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Table of Contents
Historical data of Real estate prices 9
Property Cost vs Rental Value 10
Down Payment 12
Rent to Buy Ratio 14
Break Even Horizon 15
5 ArthaYantra Buy vs Rent Score (ABRSTM) 17
Other Important Numbers 19
Limitations and Concerns 21
Buying the house is perhaps the biggest and the most common dream of every professional. Though buying a house has high emotional quotient, it is a decision that has to be ﬁnancially prudent. A wrong decision could result in excess debt and an illiquid asset. This research paper provides a personal ﬁnance perspective to the rent vs. buy decision.
Here are some of the key ﬁndings of the research:
Property cost vs Rental Value: The Residential Property prices in Bengaluru and Delhi NCR are not proportional to their rental value. Though the average residential property values of Bengaluru is higher than Kolkata by 6%, the average rental value is less by nearly 32%. The situation is similar for Delhi NCR and Mumbai. Though their average residential property values are identical, their average rental values differ by nearly 60%.
Down payment: The years of saving required to afford the initial down payment i.e. 20% of the property price determines how sooner one can buy a house. It takes at least 4 years to save for the required corpus in Hyderabad and Pune. In Kolkata and Bengaluru it takes 5 years and in Chennai it is 6 years. In Mumbai and Delhi NCR a professional has to save for at least 8 years to be able to afford the down payment amount required.
Area: The average square feet per lakh (INR) determines the amount you need to pay for the desired area . At 26.57 sq ft per lakh, Hyderabad gives highest value for money compared to other 6 metros. Hyderabad is followed by Pune, Kolkata, Bengaluru and Chennai. Delhi NCR and Mumbai offer the least sq ft lakh.
Rent to Buy Ratio: The ratio compares the monthly cost of renting house to the monthly cost of owning the same place. The ratio underlines the necessity and urgency with which the house needs to be bought. The rent to buy ratio of 0.41 shows that the rental values in Kolkata are higher and makes it an “immediate buy”. The ratio of 0.33 for Hyderabad and Pune gives ownership of house an advantage over renting.
Breakeven Horizon: The annual out of pocket costs in case of renting include the monthly rent, maintenance charges and tax. The annual out of pocket costs in case of ownership include the monthly EMI, the maintenance charges and tax. 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 12 years for Kolkata, 14 years for Pune and Hyderabad, 15 years for Mumbai and above 15 years for Delhi NCR, Bengaluru and Chennai. 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 (ABRSTM): Our proprietary ArthaYantra Buy vs Rent Score (ABRSTM) not only aids in making the rent vs Buy decision but also explains the affordability and need to buy or rent in a given city. ABRSTM considers 3 important factors: rental value, property price and gross income of the individual.
Delhi NCR: The rent to buy ratio of 0.20 means that the average rental value of residential property is very less compared to its higher prices. Renting is the best option.
Kolkata: The buy to rent ratio of 0.41 means that the average rental value of residential property is high compared to the average property price. This makes Kolkata a place to buy. The moderate prices and a decent number of sq ft lakh make it a place where in you should buy a house as soon as you can afford it. The out of pocket costs are also in favor of buy with the breakeven being achieved at 12th year (fastest of the seven cities).
Mumbai: The place with highest average rental value and average property price. The rent to buy ratio of 0.31 meant that the rental prices are moderately high and it is advisable to buy. But the higher property prices and least number of sq ft lakh( among the seven cities) makes it a place to rent.
Pune: The rent to buy ratio of 0.33 means that the rental prices are moderately high and it is advisable to buy. The years required to save for down payment (4 years, least among the seven cities) and the property prices being in a affordable range makes it the second most affordable city.
Hyderabad: The most affordable city for a professional. The rent to buy ratio of 0.33 meant that the rental prices are moderately high and it is advisable to buy. The years required to save for down payment is 4 and one can get 26.57 sq ft lakh. The affordable gross salary zone also starts from INR 10 lakh.
Bengaluru: The average residential property values of Bengaluru is higher than Kolkata by 6%, the average rental value is less by nearly 32%.A buy to rent ratio of 0.27 and moderately high property prices makes it a place to Rent.
Chennai: The rent to buy ratio of 0.25 means that the rental prices are cheaper compared to EMI to be paid in case of ownership. The city with third highest property price also means that one need to save longer for the required down payment. These factors make it better for renting.
Buying a home is a tough decision to make and emotions cloud the decision making. Often buying a home is given a high emotional weightage by 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 gives ﬂexible lifestyle options, high level of mobility and is easy on the purse when compared to the Home loan EMI.
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? This research paper tries 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 well in capital markets for the common horizon of 15 years could yield 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 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 beyond 1.2 lakh stipulated in section 80C. The tax beneﬁts received under section 24B i.e. the interest payments made towards house loan can be matched up with house rent 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 seven major cities of India: Delhi NCR, Pune, Mumbai, Hyderabad, Bengaluru, Kolkata and Chennai.
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 aggregations is collated. The primary research has been performed by collating information from over 100 real estate agents across the cities 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 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 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? Our proprietary ArthaYantra Buy vs. Rent Score (ABRSTM) 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.
- The sale price of 1000 sq ft area ready to occupy homes for sale is considered.
- The rental value of 1000 sq ft area ready to occupy homes for rent is considered.
- 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.
- Considering real estate as an asset class having same properties of other asset classes.
- The ownership/buy case considered is for self occupancy.
4.1 Historical data of Real estate prices
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.
Chennai has recorded the highest raise in the index value by 209%. Pune followed up with 100%, Kolkata and Mumbai with 96% and 97% respectively. Delhi NCR’s index was up by 72%. The index value of Bengaluru recovered steadily from its dip in 2009 and recorded a 0% increase. The current index value of Hyderabad recorded a 15% decline compared to its base year, resulting in cheaper residential properties compared to those in 2007. It is evident that each of the cities 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 only a high level perspective of the general movement in real estate in each of the cities. We delve into each city’s prospect in the later sections. The relative nature of the index hides 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 seven major cities of India. The bar graph depicts the average property price in the city and the line graph depicts the average rental value in the city.
The most important thing that stands out while assessing the current residential property prices and NHB Residex is the base effect. Chennai’s property prices (INR 7,161,591) as per NHB Residex have grown three fold but still remain less than that of Delhi NCR (INR 10,882,500) and Mumbai (INR 10,931,885). Pune whose property prices (INR 4,276,071) doubled as per NHB Residex are identical with that of Hyderabad (INR 3,764,188) which recorded a 15% decline in its index value. This means that the property prices of Chennai and Pune in the base year 2007 were less compared to other cities.
The most important factor that stands out from the rental value of the properties across the seven cities is the anomaly of the property values not proportional to the corresponding rental values. Kolkata’s average property price (INR 5,123,000) is less than that of Bengaluru (INR 5,437,500) by 6%. But the Average rental value of Kolkata (INR 17,833) is higher than that of Bengaluru (INR 12,125) by nearly 32%. The same case has been observed with Delhi NCR and Mumbai. Though their average residential property values are identical, the average rental value of Mumbai (INR 28,830) is higher than that of Delhi NCR (INR 18,137) by 60%.
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 seven major cities of India. Hyderabad stands out as the most affordable place for a professional to rent as well as buy. Mumbai stands out as the least affordable place in both scenarios. Pune is the second most affordable place and Delhi NCR is the second least affordable place. The rank of affordability to Rent matches with the rank of affordability to buy in the case of above mentioned 4 cities. This means that the high/low property prices of the 4 cities are translated to their relative rental prices.
Bengaluru ranks 3rd on the affordability to rent where as it ranks 4th on affordability to buy. Chennai ranks 4th on the affordability to rent where as it ranks 5th on affordability to buy. Kolkata ranks 5th on the affordability to rent where as it ranks 3rd on affordability to buy. This means that the average property price in Kolkata is less than that of Bengaluru and Chennai but the rental value is higher. This signiﬁes the fact that people of different cities have different expectations from their real estate markets.
4.3 Down payment
A critical decision in purchasing a home is the down payment required. It is often a substantial amount of money . Assuming a 20% of property price as the down payment and a 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. Figure 4 shows the graphical representation of the same.
The average property prices translate to the number of years professional needs to save for the required corpus for down payment. Based on the above stated assumption and average property prices a professional can afford the down payment required in Hyderabad and Pune in 4 years.
In Kolkata and Bengaluru a professional has to save for 5 years and in Chennai a professional has to for 6 years. In Mumbai and Delhi NCR, a professional has to save for at least 8 years to be able to afford the down payment. A professional from Hyderabad and Pune needs to save two fold to be able to buy a house in Mumbai and Delhi NCR.
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 5 compares the average number of sq ft that can be bought for 1 lakh rupees across the seven cities.
Mumbai, the costliest city to buy a home out of the seven cities considered, offers the least space of 9.15 sq ft per lakh. Delhi NCR is the second costliest city offering a living space of
9.19 sq ft per lakh, which is only 0.04 sq ft more than Mumbai. Hyderabad, being the cheapest city to buy a home out of the seven cities considered offers the largest living area of 26.57 sq ft per lakh. This means that a professional who wants to own a home in Mumbai and Delhi NCR has to spend 3 times more than what he spends in Hyderabad for the same no of sq ft.
Pune is the next cheapest city to buy a home in. It provides a residential space of 23.39 sq ft per lakh. A professional from Mumbai and Delhi NCR will get 2 and a half times more area in Pune for lakh. Kolkata offers the third largest living space of 19.52 sq ft per lakh. Bengaluru and Chennai come in next at 18.39 sq ft and 13.96 sq ft per lakh respectively.
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 (rental + maintenance) and average monthly cost of ownership (EMI + Maintenance).
As per the values mentioned in Table 3,Delhi NCR has the least rent to buy ratio value which means that the renting is nearly 80% cheaper compared to buying a house based on the monthly charges one bares in both the cases. Kolkata scores highest making the decision to buy easier once in a position to afford the EMI payments and required down payment.
The rent to buy ratio of 0.33 in Hyderabad and the least average out of pocket cost in case of owing house (INR 34,288) means that the buying is a better option in Hyderabad. Though Mumbai has a ratio value of 0.31 which meant that the buying is better option, high average out of pocket cost in case of owning (INR 97,673) meant that affordability is a major stumbling block.
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 seven cities. The annual out of pocket cost in case of renting include the annual amount paid towards the rent, the annual maintenance charges and the amount of income tax. The annual out of pocket cost in case of ownership include the annual amount paid towards the EMI of the house loan, annual maintenance charges and the amount of income tax .
The income tax being paid is considered in calculations because most of the professionals feel buying a home is 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 Kolkata happens after 12 years. The costs matchup happens approximately after 14years in Pune and Hyderabad and at 15th year in Mumbai. The costs don’t matchup in the case of Delhi NCR, Bengaluru and Chennai. The planned length of stay in the house becomes an important aspect in deciding whether to buy or rent especially for a ﬁrst time home buyer. With the current average stay around 7 years. most of the house owners might not see a break even point.
5. ArthaYantra Buy vs Rent Score (ABRS)
There are multiple factors to be considered during the decision to buy or rent a place. The factors include property price, EMI’s, corpus required for down payment, rental value, security deposit to be paid for renting a house, expected duration of stay etc. These parameters though important cannot individually serve as a single reference point for making an unbiased and objective decision on whether to buy or rent. Currently most of the people look at the appreciation of property price and comparison of the rental value and property prices are given major priority in the decision making process. This approach is ﬂawed. The appreciation of the property value can’t be determined provided the fact that the movement of real estate prices is unpredictable. It’s not necessary that the property prices translate to rental values. Even the lending rate on house loan differs from individual to individual. So considering EMI to be paid instead of property cost in comparison with the rental value gives a clear picture.
ArthaYantra developed a proprietary composite score called ArthaYantra Buy vs. Rent Score (ABRSTM) to objectively address the buy vs. rent argument. ABRSTM is an effort to seamlessly integrate a consumers concern vis-a-vis ability to afford buying and renting and the reason why one should own a house instead of renting. The monthly rent value to EMI comparison in turn deﬁnes the duration of stay in the house. Most of the costly personal ﬁnancial decisions made by the consumers during this period either involve buying something they could not afford, EMI’s that are too high or living beyond the means. ABRSTM is an effort to suggest the best recommended action given the rental value, EMI to be paid and the gross income.
As a part of this research report we have calculated the ABRSTM score across different salary ranges based on the average property prices and rental values of the cities. 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 with property prices of a different region. This makes ABRSTM a powerful tool to logically gauze the pros and cons of renting and buying a house.
Delhi NCR: The low rental values compared to high property prices makes it a place where renting can be easily afforded and the EMI associated with home loan in high. It is advisable to rent for a professional with a salary range of 8 – 25 lakhs
Kolkata: The ABRS score of 75 for a salary range of 8-12 lakhs signiﬁes the fact the rental value is critically high but a professional in the salary range can’t afford to buy. A professional whose salary range is between 13 – 25 lakhs is better off owning a home than renting it.
Mumbai: The score of 65 signiﬁes that though the rents are high, it is advisable to rent because the property prices are also high. The EMI payments to be made in case of ownership are not affordable.
Pune: For a professional with a salary range of 8- 11 lakhs in Pune, it is advisable to rent. A professional with a salary of 12- 15 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. Professionals with a salary range more than 15 lakhs are advised to buy.
Hyderabad: For a professional with a salary range of 8- 9 lakhs in Hyderabad, it is advisable to rent. 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. Professionals with a salary range more than 12 lakhs are advised to buy.
Bengaluru: 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 that of buying by more than 70%. The low rental prices also mean that though a professional with a salary more than 15 lakhs can afford to buy a house, renting is a better option.
Chennai: The score of 55 for a professional with a salary range of 8-19 lakhs signiﬁes that the monthly cost of renting is cheaper than that of buying by more than 70%. The low rental prices also mean that though a professional with a salary more than 20 lakhs can afford to buy a house, renting is a better option.
Based on the current real estate markets, Hyderabad and Pune are the best places to own a house. The property prices and rental values in these two cities are low, thus making them the most affordable places for a professional to rent or own a house. The larger residential spaces offered by Hyderabad and Pune provide a better lifestyle option. The real estate market of Kolkata favors the home owners because of its moderate property prices and high rental value. Though the moderate property prices of Chennai and Bengaluru 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 Delhi NCR make the decision to rent easier. Mumbai is the least affordable city 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. It is important to assess both home for rent as well as homes for sale columns of real estate homes classiﬁeds column before making a decision. The comprehensive ArthaYantra Buy vs. Rent Score (ABRSTM) suggests the decision a professional should take across the seven major cities of India 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 his/her 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 the Seven cities:
Delhi NCR: Golf course Road, Sohna Road, Golf course extension Road, Noida – Greater Noida Express Highway, Noida City, Indirapuram, SafdarGunj Enclave, Rohini Sec – 13, Delhi East, Delhi South, Vasant Kunj.
Kolkata: Alipore, PA Shah Road, EM bypass, Lake town, Behala,Howrah, Jodhpur Park, Jadavpur, Salt Lake City.
Pune: Wakad, Kharadi, Hadapsar, Hinjewadi, Kondhwa, Pimpri – Chinchwad,Kothrud.
Mumbai: Lower Parel, Wadala, Andheri, Ghatkopar, Ghodbunder Road, Kharghar, Chembur, Borivali West, Bhandup West, Mira Road, Kalyan, Virar, Pokaran Road.
Hyderabad: Banjara Hills, Begumpet, Kondapur, Tellapur, Kukatpally, Miyapur, Rajendra Nagar, L.B Nagar.
Bengaluru: Old Madras Road, Indira Nagar, Bellary Road, Hosur Road, Whiteﬁeld, Tumkur Road, Kanakapur Road, Mysore Road.
Chennai: Adyar, Medavakkam, Tambaram, Anna Nagar, Porur, Sholinganallur, Perambur, Kolathur, Chetpet, Ashok Nagar, Chromepet.
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.
Figure1: Graphical Representation of Buy Vs. Rent
Figure 2: Historical values of National Housing Board India Residential Index (NHB Residex)
Figure 3: Average property price and rental values across seven major cities of India
Figure 4: No. of years required to save the corpus for down payment across seven major cities of India
Figure 5: Average no. of sq ft per INR 1lakh across seven major cities of India
Figure 6: Break even horizon for the seven major cities of India
Table 1: Factors associated with home ownership and renting
Table 2: City wise ranking based on the affordability to rent and buy
Table 3: Rent to Buy ratio and Urgency to buy rank of seven major cities across India
Table 4: ArthaYantra Buy vs. Rent Score Explanation
Table 5: ArthaYantra Buy vs. Rent scores for different salary ranges across seven major cities of India.
Table 6 : Other important numbers
National Housing Board, India: www.nhb.org.in
Jones Lang LaSalle: www.joneslanglasalle.co.in
Magic Bricks: www.magicbricks.com
Multiple Primary sources (100+)
To positively impact the future of our customers & their families.
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