Table of Contents
4.1 Historical data of Real estate prices
4.2 Property Cost vs Rental Value
4.3 Down Payment
4.5 Rent to Buy Ratio
4.6 Break Even Horizon
5 ArthaYantra Buy vs Rent Score (ABRSTM)
6. Other Important Numbers
8.Limitations and Concerns
Property cost vs Rental Value: The Residential Property prices in Pimpri-Chinchwad and Kharadi are not being translated to their rental value. Though the average residential property values of Pimpri-Chinchwad is higher than Wakad by 3%, the average rental value is less by nearly 9%. The same case goes with Hadapsar and Kharadi. Though their average residential property values are identical, their average rental values differ by nearly 8%.
Down payment: The years of saving required to afford the initial down payment i.e. 20% of the property price determines how sooner we can buy a house. It takes at least 4 years to save for the required corpus in Pimpri-Chinchwad, Kondhwa, Hinjewadi, Hadapsar, Kharadi and Wakad. In Kothrud a professional has to save for at least 6 years to afford the down payment amount required.
Area: The average number of square feet per INR 1 lakh determines the amount you need to 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 cost of 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 0.39 shows that the rental values in Hadapsar and Wakad are higher and makes them an “immediately buy when you can afford” place. The ratio of 0.33 for Kondhwa gives ownership of house an advantage over renting.
Annual out of Pocket Costs: The annual out of pocket costs in case of ownership include the monthly 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 13 years for Hadapsar and Wakad, 14 for Pimpri-Chinchwad, Hinjewadi and Kharadi, 15 for Kondhwa and above 15 years for Kothrud. 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 in making 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.
Hadapsar : The rent to buy ratio of 0.39 meant that the average rental value of residential property is high compared to the average property price. This makes Hadapsar 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 13th year (fastest of the seven localities).
Hinjewadi : The rent to buy ratio of 0.36 meant that the rental prices are high and it is advisable to buy. The years required to save for down payment (4 years, which is least among the seven localities) and the property prices being in an affordable range makes it the second most affordable locality (out of the seven).
Kharadi : The second highest in terms of average property prices. The rent to buy ratio of 0.35 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.
Kondhwa :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 (4 years, which is least among the seven localities) and the property prices being in an affordable range makes it an affordable locality.
Kothrud : The highest in terms of average property prices. The rent to buy ratio of 0.25 meant 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 seven localities) make it a place to rent.
Pimpri-Chinchwad : The average residential property values of Pimpri-Chinchwad is higher than Wakad by 3%, the average rental value is less by nearly 9%. A rent to buy ratio of 0.35 and moderately high property prices makes it a place to Rent.
Wakad : The rent to buy ratio of 0.39 meant that the average rental value of residential property is high compared to the average property price. This makes Wakad 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 13th year (fastest of the seven localities).
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 Pune: Hadapsar, Hinjewadi, Kharadi, Kondhwa, Kothrud, Pimpri-Chinchwad and Wakad.
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.
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.
4.1 Historical data of Real estate prices
National Housing Board India's Residential Index (NHB Residex) tracks the movement of prices in the different zones of the city.
Figure 1 shows the historical NHB Residex values since its inception in 2007.
Pune as a city has recorded a raise of 100% in its NHB Residex value when compared to the base year of 2007. The East Zone of Pune has recorded the highest raise in the index value by 195%. West zone and Other zone followed up with a 140% and 129% raise respectively. Central and South zone have recorded a raise of 89% and 66% respectively when compared to base year. East, West and Other zones have performed better than the city while Central and South zones have underperformed. Kharadi falls under the East Zone. Kothrud falls under West Zone. Wakad and Hinjewadi fall under Other zone. Pimpri-Chinchwad falls under the Central Zone. Kondhwa and Hadapsar fall under the South Zone.
It is evident that each of the localities under different 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.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 localities of Pune. 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. Kharadi's property prices (INR 4,350,000) as per NHB Residex have grown two fold but still remains almost identical with that of Hadapsar (INR 4,250,000) which recorded a raise of only 66%.Wakad's and Hinjewadi's property prices (INR 3,350,000) as per NHB Residex have grown by 129% but still are identical to that of Pimpri-Chinchwad (INR 3,450,000) and Kondhwa (INR 3,850,000) which have recorded a raise of 89% and 66% respectively. This means that the property prices of Kharadi, Wakad and Hinjewadi 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 seven localities is the anomaly of the property values not being translated to the corresponding rental values. Wakad's property price (INR 3,350,000) is less than that of Hinjewadi (INR 3,350,000), Pimpri-Chinchwad (INR 3,450,000) and Kondhwa (INR 3,850,000) by 0%, 3% and 15% respectively. But the Average rental value of Wakad (INR 11,000) is higher than that of Hinjewadi (INR 10,000), Pimpri-Chinchwad (INR 10,000) and Kondhwa (INR 10,500) by 9%, 9% and 5% respectively. The same case has been observed with Hadapsar and Kharadi. Though their average residential property values are identical, the average rental value of Hadapsar (INR 14,000), is higher than that of Kharadi (INR 13,000) by 8%.
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 localities of Pune. Wakad stands out as the most affordable place to buy while Hinjewadi stands out to be the most affordable place to rent. Kothrud stands out to be the least affordable place in both scenarios. Hinjewadi is the second most affordable place to buy and Pimpri-Chinchwad is the second most affordable place to rent. Kharadi is the second least affordable place to buy and Hadapsar is the second least affordable place to rent. Kondhwa takes the 3rd place on affordability to rent and 4th place on affordability to buy. Wakad takes 4th and Kharadi takes 5th on affordability to rent rankings. Pimpri-Chinchwad ranks 3rd and Kondhwa ranks 4th on affordability to buy. Hadapsar takes the 5th place in affordability to buy.
The rank of affordability to Rent does not match with the rank of affordability to buy in the case of any of the seven localities. This means that the high/low property prices of the seven 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.
The average property prices translate to the number of year's 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 to buy a house in Pimpri-Chinchwad, Kondhwa, Hinjewadi, Hadapsar, Kharadi and Wakad in 4 years. In order to own a house in Kothrud professional has to save for 6 years.
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 seven major localities in Pune.
Kothrud being the costliest locality offers a space of 13.64 sq ft per INR 1 lakh. Wakad and Hinjewadi being the cheapest localities offer a space of 29.85 sq ft per INR 1 lakh. Pimpri-Chinchwad offers a space of 28.99 sq ft per INR 1 lakh. This means that for the same amount of living area, a professional who wants to buy a house in Kothrud has to spend at least 2 times the amount he spends in Wakad, Hinjewadi and Pimpri-Chinchwad. Kondhwa offers a space of 25.97 sq ft per INR 1 lakh. Hadapsar and Kharadi offer a space of 23.53 sq ft and 22.99 sq ft per INR 1 lakh respectively. 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.
Kothrud 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 75%. Kondhwa and Pimpri-Chinchwad also have low rent to buy ratios. Hadapsar and Wakad have 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 0.39 and the average monthly out of pocket cost of Owning house being moderate, rents being relative higher Hadapsar and Wakad rank high in the urgency to buy ratio. Hinjewadi and Kharadi are also ranked high on urgency to buy rank
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 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 matchup of cost of ownership and renting in Hadapsar and Wakad is 13 years. The cost matchup in Pimpri-Chinchwad, Hinjewadi and Kharadi happens in 14 years. In Kondhwa, it takes 15 years. The costs don't matchup in the case of Kothrud. 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.
Hadapsar : A professional with a salary range of 8-10 lakhs is better of renting. Even though rents are high, he really can't afford to buy so he should rent. 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 a few adjustments to the current lifestyle in order to afford the additional amount for EMI payments. The professional with a salary range of more than 15 lakhs are advised to buy.
Hinjewadi : A professional with a salary of 8 and 9 lakhs is better of renting. A professional with a salary of 10 and 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 12 lakhs are advised to buy.
Kharadi : A professional with a salary range of 8-10 lakhs is better of renting. Even though rents are high, he really can't afford to buy so he should rent. 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 a few adjustments to the current lifestyle in order to afford the additional amount for EMI payments. The professional with a salary range of more than 15 lakhs are advised to buy.
Kondhwa : A professional with a salary range of 8 lakhs is better of renting. A professional with a salary of 9-14 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.
Kothrud : 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 buying by more than 70%. A professional with a salary range of more than 20 lakhs cannot afford to rent or buy. But the low rental prices compared to the EMI also meant that though the professional cannot afford it renting is a better option.
Pimpri-Chinchwad : A professional with a salary range of 8 and 9 lakhs is better of renting. A professional with a salary of 10 and 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 12 lakhs are advised to buy.
Wakad : A professional with a salary range of 8 and 9 lakhs is better of renting. A professional with a salary of 10 and 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 12 lakhs are advised to buy.
Based on the current real estate markets, Hinjewadi and Wakad are the best places to own a house. The property prices and rental values in these two localities are low, thus making them the most affordable places for a professional to rent or own a house. The larger residential spaces offered by Hinjewadi and Wakad provide a better lifestyle option. The real estate market of Hadapsar and favors the home owners because of its moderate property prices and high rental value. Though the moderate property prices of Pimpri-Chinchwad and Kondhwa 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 Kharadi make the decision to rent easier. Kothrud 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 seven major localities of Pune 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 Pune:
Wakad, Kharadi, Hadapsar, Hinjewadi, Kondhwa, Pimpri-Chinchwad and Kothrud..
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.
Figure 1: Graphical Representation of Buy Vs. Rent in Pune
Figure 2: Historical values of National Housing Board India Residential Index (NHB Residex)
Figure 3: Average property price and rental values across seven major localities of Pune
Figure 4: No. of years required to save the corpus for down payment across seven major localities of Pune
Figure 5: Average no. of sq ft per INR 1lakh across seven major localities of Pune
Figure 6: Break even horizon for the seven major localities of Pune
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 seven major localities of Pune
Table 4 : ArthaYantra Buy vs. Rent Score Explanation
Table 5 : ArthaYantra Buy vs. Rent scores for different salary ranges across seven
major Localities of Pune.
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+)
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