by more than 70%. The low rental prices compared to the EMI also meant that though the professional with a salary more than 15 lakhs can afford to buy a house renting is a better option.

Tumkur Road :The score of 55 for a professional with a salary range of 8-12 lakhs signifies that the monthly cost of renting is cheaper than buying by more than 70%. The low rental prices compared to the EMI also meant that though the professional with a salary more than 12 lakhs can afford to buy a house renting is a better option.


Whitefield :A professional with a salary range of 8-9 lakhs is better of renting. A professional with a salary of 10-14 lakhs falls in the neutral zone i.e. he can afford to buy and it is advisable to buy but have to make few adjustments to the current lifestyle in order to afford the additional amount for EMI payments. The professionals with a salary range of more than 14 lakhs are advised to buy.

 

*Initial corpus required for owning = 20% of the Average property price (down payment for house loan) **Initial corpus required for renting= Amount equivalent to 10 months of rental value *** (Renting the house) / Average out of pocket cost (Owning the house)
The gross income of 8 lakhs per annum is considered.

Table 6: Other important numbers

7. Conclusion

Based on the current real estate markets Mysore Road is the best place to own a house. The property prices and rental value in this locality is low, thus making it the most affordable places for a professional to rent or own a house. The larger residential spaces offered by Mysore Road provide a better lifestyle option. The real estate market of Hosur Road, Kanakapur Road and Whitefield favors the home owners because of its moderate property prices and high rental value. Though the moderate property prices of Tumkur Road and Bellary Road make a strong case of ownership for professionals with higher salaries, the low rental values make renting a better option. The high property prices and low rental values of Old Madras Road make the decision to rent easier. Indiranagar is the least affordable locality for a professional because of its high property prices and rental values.

The research addresses the fact that Buy vs. rent decision has a huge impact on the personal finance of a professional. Buying a home is an integral part of every one's dream. But a very calculated and merit based judgment is needed before taking the decision to own the house. The comprehensive ArthaYantra Buy vs. Rent Score (ABRS) suggests the decision a professional should take across the eight major localities of Bengaluru based on the current rental values, property prices and the salary. If a professional finds himself in the rent zone as per the ABRS but still wants to buy a house, one has to make sure that their Emotional Premium attached with buying a house is going to match the EMI premium being paid.

8. Limitations and Concerns:

The data is related to following localities of Bengaluru:

Bellary Road, Hosur Road, Indiranagar, Kanakapur Road, Mysore Road, Old Madras Road, Tumkur Road and Whitefield.

The property tax to be paid is considered as 1.5% of the property value. The property tax calculation reforms need some stringent reforms to regulate the process. In most places the value is calculated based on the rental value. The rental values being shown in the related local governing bodies website varies from the actual rental prices.

The tax benefits received under section 80C is considered as INR 1.2 lakh both in the case of house ownership and renting.

9. Appendix

FIGURES:

Figure1:Graphical Representation of Buy Vs. Rent in Bengaluru

Figure2:Historical values of National Housing Board India Residential Index (NHB Residex)

Figure 3:Average property price and rental values across eight major localities of Bengaluru

Figure 4:No. of years required to save the corpus for down payment across eight major localities of Bengaluru

Figure 5:Average no. of sq ft per INR 1lakh across eight major localities of Bengaluru
Figure 6:Break even horizon for the eight major localities of Bengaluru


TABLE:

Table 1 :Factors associated with home ownership and renting

Table 2 :Locality wise ranking based on the affordability to rent and buy

Table 3 :Rent to Buy ratio and Urgency to buy rank of eight major localities of Bengaluru

Table 4 :ArthaYantra Buy vs. Rent Score Explanation

Table 5 :ArthaYantra Buy vs. Rent scores for different salary ranges across eight
major Localities of Bengaluru.

Table 6 :Other important numbers

SOURCES:

National Housing Board, India: www.nhb.org.in
Jones Lang LaSalle: www.joneslanglasalle.co.in
Makaan: www.makaan.com
Magic Bricks: www.magicbricks.com
Multiple Primary sources (100+)

 

 

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