Thursday, 20 November 2014 06:53

Buy Vs Rent Report - 8 Cities-2015

Written by ArthaYantra

  

 

Summary:

 

The current edition of Buy vs Rent research covers 8 major cities across India.

 

Ahmedabad: Ahmedabad is now the cheapest city to rent a property unlike the previous year.It also stands 2nd in affordability to buy ratio. Buying a home would be a better option for individuals with income above 12 lacs.

 

Bengaluru: Over the years the city of Bangalore is favored for renting than buying which is clearly indicated by higher increase in rents as compared to the property prices. The average property rents increased by 37.51% whereas property prices increased by 12.64%. It stands 4th in term of affordability to rent amongst the 8 cities. It is suitable for professionals having income more than 15 lacs to buy the property in the city.

 

Chennai: Chennai experienced a decline in property prices in the last 3 years whereas the rentals have increased by 10%. Due to the price shift, the affordability to rent has gone to 6th from the last year's rank of 4th .More or less the property prices remained stagnant with a marginal decline by 3%. Suitable for professionals with income 20 lacs or above. Delhi NCR:City with a population consisting of mostly migrants have become expensive to rent as people prefer to rent as compared to buy. The rentals have increased by 29.05% which is the second highest after Bangalore. Due to higher rentals the affordability to rent rank has gone down to 7th from 6th. The affordability to buy rank remains 7th as the city has the second highest property rates in the county. It is recommended to rent the property for all the professionals.

 

Hyderabad: Hyderabad maintains the reputation of being the most affordable place to buy a property. The 10% decline in property prices assist in keeping the affordability to buy at the top most rank. However the rentals increased marginally upwards in the past 3 year's period. Recommended to buy for all the professionals having income above 8 lacs.

 

Kolkata: During the past three years the property prices in Kolkata slipped by 2.7% . The rents also went down by 8.5% making the city more affordable to rent and as well as buy as compared to previous year. The city is now 3rd in affordability to buy rank. It has now become affordable for professionals with income of 12 lacs or more to buy a home 

 

 

Mumbai:Mumbai remains the most expensive city to either buy or rent a home for the third consecutive year. Over the period of 3 years the property prices have increased by as much as 49.9% which is the highest amongst all the cities. The property trend does indicate increase in demand to buy but it is highly recommended to rent for all the professionals.

 

Pune:Pune have seen second high increase in property prices after Mumbai at 38.9% rise in past 3 years. The rents have also increased by 21.2%. Such high increase in prices has changed the affordability to buy rank to 5th from the last years 3rd. Also the affordability to rent rank slipped to 4th. Professionals with salary below 15 lacs are recommended to rent the property.

 

 

 

1.Introduction:

 

Over the years buying has become an 'Indian Dream'. A lot of sentiments are attached when it comes to owning a home for the family. However, with the increasing real estate prices and cost of raw materials makes them think twice before taking such decisions. Also with the buying decision there are multiple factors like income tax savings, property tax etc. which needs to be considered. The purchase of a property is also looked as a means of capital appreciation and for a lot of Indians it's a safe haven for investments. But the reality might be different from what they think especially in post 2008 era.

Other alternative to buying is the renting of the property, which does not expensive as buying initially. To a lot of professionals, renting could be a more feasible option as it provides flexibility to rent a property as per their lifestyle as some people do not intend to live in a city for a longer period of time or in case of someone whose profession does not allow them to settle down in one city for a long time. For too long buying or renting a home has been a qualitative question. ABRS report makes it into clear quantitative framework on buy vs rent decision.

 

Cash Flows

 

The first and foremost decision would depend on the impact on the cash flows each option would have. To buy a property one has to go through the down payment for the loan, EMI to be paid, property taxes and the regular maintenance and repair costs. Renting would attract the monthly payment towards rent along with the maintenance cost. The incremental rents in the subsequent years should not be ignored as the rents are most likely to increase year on year. The savings after such fixed payments would derive whether owning or renting would a feasible option. 

 

Tax Savings

 

The net savings after bearing the cost of ownership and renting would have major impact on the tax savings for each of the decision. For some cases it becomes a deciding factor as the tax savings through Section 24 B and Section 80 C of income tax would reduce the net payments towards the EMI's. On other hand, renting would also save your taxable income as the major or whole portion of the rent paid can be saved by claiming it under Section 10 as HRA. In short both options would help the tax savings; the comparative savings for the longer run would give a real picture on what should be done. .

Taking a decision on real estate can become more complicated than it looks, in order to simplify that Arthayantra is presenting the third Version of Buy vs. Rent report for 8 major cities in India which deeply analyzes the changes in trends of the property prices and their rental values over the past three years. It also studies how convenient it would be for working professionals to buy or rent a property considering various aspects and help them take a sound financial decision. 

 

2. Methodology:

 

Property price 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 the 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 is 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. This year also saw a 50% increase in the localities covered city. This has been done to increase the coverage area and reduce error rate. 

 

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:

 

 4.1 Historical data for NHB Residex: 

 

In the Indian real estate growth story, Chennai typically is not spoken about. However, the NHB index which indicates real estate price growth across Indian cities shows Chennai index at 349 which has been seen the highest growth since its inception in 2007.

 

Pune is at distant second place having experienced an increase of 132 basis points. On the other hand, financial capital Mumbai's real estate prices increased by 129 basis points. Cities like Delhi, Ahmedabad and Kolkata's index value have doubled (99, 109 and 106 basis points respectively) during the 7 year period starting from 2007. For the home buyers, Hyderabad proves to be the cheapest as it has shown negative growth ( - 5 basis points) followed by Bangalore whose Real estate index increased by just 7%.

With the given analysis of real estate price trends the report aims to provide brief study of the real estate price change during last 3 years (2012 – 2014) and facilitate the decision making for the buyers of home.

 

4.2 Property cost Vs. Rental Value:

 

The key parameter in determining whether to buy or rent a home is the property cost vis-à-vis the rental value. In this study Arthayantra compares property prices and rental values of 1000 sq feet ready to occupy house across eight major cities. The diagram below shows the findings -

 

The average property prices in the city of Delhi ( Rs. 1.1 Crore) are almost equal to the average property prices of Kolkata and Pune combined( Rs. 59.4 and Rs. 49.9 lacs). Mumbai remains the city with the highest residential real estate prices followed by Delhi. These two cities are the least affordable for a middle class home seeker. Chennai which showed highest increment in real estate prices as per NHB residex has the 3rd highest property prices ( Rs. 69.5 lacs) in these 8 cities.

As far as the average rents are concerned, Mumbai has the average rent of Rs. 32250 which corresponds with the property rates as the highest when compared to other 7 cities. Ahmedabad comes out as city with most affordable rentals with Rs. 10250 marginally lesser than Hyderabad (Rs. 10640). Interesting fact is that some cities having comparatively lower property rates have higher rents. Kolkata whose average property prices were lower as compared to Pune has higher rent as compared to the latter (Rs.16308 vsRs.14545). The rentals are even closer to cities like Chennai (Rs. 16567) and Bangalore (Rs.16758). These factors make buying a home more attractive in Kolkata than renting. Hyderabad remains the most suitable city to either buy or rent a property with the second lowest average rent and lowest property prices.

 

 

Change in Property Rates (2012‐2014) :

 

Trends in the last 3 years period starting 2012 have shown a different picture as depicted by the 7 year growth index in NHB. Out of the 7 cities(Ahmedabad was not a part of our research for 2012)Mumbaihas experienced highest gain in the real estate prices in the years 2012-2014 with 49.87% increase, followed by Pune (38.91%) and Bangalore (12.64%). Chennai which had the highest rise is sixth amongst the seven cities with a negative growth of -2.97% during last 3 years. Hyderabad also showed negative trend in past 3 years emerging as the city with the cheapest real estate prices. The decline in value was also seen in Kolkata. The 3 year trend clearly shows that each market is behaving differently. From ainflation adjusted growth perspective, most cities in India has lost value. The only ones that are in the positive territory are Mumbai and Pune. Despite Mumbai being expensive, people living there prefer buying more than renting

 

Cities like Bangalore, Chennai and Delhi had incremented rentals more than proportionately compared to the property price rise. Bangalore has seen the largest increase in rentals at 37.5% over the last three years. This growth dwarfs the asset growth in the city. Delhi has the second highest growth; even here hare have shown increase in rental yields when compared to the asset appreciation. This indicates that the professional's behavior is more inclined to buying than renting.

The change in rentals in other cities was unlike the pattern which was shown in the property price changes. Hyderabad indicated a marginal increase in rental of 1.93% as compared to the decline which was shown in the property prices except Kolkata which complimented the property price change pattern in past 3 years with a decrease of 8.5%.

 

4.3 Affordability to buy and Affordability to Rent ranking:

 

Assuming the income factors for a middle class family and their savings ratio and factoring in with the rental and buying prices of properties in the 8 cities, Hyderabad comes to be the most affordable city to buy a property for the third straight year. The decline in the buy prices and a marginal increase in rental prices helped the city to remain on top in terms of affordability..

 

After the introduction of Ahmedabad in the year 2013, the city has now replaced Hyderabad as the most affordable place to rent as per the new ranking. Mumbai easily managed to maintain its familiar position as the most expensive to either buy or rent for the second straight year whereas Chennai became more expensive to rent at 6th rank pushing Delhi further below to 7th rank. Kolkata after going through a negative growth phase in property prices have become more economical for both buy and rent as compared to the last year. ..

When it comes to affordability to buy, most of the cities managed to maintain same position as on last year except Kolkata and Pune who replaced each other at 3 and 5 respectively.

 

4.4 Area Covered:

 

For every middle class Indian spender, quantity and economy is one of the biggest factors behind every purchase decision. Just like the mileage of a vehicle i.e Kilometers covered per liter of fuel is very essential, area covered per lac rupees spend for a home is also very important aspect to consider. This would facilitate the investor to make a decision especially when they want a place for a joint family and sometimes even a nuclear family. With the change in property prices during the past three years the area covered per lac rupee spent also changes accordingly. This change in comparison with the previous 2 years is depicted in the below figure.

 

Mumbai being the costliest city amongst all has the least coverage per lac which is just 20% of Hyderabad which proves to be the most economical city. It remains the most economical for the third consecutive years. Kolkata improvised significantly by providing 28% more area as compared to previous year. Ahmedabad becomes second most economical covering 20.5% more area as compared to 2013. Pune becomes expensive year on year as the area covered reduced by 9% from the previous year. Professional from Delhi would get half of the area in Bangalore which stands5th when it comes to the area covered. From lifestyle perspective consumer from Hyderabad Ahmedabad, Kolkata Bangalore tends to have large house to buy as well as rent. 

 

4.5 Down payment:

 

Taking a loan is the only option left for working professionals to fulfill their dream to buy a home. The banks have also tightened the rules by approving loan equivalent to 80% of the value of property. This forces the homebuyers to arrange for the down payment for the loan.Assuming the savings rate of 25% of income( post income tax and property tax of Rs 1.5%) and the income increment of 10% year on year, the time required to accumulate the corpus for the down payment is presented in the below figure –.

 

Professionals living in Hyderabadwould take least amount of time (3.4 years) to accumulate the down payments for the home loan followed by Ahmedabad (4.1 Years). Overall the required number of years has been reduced in all cities comparedto the previous year's findings except Pune and Mumbai. Delhi has shown some improvement from the last year as the number of years has fallen by .4years from the previous value of 10.1 years. Similar improvement can be seen in Kolkata with a change of1.2 years. Time taken to accumulate the down payment amount in Mumbai is more than thrice of Hyderabad. The Mumbaikars would have to wait for a very long time to by their dream home. Despite this uphill task, most people are becoming house owners. This is largely driven by the ability of the professional to finance their home from friends and family instead of just relying on savings, loans etc. This has also pushed the personal finance situation of many families to the brink.

 

4.6 Urgency to Buy Ratio:

 

Urgency to buy ratio is a ranking that enables professionals to take an objective decision to either buy or rent. The urgency to buy ratio indicates what extra payment one has to pay every month if the property is purchased instead of rented. This ration helps in understanding whether the rental yields are in line with the property prices in a city. The average monthly cost of renting is derived from the sum of rents and maintenance cost whereas monthly cost of buying is calculated by adding maintenance cost with the monthly EMI's. It is a good means to understand if property prices are inflated.

 

Mumbai has the least Rent to Buy ratio .22 which means that renting home is 78% cheaper than buying. Delhi which had a lowest ratio in the previous year has bettered its position to 7. Kolkata has the highest ratio of .37 which would enable the home buyer to take the decision to buy if they can afford the EMI cost per month.

 

 

4.7 Cash Flow Break Even Analysis:

 

Cash flow break even analysis explores the cash outflow for buy vs rent. The intersection of cash outflows due to rent or buy in the future is the break-even point.

The study will also give another dimension to the buying or renting decision. The city where the breakeven year comes before the loan tenure expires is supposed to be more suited for buying whereas the city where the breakeven year is not attained before 15 years, renting would be more suitable. In comparison with the last year, a lot of changes have occurred in the tax treatment of ownership of the property which is also been taken into account.

For example the interest component of the EMI is subject to deduction u/s 24B and the principal part u/s 80C of Income tax act. In case of renting, benefit is available under house rent allowance. Using these parameters one can identify the time period where the cost of renting would be equal to the cost of buying within the loan tenure. The recent change introduced due to finance bill will also have some impact on the decision.

 

 

 

Hyderabad having the low rentals is the most suitable city for buying with the break- even year of 13 years. This was mainly due to drop in property prices during the past three years. Kolkata comes second where the break -even year is 14.This is mainly due to drop in the property prices. Ahmedabad would be more suitable for renting as of now due to very low rents. For the rest of the cities the time taken to equalize the cost of renting to buying is over 15 years which makes them more suitable for renting. This indicated more inclination towards renting.

 

5. ArthaYantra Buy VS. Rent Score (ABRS) :

 

The property price and rental value of the place determines if 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. 

 

 

 

 

6. Comparison with previous years Bengaluru - Rising Rental Yields:

 

Over the last 3 years, Bengaluru has seen relatively higher growth in the rental rates compared to the property prices. Rental values in the area increased by 37.51% compared to 12.64% increase in the property prices. The NHB Residex value for the Jan – March 2014 quarter is recorded at 107, which is 2 base points less than the index value recorded during the same quarter of last year. Among the 8 cities, Bengaluru is ranked as third most affordable place to rent and fourth affordable place to buy a property. The years of saving required for the down payment in Bengaluru has moved down marginally to 5.8 from 5.9 when compared to last year. A new home buyer in Bengaluru, now gets 2.00% more carpet area compared to the previous year, but, gets lesser carpet area by 11.20% when compared to 2012.The city being the most preferred one for the immigrants as it provides favorable working opportunities to them, renting is been more prominent option rather than buying the property. This is well indicated by the superior increase in rentals as compared to the property prices in past few years.The ABRS values of Bangalore recorded during this year increased to 90 making the professionals who fall under salary range of 20 lacs, affordable to buy a property when compared to the values recorded during the previous year.For professionals under 20 lacs income, Bangalore is the city where renting is more optimal financially. There are micro markets such as Mysore Road and Old Madras Road where it affordable to buy even at salary below 20 lacs. However, professionals have to make lifestyle compromises and adjust to the higher commitment. The break- even year where the cost of owning equals the cost of renting is more than 15 years for professionals having annual income of less than the recommended salary range for buying. The last year's figure was 15 years.

 

 

Chennai - Plateau Market:

 

The NHB Residex value for the Jan – March 2014 quarter is recorded at 349, which is 39 base points higher than the index value recorded during the same quarter of last year. Rental value of the areas over the three periods has increased by 10.75% whereas the property prices have decreased by 2.97%. Among the 8 areas, Chennai is ranked as 6th affordable place to rent and as well as buy. With respect to affordability of renting, Chennai's ranking has increased to 6 when compared to previous years ranking of 4, which means it has become more costly when compared to the earlier years. On the other hand, affordability to buy remains on the same place but the years of saving has come down to 6.5 from 7 compared to last year due to decline in the real estate prices and increment in the savings due to change in tax benefit structure. A new home buyer in Chennai, now gets 9.43% more carpet area when compared to last year and 3.08% more area when compared to 2012. The ABRS values of Chennai recorded during this year increased to 80 making the professionals who fall under salary range of 20 – 25 lakhs, either to buy a property/rent it out compared to the values recorded during the previous year. However, in case if one having income below that recommended level choose to buy a home in Chennai can choose areas like Sholinganallur and Kolathur where the property prices were much lower than the average price in the city and hence would be more affordable to buy.The break- even year is more than 15 matching the last years number.

 

 

Delhi - Rents are increasing:

 

Delhi continues to be second most expensive city to own a home in India. The NHB Residex value for the Jan – March 2014 quarter is recorded at 199, which is 3 base points lesser than the index value recorded during the same quarter of last year. The average rental value of Delhi over the last three years has increased by 29.05% whereas the average property prices increased by just 2.59% over the same period. Due to the increase in the rental values, Delhi stands at 7th place in the most affordable place to rent category. For an Individual with annual income of 8 Lakhs to buy a “Dream House” will require 9.70 years to accumulate fund for the down payment. A new home buyer in Delhi, now get 4.43% more carpet area compared to the previous year, but, will end up getting less area by 2.50% when compared with 2012. The ABRS score for professionals with a salary range of 8 – 25 lakhs remains in between 55 – 67.50 making it a place to rent for majority of such individuals. The residents are preferring areas in the NCR region which have comparatively lower prices. The areas like Greater Noida Expressway and Indirapuram (Gaziabad) have the lowest prices in the region but living in these areas would increase the travel time to the workplace and hence could cause inconvenience. The break- even year figure also suggest the same for the earning professionals. 

 

 

Hyderabad – The Affordable Market :

 

Hyderabad continues to be the most affordable real estate market among the major cities of India. The NHB Residex value for the Jan – March 2014 quarter is recorded at 95, which is 7 base points higher than the index value recorded during the same quarter of last year. Rental values in the area increased by 1.93% over last 3 years but reduced by 11.35% when compared last year. On the other hand, property prices are continuing to decline by 5% on an average in the past 3 years, making Hyderabad the most affordable to place to buy a property among the 8 cities picked up for this study, but, moves down to 2nd place in the most affordable place to rent a home category. The saving required to afford buying a property in Hyderabad has declined to 3.40 years from 3.80 years in 2012. Based on the previous year prices, a middle professional needed to save for 4.10 years. A new home buyer in Hyderabad, now gets 23.38% more carpet area compared to the previous year and 11.22% when compared to 2012.The ABRS score for professionals with annual income of 10 Lakhs has increased to 90 from 77.50 as recorded in the previous year, making Hyderabad the most affordable place to buy among the eight places studied. The most affordable regions in the city are Uppal and Rajendra Nagar. The home buyers would recover the cost in less than 15 years which shows a green flag to buy the property.

 

 

Kolkata – Contraction in rentals :

 

Real estate in Kolkata scored negative both in terms of property prices and rental prices.The fall is the steepest amongst all the cities . The average rental value and property value of the place has decreased by 8.55% and 2.69% respectively over the last 3 years. However, the NHB Residex value for the Jan – March 2014 quarter is recorded at 206, which is 9 base points higher than the index value recorded during the same quarter of last year. Among the 8 cities, Kolkata is ranked as 5th affordable place to rent and 3rd affordable place to buy a property. The years of saving required to afford buying a property in Kolkata has decline to 4.80 from last year's stats of 6.00. Based on 2014 analysis, a new home buyer in Kolkata now gets 28.59% more carpet area compared to the previous year, but, when compared to 2012, the carpet area has just increased by 2.77%. The ABRS score of 77.50 suggests that, for an individual whose annual salary is 12 Lakhs is considered to be in a Neutral Zone, mostly advised to rent. The professional whose salary range is between 13 – 25 lakhs is better off owning a home than renting it. These values remain in sync with the values recorded in the previous year. However the break even figure went to 14 years as compared to 11 years in 2013, but it would not make much impact on the recommendation to buy the property. The outer regions of city like Howrah and Jadhavpur offer lower real estate prices which could be affordable for the individual's having lower income.

 

 

 

Mumbai – Zooming real estate price:

 

Mumbai still remains the costliest real estate market in India for 3 consecutive years. The NHB Residex value for the Jan – March 2014 quarter is recorded at 229, which is 7 base points higher than the index value recorded during the same quarter of last year. While the rental prices have increased by 13.07% in the last 3 years, whereas, the property prices have increased by a whopping 49.87%. Among the 8 cities, Mumbai stands as least affordable place in case of both renting and owning a house. The Mumbai resident still prefer to buy even if they have to travel far for work which indicates the annual increment in property prices to be far higher than the increase in annual rents. The years of saving required to afford buying a property in Mumbai has increased to 13.30 from 9.60 when compared to 2012 stats. Based on the previous year prices, a middle professional needed to save for 11.30 years. A new home buyer in Mumbai now gets 18.67% lesser carpet area compared to the previous year and 33.33% less area when compared to 2012. The ABRS for individuals with a salary range of 8 – 25 lakhs remains at the bottom with a score of 55 making Mumbai the costliest places to own a property in India. This is largely due to higher increase in the property value compared to increase in rental value.The recommendation is well supported by the break even figure of 15+ years. For the income group of 20-25 lacs areas like Mira Road and Kalyan could be affordable to buy.

 

 

Pune – Both real estate and rental increase:

 

Pune still largely remains a buyer's market with the property prices increasing at a higher rate than rental rates. The rental prices in the area have increased by 21.21% over the last 3 years when the property prices have increased by 38.91%. The NHB Residex value for the Jan – March 2014 quarter is recorded at 232, which is 11 base points higher than the index value recorded during the same quarter of last year. Compared to the earlier years, Pune has become costlier, both in renting as well as owning the property. Among the 8 cities, Pune, now stands at fourth most affordable place to rent while it stand fifth in terms of affordability to buy compared to last year's ranking of second and third respectively. Being the neighbor of the most expensive city (Mumbai) and due to comparatively lower property prices it became a hot destination for the property purchase during the past 2-3 years. It is well represented by the increase in property prices. The vast improvement in job opportunities in the past also contributed a lot to the property prices as lot of professional were keen to buy the property and intended to settle down in the city. The years of saving required to afford buying a property in Pune has increased to 5.60. Based on the previous year prices, a middle professional needed to save for 5.20 years. A new home buyer in Pune now gets 9.27% lesser carpet area compared to the previous year and 28% less area when compared to 2012.Due to the rise in the property prices, the ABRS values of Pune recorded during this year decreased to 80 making the professionals who fall under salary range of 20 – 25 lakhs, either to buy a property/rent it out as opposed to 90 for professionals earning more than 15 lakhs during the last year. The incremental rates also had an impact on the break-even year which is not looking achievable during the loan tenure which is unlike the last year figure of 15. Some areas like Hadapsar and Kondhwa were found to have cheaper property rates and proven to be affordable for the individuals having income between 10-20 lacs per annum.

 

 

Ahmedabad – Waiting to be found:

 

Ahmedabad was the new addition in the last year's buy vs rent report by ArthaYantra. The NHB Residex for Jan – March 2014 quarter has increased by 17 points to end up at 209 compared to last year's value of 192 in the same quarter. Among the 8 cities, Ahmedabad is the second most affordable place to own a house after Hyderabad and stands at the top of the table when it comes to renting a home. This year, middle income individual needs to save for at least 4.10 years to afford the down payment for the house compared 4.80 year's last year. The city also offers good value for buyer's money who can get around 24.32 sq. ft. for every 1 lakh spent which is 4.14 sq. ft. more compared to last year. The ABRS value of 87.5 and higher for individuals who earn more than 12 lakhs per annum signifies that such individuals should opt for buying a property over renting in Ahmedabad.However , the significant decline in rentals shows a different picture altogether as the break even becomes difficult during the loan tenure. Amongst all the regions Vastral and Vejalpur were the most affordable places to own a home.

 

 

7.Conclusion:

 

The ABRS calculator does provides assistance in making a rational decision while purchasing a property but there are factors which are region specific and are very important to understand. A lot of cities have indicated indifferent behavior from what the statistics suggests but such decision are driven by factors which cannot be generalized for all the cities. Mumbai being the most expensive and unaffordable city to buy is still preferred by the individuals for buying the property. Delhi and Bangalore have become a popular choice for renting which is clearly justified by the immigrant population contributing to the increased demand for the rental properties. Pune also lies in the same category but being the nearest to the costliest city in the country it is looked as an alternative residential place which to an extent, increased the property prices in the city. Ahmedabad and Hyderabad has emerged as a heaven for the salaried individuals as the prices are very much as per their income levels.

The changing market scenario which might have some favorable impact on the interest rates for the loans could make buying a bit easier in the coming years as the rate of interest are expected to go down. The positive outlook on the future of Indian markets would also impact the job markets and hence the income levels, which might increase the possibilities to of property buying. Acquiring a property involves long term commitments and adjustments. Any decision taken in haste could cause long term impact on the personal finances. It is very important to analyze both sides of buying and renting before going forward.

 

8. Limitations:

 

The data is related to following localities of the eight cities:

Delhi NCR: Golf course Road, Sohna Road, Golf course extension Road, Noida – Greater Noida Express Highway, Noida City, Indirapuram, Faridabad, Safdarjung Enclave, Rohini Sec – 13, Delhi East, Delhi South, VasantKunj, Friends Colony, Shalimar Bagh, VasantKunj, Dwarka, MayurVihar Phase 1.

Kolkata: Alipore, PA Shah Road, EM bypass, Lake town, Behala, Howrah, Jodhpur Park, Jadavpur, Salt Lake City,Maniktla,Bhavanipur,Dhakuria, Behola.

Pune: Wakad, Kharadi, Hadapsar, Hinjewadi, Kondhwa, Pimpri–Chinchwad, Kothrud, Kasbapeth, Kharodi,Pashar,Chinchwad.

Mumbai: LowerParel, Wadala, Andheri, Ghatkopar, Ghodbunder Road, Kharghar, Chembur, Borivali West, Bhandup West, Mira Road, Kalyan, Virar, Pokaran Road, Malabar Hills, MatungaEast,BandraWest, Mulund, Dahisar.

Hyderabad: Banjara Hills, Begumpet, Kondapur, Tellapur, Kukatpally, Miyapur, Rajendra Nagar, L.BNagar, Tolichowki,Himayatnagar,Tarnaka,Uppal, Srinagar Colony.

Bengaluru: Old Madras Road, Indira Nagar, Bellary Road, Hosur Road, Whitefield, Tumkur Road, Kanakapur Road, Mysore Road, Lavella Road, Benson Town, Vijaya Nagar, Madibana.

Chennai:Adyar, Medavakkam, Tambaram, Anna Nagar, Porur, Sholinganallur, Perambur, Kolathur, Chetpet, Ashok Nagar, Chromepet,Thriuvanmiyur,Nehru Nagar,Numgambakkam.

Ahmedabad: Motera,Gota, Satellite,Maninagar,Thaltej, Bodakdev, Vatva,Ambawadi, Sola Road, Chandkheda Gam, Vejalpur, Shilaj, Vastral.

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 80 C is considered as INR 1.5 lakh both in the case of home ownership and renting.

The tax benefits under section 24B for home buyers is considered as 2 lakhs.

The HRA benefits in case of renting is considered as per the taxation rules based on average rental prices.

However, the tax calculation for the previous years is taken as per the rules pertaining to the respective previous years.

Copyright

9. Appendix - I

 

FIGURES:

 

 

Figure1: National snapshot

Figure 2: Historical values of National Housing Board India Residential Index (NHB Residex)

Figure 3: Average property price and rental values across eight major cities of India

Figure 4: Number of square feet covered per one lakh of amount paid

Figure 5: Number of years required to save the corpus for down payment

Figure 6: Break even horizon for eight major cities of India

 

TABLES:

 

Table 1: Affordability to buy rank

Table 2: Affordability to rent rank

Table 3: Urgency to buy rank

Table 4: Factors associated with home ownership and renting

Table 5: Arthayantra Buy vs Rent score explanation

Table 6 : Arthayantra Buy vs Rent Score for different income levels across eight major cities

Table 7 : Important numbers to look before making a decision.

 

 

SOURCES:

 

 

National Housing Board, India: www.nhb.org.in

Jones Lang LaSalle: www.joneslanglasalle.co.in

Makaan: www.makaan.com

Commonfloor: www.commonfloor.com

Magic Bricks: www.magicbricks.com

99 Acres: www.99acres.com

Multiple Primary sources

 

 

 

 

ArthaYantra is an online personal finance advisor which makes full service wealth management grade financial advice accessible to middle income families instantly.

Friday, 13 December 2013 03:47

Buy Vs Rent Report - 8 Cities-2014

Written by

  

 

 

 

 

 

 

 

Table of Contents

Summary


1. Introduction 5

2. Methodology 6

3. Assumptions 7

4. Findings

4.1 Historical data of Real estate prices 8

4.2 Property Cost vs Rental Value 9

4.3 Down Payment 11

4.4 Area 12

4.5 Rent to Buy Ratio 13

4.6 Break Even Horizon 14

4.7 Comparision with 2012 15

5 ArthaYantra Buy vs. Rent Score (ABRS) 23

6. Conclusion 26

7. Limitations 27

8. Appendix 28

 

Summary

The current edition of Buy vs Rent research covers 8 major cities across India.

Ahmedabad: Ahmedabad is the 2nd most affordable city to buy a home among the 8 cities. However, on the scale of affordability to rent, the city is ranked 5th signifying higher rental value of the city. As per the current average property prices and average rental value of the city, individuals earning 8-12 Lakh p.a are recommended to rent. Buying a home is a better option for individuals with annual income of more than 12 Lakhs.


Bengaluru: Over the last year, Bengaluru has seen relatively higher growth in the rental rates compared to the property prices. Bengaluru is ranked 4th on affordability to buy and 3rd on affordability to rent. Individuals earning up to Rs 15 Lakhs are advised to rent the home whereas Individuals with annual income of 15 – 19 Lakhs are in the ABRS neutral zone (can buy or rent). Individuals earning more than 10 lakhs are advised to buy a home.


Chennai: Rental value in Chennai has increased by 14% whereas the property prices have increased by 6%. Chennai is ranked 5th on affordability to buy and 4th on affordability to rent. Individuals with annual income of less than 20 Lakhs cannot afford buying a home and are advised to opt for rent. Individuals with annual income of Rs 20 – 24 Lakhs are in ABRS neutral zone whereas individuals earning more than 24 Lakhs are in affordable zone to buy a home.


Delhi NCR: Delhi stands as the second costliest real estate market in India. However, the higher property prices did not translate to high rental prices of the city. Due to its relatively lower rental value compared to Kolkata and Mumbai, Delhi is the 6th affordable place to rent. The ABRS score for individuals within the salary range of 8 – 25 Lakhs remains at 55, making Delhi a place to rent.


Hyderabad: Hyderabad continues to be the most affordable (ranked 1) city both in terms of buying and renting a home. Only people earning less than 8 Lakhs p.a are advised to rent. Individuals in 8-10 Lakhs p.a bracket fall in ABRS neutral zone i.e they can buy or rent. Those earning more than 10 Lakhs are advised to buy home in Hyderabad.


Kolkata: Real estate in Kolkata scored substantially both in terms of property prices and rental prices. The average rental value and property value of the place has increased by
24% over the last year. The report ranks Kolkata 5th on affordability to buy and 7th on affordability to rent highlighting high rentals in Kolkata. Individuals with annual income of less than 14 Lakhs are advised to rent whereas individuals earning more than 14 Lakhs are advised to buy a home.


Mumbai: Mumbai remains the most costly real estate market in India. It is ranked as the least affordable city both in terms of renting and buying a home. The ABRS score of 55 for individuals earning 8 – 25 Lakhs also confirms the fact that one can afford to rent but cannot afford to buy a home in Mumbai.

Pune: Pune remains as the second most affordable place to rent. When it comes to owning a home, it is ranked 3rd among the eight cities.  While the individuals with annual income up to 15 Lakhs are advised to rent, individuals in the salary range of 15 – 19 Lakhs can chose

 

 

 

1. Introduction

A decision to buy a home depends on both financial and more importantly emotional factors. Factors such as social standing, secure environment for children and a comfortable place where people can grow old are some of the emotional factors that influence the buying of a home. When considering these emotional factors people tend to ignore the financial implications that need to be considered before making an important decision like buying a home.

Buying a home is also looked at as a means for financial security, creation of wealth and appreciation of property rates. Renting on the other hand is treated as an expense and not always looked upon as an advantage. But in reality renting a space can prove advantageous for flexible lifestyle, give options of higher mobility and is easy on pocket when compared to the EMI that need to be paid when owning a home.

Choosing between buying a home as opposed to renting one can prove to be a daunting a task especially from the perspective of personal finance. Is it financially prudent to buy a house? Can there be an advantage to renting a place to live? Will there be any lifestyle changes that one needs to accommodate? These are some of the questions that come up when arriving at a decision to buy a home. This annual research report attempts to answer some of these questions . As part of this research we aim to objectively address the major factors which impact the decision of buying versus renting.

There is a common assumption that the residential property rates always appreciate and hence investing in them always gives good returns. However this is not always true as the returns offered from real estate are not always consistent and also the appreciation of a residential property is dependent on several factors. It is not easy for individuals to determine the rate at which the residential property is going to appreciate or depreciate. There is a school of thought that supports the argument that real estate market's returns are similar to equity markets when it comes to predictability. They are simply not predictable.

Tax saving is another reason that is considered when buying a home. If one avails a loan to buy a home, then the principal payment of home loan is deductible from taxable income under section 80C. However it is imperative to note that during the first few years of the loan the interest component of an EMI is higher than the principal component. Thus a home loan is not always the best option to enjoy major tax benefit under section 80C. Besides the HRA allowance when renting a place can offset the benefit received under section 24B for interest payments made towards home loan. Hence tax benefits are not always a good reason on which the decision of buying a house can be based

The three factors that are pivotal when deciding to buy a house 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 should not consume most of the salary which in turn will affect the current lifestyle or future goals. Also, it is not a good financial decision to buy if the rental value is low compared to the EMI to be paid when owning a property.

As a part of our study, we analyzed the costs associated with owning a house and renting a house across Delhi NCR, Kolkata, Ahmedabad, Pune, Mumbai, Hyderabad,

Bengaluru and Chennai. The research report for 2013-2014 has added Ahmedabad to the list of existing major cities.

 

2. Methodology

Property price 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 the 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 is 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

4.1 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 2 shows the historical NHB Residex values since its inception in 2007.

 

 

As per NHB Residex values during Apr – Jun 2013, Delhi, Mumbai, Ahmedabad and Pune have recorded increase in the index value over the last year. Hyderabad, Chennai and Kolkata has shown decline in the index value. Delhi recorded a highest raise in the index value by 27 base points compared to the same period last year. While Mumbai posted an increase of 24 base points compared to same period last year, Pune is at 219 base points which has increased by 19 points during the period. Ahmedabad recoded an increase of
12 base points. Hyderabad's index value has decreased from the base year value by 16%. Chennai and Kolkata's index values have receded from the last year's values negatively.

Given the current scenario of real estate prices, this research report aims to take forward the thought process of finding most affordable place for middle income professionals. In the further sections, we examine the on ground situation in these cities and provide more insights on various aspects that would aid the readers in making well informed decisions.

 

4.2 Property cost Vs. Rental Value

A comparison of the property prices and rental value of 1000 sq ft ready to occupy house across eight major cities of India is shown in Figure 3. While the bar graph shows the average property prices in the city, the line graph depicts the average rental value in the city.

 

 

As per the NHB residex, Pune and Mumbai have grown at a similar pace since 2007. However, the average property price of Mumbai is nearly two and half times higher than that of Pune. Mumbai remains the costliest real estate market followed by Delhi. Though the index value of Delhi property prices has recorded the highest increase amongst the 8 cities, the actual property price in Delhi is lower than that of Mumbai. Though Chennai remains as the city which recorded highest growth in Residex value since 2007, property prices in Chennai have seen a relatively sluggish growth. Kolkata's real estate market experienced a substantial growth in the prices recording a near 27% growth over the past year.

The disparity in prices not only exists in property prices but is also evident in the rental rates across the cities. The cities with higher property prices are not necessarily the cities with higher rent. Between Bengaluru and Kolkata the properties are priced in similar ranges. However, rental value for Kolkata is higher than Bengaluru by nearly 44%. Similarly, though the real estate market of Ahmedabad is cheaper for buyers compared to Pune, its rental rates are 28% costlier than that of Pune. When it comes to rental prices, Delhi also fails to translate its higher property prices. Delhi, which is nearly 83% costlier than Kolkata in terms of buying a home attracts lesser rental value. Similarly, though Delhi and Mumbai have identical property prices, Mumbai is nearly 48% costlier to rent. These anomalies in rental and property prices are largely driven by the micro structures of the markets.

 

With the introduction of Ahmedabad into the ranking, most of the cities have slipped down their affordability ranks both in buying and renting. However, Hyderabad remains the most affordable place to rent as well as buy. Mumbai stands out as the least affordable place in both scenarios. In terms of affordability to rent, Hyderabad is followed by Pune, Bengaluru, Chennai and Ahmedabad. These are the places where one can rent a 1000 sq.ft place for below twenty thousand per month. Delhi, Kolkata and Mumbai are rated lower on the scale of affordability to rent.

On the scale of affordability to buy, Hyderabad is followed by Ahmedabad, Pune and
Bengaluru. Kolkata, which has seen a relatively rapid increase in property prices among the
8 cities, is now ranked as fifth most affordable city to own a home. It is followed by Chennai, Delhi and Mumbai.

The Table 2 shows the ranking of all cities on both affordability to buy and affordability rent.

4.3 Down payment

Majority of the middle income households in India opt for home loan to fulfill their dream of owning a home. Generally, financial institutions have a mandate for the home loan applicants to pay at least 20% of the property price using their self-funding. Provided the applicant meets the eligibility criteria, remaining 80% can be availed as a loan. 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 years professionals need to save for the required corpus for down payment. This metric has increased in all cities over the last year. Based on the above stated assumption and average property prices a professional can afford the down payment required in Hyderabad, Ahmedabad and Pune in 5 years. In Kolkata and Bengaluru it takes 6 years and in Chennai it takes 7 years. In Mumbai and Delhi a professional has to save for at least 10-11 years to afford the down payment amount required. An individual from Hyderabad and Pune needs to save two fold to buy a house in Mumbai and Delhi. Compared to the last year, this metric increased for all the cities. The highest difference can be seen in Delhi and Mumbai, which are the costliest cities to buy a home. Figure 4 is in line with the assigned affordability ranks for ownership. It also shows the changes when compared to last year.

 

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 5 compares the average number of sq ft that can be bought for 1 lakh rupees across the eight cities.

 

Mumbai, being the costliest city to own a home among of the eight cities considered, offers the least space of 7.50 sq ft per INR 1 lakh. Delhi is the second costliest city offering a residential space of 8.55 sq ft per INR 1 lakh, which is 1.06 sq ft more than Mumbai. Hyderabad, being the cheapest city to buy a home among the eight cities considered, offers the largest residential area of 23.95 sq ft per INR 1 lakh. This means that a professional who wants to own a home in Mumbai and Delhi has to spend 3 times more than what he spends in Hyderabad for the same no of sq ft. Ahmedabad is next cheapest city to buy a home in. It provides a residential space of 20.18 sq ft per INR 1 lakh. Pune provides a living space of 18.55 sq ft per INR 1 lakh. A professional from Mumbai and Delhi will get 2 and a half times more area in Pune for INR 1 lakh. This is followed by Bengaluru that offers 16.01 sq ft Kolkata which offers 15.69 sq ft per INR 1 lakh. Chennai offers less space than all other cities except Mumbai and Delhi at 13.15. In all the cities the metric has recorded lower value compared to the last year's values. The highest drop is observed in Kolkata and Pune because of the relatively faster pace in increase of property prices.

 

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.

 

 

Delhi has the least rent to buy ratio value, which means that the monthly cost of renting is nearly 80% cheaper compared to buying a house. Kolkata and Ahmedabad score highest at 41%, making the decision to buy easier once in a position to afford the EMI payments and required down payment. With a ret to buy ratio of 37%, Hyderabad ranks 3rd on the scale of urgency to buy. It is followed by Pune and Bengaluru with a urgency to buy ratio of 30% and 29% respectively.

 

4.6 Break Even Horizon

Ignoring the price appreciation of the home bought, the main aspect that is to be analyzed is the cost of owning and renting a house. The factors that are to be analyzed in case of owning a home are: EMIs being paid towards the home loan, annual maintenance, repair charges and the average amount that can be saved under tax. The factors involved in case of renting a place includes: the rental payments, annual maintenance charges and the tax savings.

Tax savings is always an integral part of all our financial decisions. Especially considering the tax benefits one can claim under section 80C and 24B, buying a home remains the most preferred tax saving avenue. The payments made towards the principal amount of the home loan are deducted under section 80C. The payments made towards interest on home loan are deducted under section 24B. In case of renting one can claim tax benefits under house rent allowance.

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 break even horizon of various areas is shown in Figure 6. The cost of ownership and renting matchup in Kolkata and Ahmedabd is attained after 11 years. The costs matchup approximately after 15 years in Pune, 14th year in Hyderabad. The costs don't matchup in the case of Delhi, Mumbai, Bengaluru and Chennai during the 15 year timeframe. 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.

 

 

4.7.1 Comparison with Previous Year - Bengaluru

 

Bengaluru: Over the last year, Bengaluru has seen relatively higher growth in the rental rates compared to the property prices. Rental values in the area increased by 26% compared to 15% increase in the property prices. The NHB Residex value for the Apr – Jun
2013 quarter is recorded at 108, which is 8 base points higher than the index value recorded during the same quarter of last year. Among the 8 cities, Bengaluru is ranked as third most affordable place to rent and fourth affordable place to buy a property. The years of saving required to afford buying a property in Bengaluru has increased to 6. Based on the previous year prices, a middle professional needed to save for 5 years. A new home buyer in Bengaluru, now gets 13% lesser carpet area compared to the previous year. The ABRS values of Bengaluru recorded during this year are same as the values recorded

 

 

4.7.2 Comparison with Previous Year - Chennai

 

Chennai: The NHB Residex value for the Apr – Jun 2013 quarter is recorded at 309, which is 6 base points lesser than the index value recorded during the same quarter of last year. Rental value of the areas has increased by 14% whereas the property prices have increased by 6%. Among the 8 areas, Chennai is ranked as 4th affordable place to rent and 6th place to buy. With respect to affordability of renting or buying, Chennai stands at same spot compared to the previous year. The years of saving required to afford buying a property in Chennai has increased to 7. Based on the previous year prices, a middle professional needed to save for 6 years. A new home buyer in Chennai, now gets 6%  this year are same as the values recorded during the previous year. A new home buyer in Chennai, now gets 6% lesser carpet area compared to the previous year. The ABRS values of Chennai recorded during this year are same as the values recorded during the previous year.

 

 

4.7.3 Comparison with Previous Year - Delhi

Delhi NCR: Delhi continues to be second most expensive city to own a home in India. The NHB Residex value for the Apr – Jun 2013 quarter is recorded at 199, which is 27 base points higher than the index value recorded during the same quarter of last year. The average rental value of Delhi has increased by 17% during the year when the average property prices increased by 7%. Due to its relatively lower rental value compared to Kolkata and Mumbai, Delhi is the 6th affordable place to rent. The years of savings required by a middle income professional to afford the down payment has increased to 10 compared to 8 years in 2012. A new home buyer in Delhi, now gets 7% lesser carpet area compared to the previous year. The ABRS score for individuals with a salary range of 8 – 25 lakhs remains at 55 making it a place to rent for majority of such individuals.

 

 

4.7.4 Comparison with Previous Year - Hyderabad

 

Hyderabad: Hyderabad continues to be the most affordable real estate market among the major cities of India. The NHB Residex value for the Apr – Jun 2013 quarter is recorded at 84, which is 1 base point lesser than the index value recorded during the same quarter of last year. Rental values in the area increased by 15% compared to 11% increase in the property prices. Among the 8 cities, Hyderabad retains its spot as the most affordable place to buy or rent a home. The years of saving required to afford buying a property in Hyderabad has increased to 5. Based on the previous year prices, a middle professional needed to save for 4 years. A new home buyer in Hyderabad, now gets 10% lesser carpet area compared to the previous year. The ABRS score for professionals remain the same as recorded in the previous year, making Hyderabad the most affordable place to buy or rent a property among the eight places studied.

 

 

4.7.5 Comparison with Previous Year - Kolkata

Kolkata: Real estate in Kolkata scored substantially both in terms of property prices and rental prices. The average rental value and property value of the place has increased by 24% over the last year. However, the NHB Residex value for the Apr – Jun 2013 quarter is recorded at 189, which is 7 base points lesser than the index value recorded during the same quarter of last year. Among the 8 cities, Kolkata is ranked as 7th affordable place to rent due to its high rental rates and 5th affordable place to buy a property. The years of saving required to afford buying a property in Kolkata has increased to 6. Based on the previous year prices, a middle professional needed to save for 5 years. A new home buyer in Kolkata, now gets 20% lesser carpet area compared to the previous year. The ABRS score of 75 for a salary range of 8-12 lakhs signifies the fact the rental value is critically high but the professional in the salary range can't afford to buy. The professional whose salary range is between 13 – 25 lakhs is better off owning a home than renting it. These values remain in sync with the values recorded in the previous year.

 

 

4.7.6 Comparison with Previous Year - Mumbai

Mumbai: Mumbai still remains the costliest real estate market in India. The NHB Residex value for the Apr – Jun 2013 quarter is recorded at 221, which is 24 base points higher than the index value recorded during the same quarter of last year. While the rental prices have increased by 9% over the last year, the property prices have increased by 22%. Among the 8 cities, Mumbai stands as least affordable place in case of both renting and owning a house. The years of saving required to afford buying a property in Mumbai has increased to 11. Based on the previous year prices, a middle professional needed to save for 8 years. A new home buyer in Mumbai, now gets 18% lesser carpet area compared to the previous year. The ABRS score for individuals with a salary range of 8 – 25 lakhs is recorded at 55 compared to the previous year's value of 65. This is largely due to higher increase in the property value compared to increase in rental value.

 

 

4.7.7 Comparison with Previous Year - Pune

Pune: Pune still largely remains a buyer's market with the property prices increasing at a higher rate than rental rates. The rental prices in the area have increased by 12% during the year when the property prices have increased by 26%. The NHB Residex value for the Apr – Jun 2013 quarter is recorded at 219, which is 19 base points higher than the index value recorded during the same quarter of last year. Among the 8 cities, Pune is the second most affordable place to rent while it stand third in terms of affordability to buy. The years of saving required to afford buying a property in Pune has increased to 5. Based on the previous year prices, a middle professional needed to save for 4 years. A new home buyer in Pune, now gets 21% lesser carpet area compared to the previous year. During the current year, ABRS score of 90 is recorded for individuals earning more than 20 lakhs per annum as opposed to 90 for professionals earning more than 15 lakhs during the last year.

 

4.7.8 Ahmedabad ( included first time)

Ahmedabad: Ahmedabad is the new addition in this year's buy vs rent report by ArthaYantra. The NHB Resiidex increased by 86 points since 2007 and recorded a 6 basis points increase over the last year. This is in sync with the increasing demand in the city. Among the 8 cities, Ahmedabad is the second most affordable place to own a house. However, due to higher rental rates, it is the fifth place on the scale of affordability to rent. A middle income individual needs to save for at least five years to afford the down payment for the house. The city also offer good value for buyer's money who can get around 20.18 sq.ft for every 1 lakh spent. The ABRS value of 87.5 and higher for individuals who earn more than 12 lakhs per annum signifies that such individuals should opt for buying a property over renting in Ahmedabad.

 

 

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.

 

 

 

Ahmedabad: The ABRS score of 75 for a salary range of 8-10 lakhs signifies the fact that rental value is critically high but the professional in the salary range can't afford to buy. The professional whose salary range is more than 12 lakhs per annum should consider owning a home than renting it.

Bengaluru: The score of 55 for a professional with a salary range of 8-14 lakhs signifies that the monthly cost renting is cheaper than buying by more than 70%. The low rental prices also meant that though the 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 renting is cheaper than buying by more than 70%. The low rental prices also meant that though the professional with a salary more than 20 lakhs can afford to buy a house, renting is a better option.

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 is high. It is advisable to rent for a professional with a salary range of 8 – 25 lakhs

Hyderabad: The professional with a salary range of 8-9 lakhs is better off renting. The 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 more than 12 lakhs are advised to buy.

Kolkata: The ABRS score of 75 for a salary range of 8-12 lakhs signifies the fact that rental value is critically high but the professional in the salary range can't afford to buy. The professional whose salary range is between 13 – 25 lakhs should consider owning a home than renting it.

Mumbai: The score of 55 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: A professional with a salary range of 8- 12 lakhs is better off renting. The professional with a salary of 13- 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. The professionals with a salary range more than 15 lakhs are advised to buy.

 

6. Conclusion

The current economic uncertainty combined with the inflated real estate prices makes the Buy Vs Rent decision tougher for salaried professionals. Among the top 8 cities researched in this report, Delhi & Mumbai clearly stand out as cities where buying a home has become incrementally tougher and has gone beyond the reach of the salaried professionals. The minimum salary range to be able to afford a home across all 8 cities has also increased compared to 2012. Similarly, the sq ft of area for the same amount of money has shrunk. This has lead to increasing number of people opting to rent a home rather than buying one. Hyderabad continues to be the most economical choice for both renting and buying across all salary levels. However, in Pune, Bengaluru, Ahmedabad and Kolkata the salary threshold to buy a home starts after one starts earning more than Rs. 12 Lakhs per annum. These cities today offer a good buying alternative to professionals working in Mumbai or Delhi.

The economic value for a person in buying a home across 8 major cities in country is diminishing rapidly. The high interest rate regime and uncertainty in job market in next 12 months might make more people inclined towards renting rather than buying. Buying a home without clear economic benefits can be detrimental to the financial health of the buyer. We recommend that ABRS should be used as the mainstay tool to arrive at a more objective decision on whether to buy or rent.

 

7. Limitations

The data is related to following localities of the eight cities:

Delhi NCR: Golf course Road, Sohna Road, Golf course extension Road, Noida – Greater Noida Express Highway, Noida City, Indirapuram, Faridabad, Safdarjung 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: LowerParel, 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.BNagar.

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.

Ahmedabad: Dudheshwar, Gomtipur Gam, Thaltej, Bodakdev, Shilaj, GOrdhan Vadi, Sardar Nagar, Shaijpur – Bogha, Sola Road, Chandkheda Gam, Vejalpur, Shilaj

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 80 C is considered as INR 1 lakh both in the case of home ownership and renting.

The tax benefits under section 24B for home buyers is considered as 1.5 lakhs.

The HRA benefits in case of renting is considered as per the taxation rules based on average rental prices.

 

8. Appendix - I

 

FIGURES:

Figure1: National snapshot


Figure 2: Historical values of National Housing Board India Residential Index (NHB Residex)

Figure 3: Average property price and rental values across eight major cities of India

Figure 4: No. of years required to save the corpus for down payment

Figure 5: Average no. of sq ft per lakh (`)

Figure 6: Break even horizon for eight major cities of India

TABLES:

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

Table 4: ArthaYantra Buy vs. Rent Score Explanation


Table 5: ArthaYantra Buy vs. Rent scores for different income levels across eight major cities of
India.


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

 

Appendix - II

 


Other important numbers to look at before making the decision :

*Ini al corpus required for owning = 20% of the Average property price (down payment for home loan)

**Inial corpus required for renng= Amount equivalent to 10 months of rental value (Hyderabad which is 3 months)

*** (Renng the home) / Average out of pocket cost (Owning the home) The gross income of 8 lakhs per annum is considered.


Table 6: Other important numbers

Monday, 01 April 2013 00:00

Buy Vs Rent Research Report Pune-2013

Written by

 

 

 

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Table of Contents

Summary

1.Introduction

2.Methodology

3.Assumptions

4.Findings

4.1 Historical data of Real estate prices

4.2 Property Cost vs Rental Value

4.3 Down Payment

4.4 Area

4.5 Rent to Buy Ratio

4.6 Break Even Horizon

5 ArthaYantra Buy vs Rent Score (ABRSTM)

6. Other Important Numbers

7.Conclusion

8.Limitations and Concerns

9.Appendix

 

Summary
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).

 

 

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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 Pune: Hadapsar, Hinjewadi, Kharadi, Kondhwa, Kothrud, Pimpri-Chinchwad and Wakad.

 

 

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.

 

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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

4.1 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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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 seven major localities in Pune.

 

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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.

 

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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.

 

 

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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.

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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.

 

 

 

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*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, 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.

 

 

9. Appendix

FIGURES:

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:

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

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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Monday, 01 April 2013 00:00

Buy Vs Rent Research Report Kolkatta-2013

Written by

 

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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. Conclusion 21

8. Limitations and Concerns 21

9. Appendix 22

 

Property cost vs Rental Value: The Residential Property prices in Jadavpur and Salt Lake City are not being translated to their rental value. Though the average residential property values of Jadavpur is higher than EM Bypass by 8%, the average rental value is less by nearly 10%. The same case goes with PA Shah Road and Salt Lake City. Though their average residential property values are identical, their average rental values differ by nearly 27%.

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 2 years to save for the required corpus in Howrah. In Lake Town and Behala it takes 3 years and in EM Bypass and Jadavpur it takes 4. In PA Shah Road, Jodhpur Park and Salt Lake City a professional has to save for at least 5 years and it takes 9 years in Alipore 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 52.63 per INR 1 lakh in Howrah makes it the place where you can get the highest area for the same amount of money compared to other 8 localities. This implies that for a given price one can get the largest space in Howrah followed by Lake Town, Behala, EM Bypass, Jadavpur, PA Shah Road and Salt Lake City. Jodhpur Park and Alipore offer 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 0.49 shows that the rental values in PA Shah Road are higher and makes it an “immediately buy when you can afford” place.

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 11 years for EM Bypass, Howrah, Lake Town and PA Shah Road, 12 for Behala and 13 years for Alipore, Jadavpur, Jodhpur Park and Salt Lake City. 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.

Alipore : The rent to buy ratio of 0.39 meant that the rental prices are moderately high. A salary range of 15-25 lakhs a professional can only rent as the property values are very high.

Behala : A professional with a salary range of 8-10 lakhs can afford to rent and buy. A professional with a salary range of 11-25 lakhs is advised to buy as the rents are high.

EM Bypass : The ABRS score of 75 for a salary range of 8-10 lakhs signifies the fact the rental value is critically high but a professional in this salary range cannot afford to buy. A professional whose salary range is between 13-25 lakhs is better off owning a home than renting it.

Howrah : The rent to buy ratio of 0.39 meant that the rental prices are low. A salary range of 8-25 lakhs allows a professional to buy.

Jadavpur : The rent to buy ratio of 0.38 meant that the rental prices are low. The rent is low compared to the EMI that has to be paid in case of buying a house. A salary range of 12-25 lakhs allows a professional to buy.

Jodhpur Park : The rent to buy ratio of 0.38 meant that the rental prices are low. The rent is low compared to the EMI that has to be paid in case of buying a house. A salary range of 16-25 lakhs allows a professional to buy.

Lake Town : A professional with a salary range of 8-10 lakhs and 10-25 lakhs has an ABRS score of 87.5 and 100 respectively. This signifies that a professional with these salary ranges should buy in this locality.

PA Shah Road : The rent to buy ratio of 0.49 meant that the average rental value of residential property is high compared to the average property price. This makes PA Shah 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 11th year (fastest of the nine localities).

Salt Lake City : A professional with a salary range of 8-12 lakhs is better of renting. A professional with a salary of 13-15 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. The professionals with a salary range of more than 15 lakhs are advised to buy.

 

Alipore : The rent to buy ratio of 0.39 meant that the rental prices are moderately high. A salary range of 15-25 lakhs a professional can only rent as the property values are very high.

Behala : A professional with a salary range of 8-10 lakhs can afford to rent and buy. A professional with a salary range of 11-25 lakhs is advised to buy as the rents are high.

EM Bypass : The ABRS score of 75 for a salary range of 8-10 lakhs signifies the fact the rental value is critically high but a professional in this salary range cannot afford to buy. A professional whose salary range is between 13-25 lakhs is better off owning a home than renting it.

Howrah : The rent to buy ratio of 0.39 meant that the rental prices are low. A salary range of 8-25 lakhs allows a professional to buy.

Jadavpur : The rent to buy ratio of 0.38 meant that the rental prices are low. The rent is low compared to the EMI that has to be paid in case of buying a house. A salary range of 12-25 lakhs allows a professional to buy.

Jodhpur Park : The rent to buy ratio of 0.38 meant that the rental prices are low. The rent is low compared to the EMI that has to be paid in case of buying a house. A salary range of 16-25 lakhs allows a professional to buy.

Lake Town : A professional with a salary range of 8-10 lakhs and 10-25 lakhs has an ABRS score of 87.5 and 100 respectively. This signifies that a professional with these salary ranges should buy in this locality.

PA Shah Road : The rent to buy ratio of 0.49 meant that the average rental value of residential property is high compared to the average property price. This makes PA Shah 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 11th year (fastest of the nine localities).

Salt Lake City : A professional with a salary range of 8-12 lakhs is better of renting. A professional with a salary of 13-15 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. The professionals with a salary range of more than 15 lakhs are advised to buy.

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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 nine major localities of Kolkata: Alipore, Behala, EM Bypass, Howrah, Jadavpur, Jodhpur Park, Lake Town, PA Shah Road and Salt Lake City.

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.

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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

4.1 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.

Kolkata as a city has recorded a raise of 96% in its NHB Residex value compared to the base year of 2007. Zone 9 of Kolkata has recorded the highest raise in index by 172%. Zone 10 and Bidhan Nagar have followed up with a 153% raise when compared to the base year. Howrah and Zone 13 recorded an index raise of 99% and 85% respectively. Zone 12, South Dumdum and Zone 11 have also recorded a raise of 69%, 53% and 47% respectively, when compared to their base year index. While Zones 9 and 10, Bidhan Nagar and Howrah have outperformed the city average, Zones 11, 12, 13 and South Dumdum have underperformed.

Alipore falls under Zone 9, Behala under Zone13 and EM Bypass under Zone 12. Howrah falls under Howrah zone, Jadavpur under Zone 11 and Jodhpur Park under Zone 10. Lake Town falls under South Dumdum and Salt Lake City falls under Bidhan Nagar.

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.

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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 evident base effect in property prices that can be observed in the other cities is missing in the case of Kolkata. While comparing the NHB Residex and current Property Prices of Kolkata, one can observe a steady rise in the prices. Alipore scored high in the rise of NHB Residex value as well as the property prices. Except Alipore the prices in all the other regions are in affordable level for a professional with a yearly gross income of 12 lakhs. Though all the regions of Kolkata recorded a steady rise in the property prices, still the property prices remain moderate.

 

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The most important factor that stands out from the rental value of the properties across the nine localities is the anomaly of the property values not being translated to the corresponding rental values. EM Bypass's average property price (INR 4,250,000) is less than that of Jadavpur (INR 4,598,000) by 8%. But the Average rental value of EM Bypass (INR 16,500) is higher than that of Jadavpur (INR 15,000) by nearly 10%. The same case has been observed with PA Shah Road and Salt Lake City. Though their average residential property values are identical, the average rental value of PA Shah Road (INR 21,000) is higher than that of Salt Lake City (INR 16,500) by 27%.

 

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 thirteen localities of Mumbai. The bar graph depicts the average property price in the locality and the line graph depicts the average rental value in the locality.


Lower Parel's property prices as per NHB Residex have grown two and half times. This locality has seen the highest increase in Mumbai city and this is shown in its property price of INR 27,500,000. Andheri whose property prices (INR 14,500,000) doubled as per NHB Residex are identical with that of Chembur (INR 14,183,500) which recorded a 54% raise in its index value.

 

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The most important factor that stands out from the rental value of the properties across the thirteen localities is the anomaly of the property values not being translated to the corresponding rental values. Ghatkopar's average property value (INR 10,750,000) is less than that of Chembur (INR 14,183,500) by 32%. But the Average rental value of Ghatkopar (INR 40,000) is higher than that of Chembur (INR 31,500) by nearly 21%. The same can be said about Borivali West and Bhandup West. Though their average residential property values are almost similar, the average rental value of Bhandup West (INR 28,000) is higher than that of Borivali West (INR 23,500) by 19%.

 

 

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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 thirteen major localities of Mumbai. Virar stands out as the most affordable place to buy and rent. Lower Parel stands out to be the least affordable place in both scenarios. Kalyan is the second most affordable place and Wadala is the second least affordable place. Ghodbunder Road and Pokaran road take the 5th and 6th place respectively in both scenarios. Bhandup West and Andheri take the 8th and 11th place respectively in both scenarios. This means that the high/low property prices of the 8 localities are translated to their relative rental prices.

Mira Road ranks 3rd on the affordability to rent where as it ranks 4th on affordability to buy. Kharghar ranks 4th on the affordability to rent where as it ranks 3rd on affordability to buy. This means that the average property price in Kharghar is less than that of Mira Road but the rental value is higher. Borivali West ranks 7th on the affordability to rent where as it ranks 9th on affordability to buy. Chembur ranks 9th on the affordability to rent where as it ranks 10th on affordability to buy. Ghatkopar ranks 10th on the affordability to rent where as it ranks 7th on affordability to buy. This means that the average property price in Ghatkopar is less than that of Chembur and Borivali West but the rental value is higher. This signifies the fact that people of different localities have different expectations from their real estate markets.

 

4.3 Down payment

 

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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 Virar and Kalyan in 4 years. In order to own a house in Mira Road and Kharghar professional has to save for 5 years. To buy a house a professional will need to save for 6 and 7 years in Ghodbunder Road and Pokaran Road respectively. A professional can afford the down payment required to buy a house in Ghatkopar and Bhandup West in 8 years. In order to own a house in Borivali West a professional has to save for 9 years. To save for the down payment of a house in Wadala, Andheri and Chembur a professional will need to save for 10 years. To buy a house in Lower Parel a professional will need to save for 14 years. Figure 3 is in sync with the assigned affordability ranks for ownership.

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 thirteen major localities in Mumbai.

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Lower Parel being the costliest locality offers a space of 3.63 sq ft per INR 1 lakh. Virar being the cheapest locality offers a space of 24 sq ft per INR 1 lakh. Kalyan offers a space of 21.97 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 Lower Parel has to spend at least 7 times the amount he spends in Virar and Kalyan. A professional gets 16.95 sq ft space for INR 1 lakh in Kharghar and Mira Road. Ghodbunder Road and Pokaran Road offer a space of 14.29 sq ft and 11.19 sq ft per INR 1 lakh respectively. Ghatkopar and Bhandup West offer a space of 9.30 sq ft and 8.99 sq ft per INR 1 lakh respectively. Borivali West and Chembur offer a space of 8.27 sq ft and 7.05 sq ft per INR 1 lakh respectively. Andheri and Wadala offer a space of 6.90 sq ft and 6.45 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.

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Borivali West 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 77%. Mira Road and Pokaran Road also have low rent to buy ratios. Ghatkopar has 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 0.43 and the average monthly out of pocket cost of Owning house being moderate, rents being relative higher Ghatkopar ranks high in the urgency to buy ratio. Wadala and Andheri are also ranked high on urgency to buy rank.

Lower Parel and Kharghar rank 4th and 5th respectively in the urgency to buy rank. The 6th and 7th position in the urgency to buy rank is taken by Bhandup West and Ghodbunder Road respectively. Kalyan and Virar take the 8th and 9th positions respectively. The 10th position in the urgency to buy rank is taken by Chembur.

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.

 

4.5 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 thirteen 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 Ghatkopar is 12 years. The cost matchup in Wadala and Andheri happens in 14 years. In Lower Parel and Kharghar, it takes 15 years. It takes more than 15 years in Bhandup West, Borivali West, Chembur, Ghodbunder Road, Kalyan, Mira Road, Pokaran Road and Virar. The planned length of stay in the house becomes an important aspect in deciding whether to buy or rent.

 

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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.

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Andheri : A professional with a salary range of 8-14 lakhs cannot afford to stay in this locality. A professional with a salary range of 15-25 lakhs has a score of 65. 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.

Bhandup west : 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.

Borivali west : The score of 55 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.

Chembur : A professional with a salary of 8 lakhs cannot afford this locality. He will not be able to pay the rents nor will he be able to afford the EMI payments. A professional with a salary range of 9-25 lakhs can afford the rents in this locality but can't afford the EMI associated with home loans.

Ghatkopar : A professional with a salary range of 8-11 lakhs cannot afford to stay in this locality. The ABRS score of 75 for a salary range of 12-25 lakhs signifies the fact that the rental value is critically high but a professional in this salary range cannot afford to buy.

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Ghodbunder Road : The score of 55 for a professional with a salary range of 8-15 lakhs signifies that the monthly cost of renting is cheaper than buying. The low rental prices also meant that though the professional with a salary more than 16 lakhs can afford to buy a house renting is a better option.

Kalyan : A professional with a salary range 8-11 lakhs is advised to rent. He should rent even with the high rents because he can't afford the EMI associated with a home loan. A professional with a salary more than 12 lakhs can afford to buy a house, but because of the low rents, renting is a better option.


Kharghar : The score of 65 for a professional with a salary range of 8-15 lakhs 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. A professional with a salary more than 16 lakhs is advised to buy.

Lower Parel : A professional with a salary range of 8-25 lakhs cannot afford the rents or the EMI associated with a home loan in this locality.

Mira Road : The score of 55 for a professional with a salary range of 8-15 lakhs signifies that the monthly cost of renting is cheaper than buying.The low rental prices also meant that though the professional with a salary more than 16 lakhs can afford to buy a house renting is a better option.

Pokaran Rd : A professional with a salary range of 8-20 lakhs can afford to rent but can't afford to buy in this locality. A professional with a salary range of 21-25 lakhs can afford to buy but because of the low rents is advised to rent.

Virar : A professional with a salary range 8-11 lakhs is advised to rent. He should rent even with the high rents because he can't afford the EMI associated with a home loan. A professional with a salary more than 12 lakhs can afford to buy a house, but because of the low rents, renting is a better option.

Wadala : A professional with a salary range of 8-14 lakhs cannot afford to stay in this locality. A professional with a salary range of 15-25 lakhs has a score of 65. 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.

 

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7 Conclusion

Based on the current real estate markets, Virar and Kalyan 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 Virar and Kalyan provide a better lifestyle option. The real estate market of Ghatkopar favors the home owners because of its moderate property prices and high rental value. Though the moderate property prices of Mira 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 Borivali West make the decision to rent easier. Lower Parel 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 thirteen major localities of Mumbai 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 of Mumbai:

Andheri, Bhandup West, Borivali West, Chembur, Ghatkopar, Ghodbunder Road, Kalyan, Kharghar, Lower Parel, Mira Road, Pokaran Road, Virar and Wadala.

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

 

FIGURES:

Figure 1: Graphical Representation of Buy Vs. Rent in Mumbai

Figure 2: Historical values of National Housing Board India Residential Index (NHB Residex)

Figure 3: Average property price and rental values across thirteen major localities of Mumbai

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

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

Figure 6: Break even horizon for the thirteen major localities of Mumbai


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 thirteen major localities of Mumbai

Table 4 : ArthaYantra Buy vs. Rent Score Explanation

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

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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Monday, 01 April 2013 00:00

Buy Vs Rent Research Report Chennai-2013

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Property cost vs Rental Value: The Residential Property prices in Old Mahabalipuram and Porur are not being translated to their rental value. Though the average residential property values of Tambaram is higher than Old Mahabalipuram Road by 16%, the average rental value is less by nearly 32%. The same case goes with Chromepet and Porur. Though their average residential property values are identical, their average rental values differ by nearly 32%.

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 Medavakkam, Tambaram, Porur, Kolathur, Chromepet and Old Mahabalipuram Road. In Sholinganallur and Perambur it takes 5 years, in Ashok Nagar it takes 7 years and in T. Nagar it takes 8 years. In Anna Nagar and Adyar a professional has to save for at least 9 years to afford the down payment amount required. In Chetpet it takes 10 years to save for a house.

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 28.90 per INR 1 lakh in Old Mahabalipuram Road makes it the place where you can get the highest area for the same amount of money compared to other 11 localities. This implies that for a given price one can get the largest space in Old Mahabalipuram Road followed by Tambaram, Medavakkam, Porur, Chromepet, Kolathur, Sholinganallur, Perambur, Ashok Nagar, T. Nagar and Anna Nagar. Adyar and Chetpet offer 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 0.52 shows that the rental values in Old Mahabalipuram Road are higher and makes it an “immediately buy when you can afford” place. The ratio of 0.32 in Tambaram 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 9 years for Old Mahabalipuram Road, 15 for Tambaram, Medavakkam and Chromepet and above 15 years for T. Nagar, Sholinganallur, Porur, Perambur, Kolathur, Chetpet, Ashok Nagar, Anna Nagar and Adyar. 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.

Adyar:The second highest in terms of average property prices. The rent to buy ratio of 0.2 meant that the average rental value of residential property is very less compared to its higher prices. Renting is the best option.

Anna Nagar:A rent to buy ratio of 0.20 and high property prices makes it a place to Rent.

Ashok Nagar:A rent to buy ratio of 0.26 and moderately high property prices makes it a place to Rent.

Chetpet:The place with highest average rental value and average property price. The rent to buy ratio of 0.24 meant that the rental prices are high and it is advisable to buy. But the higher property prices and least number of sq ft per INR 1 lakh (among the thirteen localities) makes it a place to rent.

Chromepet:The rent to buy ratio of 0.31 meant that the rental prices are moderately high and it is advisable to buy. The number of years required in order to save for down payment (4 years, which is least among the twelve localities) and the property prices being in an affordable range make it an affordable locality.

Kolathur:A rent to buy ratio of 0.27 and moderately high property prices makes it a place to Rent.

Medavakkam:The rent to buy ratio of 0.32 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 twelve localities) and the property prices being in an affordable range makes it the third most affordable locality (out of the thirteen).

Old Mahabalipuram Road:The rent to buy ratio of 0.52 meant that the average rental value of residential property is high compared to the average property price. This makes Old Mahabalipuram Road 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 9th year (fastest of the thirteen localities).

Perambur:The rent to buy ratio of 0.24 meant that the rental prices are high and it is advisable to buy. But the higher property prices makes it a place to rent.

Porur:The rent to buy ratio of 0.22 meant that the average rental value of residential property is very less compared to its higher prices. Renting is the best option.

Sholinganallur:A rent to buy ratio of 0.27 and moderately high property prices makes it a place to Rent

T. Nagar:A rent to buy ratio 0f 0.28 meant that the rental values are high but the property prices are higher. Therefore it is advised to rent.

Tambaram:The rent to buy ratio of 0.32 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 thirteen localities) and the property prices being in an affordable range makes it the second most affordable locality (out of the thirteen).


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 thirteen localities in Chennai: Adyar, Anna Nagar, Ashok Nagar, Chetpet, Chromepet, Kolathur, Medavakkam, Old Mahabalipuram Road, Perambur, Porur, Sholinganallur, T. Nagar and Tambaram.

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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.

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.

 


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.
Chennai as a city has recorded a raise of 209% when compared to the base year of 2007. Zone 4 has recorded the highest raise in index value by 538%. Zones 5 and 8 have followed up with a 530% and 464% raise respectively. All the other zones have also recorded a minimum raise of 80% and a maximum raise of 253% when compared to their base year. Some zones have performed better than the city while other zones have not done as well as the city. Porur falls under Zone1, Perambur under Zone 3 and Kolathur under Zone 4. Anna Nagar and Chetpet fall under Zones 5 and 7 respectively. Ashok Nagar falls under Zone 8, Chromepet under Zone 9 and Adyar under Zone 10.

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.


The graph compares the property price and rental value of 1000 sq ft ready to occupy house across thirteen localities of Chennai. 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. Anna Nagar's property prices (INR 11,500,000) as per NHB Residex have grown six fold but still remain similar to property prices of Adyar (INR 13,000,000). Kolathur whose property prices (INR 4,286,500) grew 538% as per NHB Residex are identical with that of Chromepet (INR 4,229,000) which recorded a growth of only 200% in its index value. This means that the property prices of Anna Nagar and Kolathur in the base year 2007 were less compared to other localities.

The most important factor that stands out from the rental value of the properties across the thirteen localities is the anomaly of the property values not being translated to the corresponding rental values. Old Mahabalipuram Road's average property price (INR 3,460,000) is less than that of Tambaram (INR 4,000,000) by 16%. But the Average rental value of Old Mahabalipuram Road (INR 15,500) is higher than that of Tambaram (INR 10,500) by nearly 32%. The same case has been observed with Chromepet and Porur. Though their average residential property values are identical, the average rental value of Chromepet (INR 11,000) is higher than that of Porur (INR 7,500) by 32%.


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 thirteen major localities of Chennai. Chetpet stands out to be the least affordable place in both scenarios. Adyar is the second least affordable place. Ashok Nagar takes the 9th position in both the rankings. Medavakkam takes the 4th place in both the rankings. This means that the high/low property prices of the above 4 localities are translated to their relative rental prices.

Old Mahabalipuram Road stands out as the most affordable place to buy and Porur stands out as the most affordable place to rent. Tambaram takes the second place and Porur takes the third place in the affordability to buy rankings. Kolathur is the second most affordable place to rent and Tambaram is the third most affordable place to rent. The property prices do not match the rental values in the above localities. Chromepet, Sholinganallur, Perambur, Anna Nagar and T. Nagar also face the same scenario. This signifies the fact that people of different localities have different expectations from their real estate markets.

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 Medavakkam, Tambaram, Porur, Kolathur, Chromepet and Old Mahabalipuram Road in 4 years. In order to own a house in Sholinganallur and Perambur a professional has to save for 5 years. To buy a house in Ashok Nagar a professional will need to save for 7 years. In T. Nagar takes 8 years to save for the down payment required to buy a house. A professional can afford the down payment required to buy a house in Anna Nagar and Adyar in 9 years. In order to own a house in Chetpet a professional has to save for 10 years. Figure 3 is in sync with the assigned affordability ranks for ownership.

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 thirteen major localities in Chennai.

Chetpet is the costliest locality offering a space of 6.85 sq ft per INR 1 lakh. Old Mahabalipuram Road being the cheapest locality offers a space of 28.90 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 Chetpet has to spend at least 4.5 times the amount he spends in Old Mahabalipuram Road. Tambaram offers a space of 25 sq ft per INR 1 lakh. A professional gets 23.81 sq ft of space for INR 1 lakh in Medavakkam and Porur. This means that a professional investing INR 1 lakh in Medavakkam and Porur gets 4 times the space he would get in Chetpet.

 

Chromepet and Kolathur offer a space of 23.65 sq ft and 23.33 sq ft per INR 1 lakh respectively. A professional gets a space of 21.05 sq ft and 18.27 sq ft per INR 1 lakh in Sholinganallur and Perambur respectively. Ashok Nagar and T. Nagar offer a living space of 11.71 sq ft and 9.85 sq ft per INR 1 lakh respectively. Adyar and Anna Nagar are the second and third costliest locality in Chennai. They offer a living space of 7.69 sq ft and 8.70 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.

 

Anna Nagar 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 80%. Adyar and Porur also have low rent to buy ratios. Renting is cheaper than buying by 78% in Adyar and Porur. Old Mahabalipuram Road has 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 0.52 and the average monthly out of pocket cost of Owning house being moderate, rents being relative higher Old Mahabalipuram Road ranks high in the urgency to buy ratio. Tambaram and Chromepet are also ranked high on urgency to buy rank.

Medavakkam takes the 4th place in the urgency to buy rankings. T. Nagar takes the 5th rank. Kolathur and Sholinganallur rank 6th and 7th respectively in the urgency to buy rank. The 8th position in the urgency to buy rank is taken by Ashok Nagar. The 9th and 10th position in the urgency to buy rank is taken by Perambur and Chetpet respectively.
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.


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 thirteen 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 Old Mahabalipuram Road is 9 years. The cost matchup in Tambaram, Medavakkam and Chromepet happens in 15 years. It takes more than 15 years in T. Nagar, Sholinganallur, Porur, Perambur, Kolathur, Chetpet, Ashok Nagar, Anna Nagar and Adyar. The planned length of stay in the house becomes an important aspect in deciding whether to buy or rent.


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.
Can't afford both ownership and renting.


 

Adyar : 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.

Anna Nagar : The score of 55 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.

Ashok Nagar : The score of 55 for a professional with a salary range of 8-15 lakhs signifies that the monthly cost of renting is cheaper than buying by more than 70%. The low rental prices also meant that though the professional with a salary more than 16 lakhs can afford to buy a house renting is a better option.

Chetpet : A professional with a salary of 8 lakhs cannot afford this locality. He will not be able to pay the rents nor will he be able to afford the EMI payments. A professional with a salary range of 9-25 lakhs can afford the rents in this locality but can't afford the EMI associated with home loans.

Chromepet : The score of 65 for a professional with a salary range of 8-11 lakhs 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. A professional with a salary range of 12-25 lakhs is advised to buy.

Kolathur : A professional with a salary range 8-11 lakhs is advised to rent. He should rent even with the high rents because he can't afford the EMI associated with a home loan. A professional with a salary more than 12 lakhs can afford to buy a house, but because of the low rents, renting is a better option.

Medavakkam:The score of 65 for a professional with a salary range of 8-11 lakhs 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. A professional with a salary range of 12-25 lakhs is advised to buy.


Old Mahabalipuram Road:A professional with a salary of 8 lakhs is better of renting. A professional with a salary range of 9-11 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 12-25 lakhs are advised to buy.

Perambur:A professional with a salary range of 8-12 lakhs has an ABRS score of 55. The score of 55 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. A person with a salary range of 13-15 lakhs is in a neutral zone but is still advised to rent because rents are cheaper. A person with a salary range of 16-25 lakhs should buy as the rents are high.

Porur:A professional with a salary range 8-11 lakhs is advised to rent. He should rent even with the high rents because he can't afford the EMI associated with a home loan. A professional with a salary more than 12 lakhs can afford to buy a house, but because of the low rents, renting is a better option.

Sholinganallur:A professional with a salary range of 8-10 lakhs has an ABRS score of 55. The score of 55 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. A person with a salary range of 11-15 lakhs is in a neutral zone but is still advised to rent because rents are cheaper. A person with a salary range of 16-25 lakhs should buy as the rents are high.

T. Nagar:The score of 55 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.

Tambaram: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.


*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 (Hyderabad which is 3 months) *** Average out of pocket cost(Renting the house) / Average out of pocket cost (Owning the house)
The gross income of 8 lakhs per annum is considered.
Here are some important numbers to look at before making the decision:

Based on the current real estate markets, Tambaram and Medavakkam are the best places to own a house. The property prices and rental values in these three 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 Old Mahabalipuram Road and Tambaram provide a better lifestyle option. The real estate market of Old Mahabalipuram Road favors the home owners because of its moderate property prices and high rental value. Though the moderate property prices of Porur and Kolathur make a strong case of ownership for professionals with higher salaries, the low rental values make renting a better option. Chetpet 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 twelve major localities of Chennai 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.
The data is related to following localities of Chennai:

Adyar, Anna Nagar, Ashok Nagar, Chetpet, Chromepet, Kolathur, Medavakkam, Old Mahabalipuram Road, Perambur, Porur, Sholinganallur, T. Nagar and Tambaram.

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.

FIGURES:

Figure 1: Graphical Representation of Buy Vs. Rent in Chennai

Figure 2: Historical values of National Housing Board India Residential Index (NHB Residex)

Figure 3: Average property price and rental values across thirteen major localities of Chennai

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

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

Figure 6: Break even horizon for the thirteen major localities of Chennai


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 thirteen major localities across Chennai

Table 4 : ArthaYantra Buy vs. Rent Score Explanation
Table 5 : ArthaYantra Buy vs. Rent scores for different salary ranges across thirteen
major Localities of Chennai.

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+)

ArthaYantra is a young and innovative company started by a group of alumni of the Indian School of Business (ISB) Hyderabad. It provides integrated personal finance services using its unique proprietary framework, Personal Financial Lifecycle Management (PFLM)TM, which helps clients achieve their financial goals. ArthaYantra's vision is to provide independent, high quality, customized financial planning solutions and their efficient execution to individuals. It employs proprietary financial models and enable investments through well balanced passive investment strategies. ArthaYantra's clientele includes individuals from India, US, Europe and Middle East.

For more information on this report please contact ArthaYantra Corporation Pvt. Ltd.

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Monday, 01 April 2013 00:00

Buy Vs Rent Research Report Bangalore-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+)

 

 

Monday, 01 April 2013 00:00

Buy Vs Rent Research Report Delhi-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 19

7.Conclusion 20

8.Limitations and Concerns 21

9. Appendix 22

 

Summary

Property cost vs Rental Value:The Residential Property prices in Rohini Sec-13 and Sohna Road are not being translated to their rental value. Though the average residential property values of Sohna Road is higher than Noida City by 26%, the average rental value is less by nearly 23%. The same case goes with Rohini Sec-13 and Golf Course Road. Though their average residential property values are identical, their average rental values differ by nearly 17%.

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 Indirapuram and Faridabad (Sector 86). In Noida City and Noida-Greater Noida Expressway it takes 5 years and in Sohna Road and Golf Course Extension Road it takes 6. In Delhi East and Rohini Sec-13 it takes a professional 7 and 9 years respectively. It takes 10 years to save for a house in Golf Course Road. In Delhi South and Vasant Kunj a professional has to save for at least 11 years to afford the down payment amount required. A professional needs to save for 12 years to buy a house in Safdarjung Enclave.

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 28.72 per INR 1 lakh in Faridabad (Sector 86) makes it the place where you can get the highest area for the same amount of money compared to other eleven localities. This implies that for a given price one can get the largest space in Faridabad (Sector 86) followed by Indirapuram, Noida-Greater Noida Expressway, Noida City, Sohna Road, Golf Course Extension Road, Delhi East, Rohini Sec-13, Golf Course Road and Delhi South. Vasant Kunj and Safdarjung Enclave offer 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 0.34 and 0.33 for Indirapuram and Noida- Greater Noida Expressway respectively 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 14 years for Indirapuram, 15 for Noida- Greater Noida Expressway, Noida City and Faridabad and above 15 years for Delhi East, Delhi South, Golf Course Extension Road, Golf Course Road, Rohini Sec-13, Safdarjung Enclave, Sohna Road and Vasant Kunj. 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. Summary


Delhi East :The rent to buy ratio of 0.23 meant that the rental prices are higher compared to EMI to be paid in case of ownership. 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 is high. It is advisable to rent for a professional with a salary range of 8 – 25 lakhs.

Delhi South :The rent to buy ratio of 0.16 meant that the rental price are low compared to the EMI to be paid, so it is advisable to rent. The years required to save for down payment (11 years) and the property prices being the third costliest locality (out of the twelve).A professional with a salary range of 8-25 lakhs is advised to rent.

Faridabad (Sector 86) :The place with least average rental value and average property price. The rent to buy ratio of 0.31 meant that it is advisable to buy. The lower property prices and highest number of sq ft per INR 1 lakh (among the twelve localities) makes it a place to buy.

Golf Course Extension Road :The rent to buy ratio of 0.18 meant that the average rental value of residential property is very less compared to its higher prices. Renting house is a better option. A professional with a salary range of 8-20 lakhs can't afford the locality but a professional with a salary range of 21-25 lakhs can afford to buy but because of the low rents it is advised to rent.

Golf Course Road :The fourth highest in terms of average property prices. The rent to buy ratio of 0.18 meant that the average rental value of residential property is very less compared to its higher prices. Renting house is a better option. The low rental values compared to high property prices makes it a place where renting is recommended for a salary range of 8 – 25 lakhs.

Indirapuram :The rent to buy ratio of 0.34 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 twelve localities) and the property prices being in an affordable range makes it the second most affordable locality (out of the twelve).

Noida City :The rent to buy ratio of 0.31 meant that the rental prices are moderately high and it is advisable to buy. But a professional with a salary range of 8-12 lakhs is better of renting, whereas a professional with a salary range of 13-25 lakhs can buy a house in this locality.

Noida-Greater Noida Expressway :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 (5 years) and the property prices being in an affordable range make it the third most affordable locality (out of the twelve).

Rohini Sec-13 :The rent to buy ratio of 0.16 meant that the average rental value of residential property is very less compared to its higher prices. ArthaYantra Buy vs Rent score of 55 signifies that though the rents are high, it is advisable to rent because the property prices are also high.

Safdarjung Enclave :The highest in terms of average property prices. The rent to buy ratio of 0.18 meant that the average rental value of residential property is very less compared to its higher prices. Renting is the best option.

Sohna Road :The average residential property values of Sohna Road is higher than Noida City by 26%, the average rental value is less by nearly 23%. A rent to buy ratio of 0.20 and moderately high property prices makes it a place to Rent.

Vasant Kunj :The second highest in terms of average property prices. The rent to buy ratio of 0.18 means that the average rental value of residential property is very less compared to its higher prices. Renting is the best option.




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 ahigh 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 whencompared 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 twelve major localities of Delhi: Delhi East, Delhi South, Faridabad (Sector 86), Golf Course Extension Road, Golf Course Road, Indirapuram, Noida City, Noida-Greater
Noida Expressway, Rohini Sec-13, Safdarjung Enclave, Sohna Road and Vasant Kunj.


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 occupyresidential 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 considering50% 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
4.1 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.

 

Figure 2: Historical values of National Housing Board India Residential Index (NHB Residex)9 Delhi as a city has recorded a raise of 72% in its NHB Residex value compared to the base year, 2007. Zone C has recorded the highest raise in the index value by 132%. Zones G has followed up with an 83% raise. Zones A and E have recorded a raise of 77% in their index when compared to the base year 2007. Zones B, F and D have recorded a raise of 58%, 35% and 23% respectively. Four zones have outperformed the city average while three zones have underperformed.

Safdarjung Enclave falls under Zone B, Vasant Kunj under Zone C and Rohini Sector under Zone E. Golf Course Road, Sohna Road, Golf Course Extension Road, Noida-Greater Noida Expressway, Noida City and Indirapuram fall under Zone D. Delhi East and Delhi South fall under Zones F and G respectively.


It is evident that each of the zones have different real estate markets 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. 50

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 twelve localities of Delhi. 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. Vasant Kunj's property prices (INR 18,408,500) as per NHB Residex have grown by 132% but still remain less than that of Safdarjung Enclave (INR 119,648,000) which appreciated by only 58%. Rohini Sec-13 whose property prices (INR 13,262,000) doubled as per NHB Residex are identical with that of Golf Course Road (INR 14,000,000) which recorded a 23% raise in its index value. This means that the property prices of Vasant Kunj and Rohini Sec-13 in the base year 2007 were less compared to other localities.

The most important factor that stands out from the rental value of the properties across the twelve localities is the anomaly of the property values not being translated to the corresponding rental values. Noida City's average property price (INR 5,100,000) is less than that of Sohna Road (INR 6,400,000) by 26%. But the Average rental value of Noida City (INR 13,250) is higher than that of Sohna Road (INR 10,750) by nearly 23%. The same case has been observed with Rohini Sec-13 and Golf Course Road. Though their average residential property values are identical, the average rental value of Golf Course Road (INR 21,000) is higher than that of Rohini Sec-13 (INR 18,000) by 17%.

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 twelve major localities of Delhi. Faridabad (Sector 86) stands out as the most affordable locality to buy and rent. Safdarjung Enclave stands out to be the least affordable place in both scenarios. Indirapuram is the second most affordable place and Vasant Kunj is second least affordable place. Golf Course Road and Delhi South take the 9th and 10th place respectively in both scenarios. This means that the high/low property prices of the above mentioned 6 localities are translated to their relative rental prices.


Sohna Road ranks 3rd and 5th on the affordability to rent and affordability to buy rankings respectively. Noida-Greater Noida Expressway ranks 5th and 3rd on the affordability to rent and affordability to buy rankings respectively. This means that the average property price in Noida-Greater Noida Expressway is less than that of Sohna Road but the rental value is higher. Golf Course Extension Road ranks 4th and 6th on the affordability to rent and affordability to buy rankings respectively. Noida City ranks 6th and 4th on the affordability to rent and affordability to buy rankings respectively. This means that the average pr opertyprice in Noida City is less than that of Golf Course Extension Road but the rental value is higher. Rohini Sec-13 ranks 7th and 8th on the affordability to rent and affordability to buy rankings respectively. Delhi East ranks 8th and 7th on the affordability to rent and affordability to buy rankings respectively. This means that the average property price in Delhi East is less than that of Rohini Sec-13 but the rental value is higher. This signifies the fact that people of different localities have different expectations from their real estate markets.

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 twelve major localities in Delhi.

 

Safdarjung Enclave being the costliest locality offers a space of 5.09 sq ft per INR 1 lakh. Faridabad (Sector 86) being the cheapest locality offers a space of 28.72 sq ft per INR 1 lakh. Indirapuram offers a space of 26.67 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 Safdarjung Enclave has to spend at least 5 times the amount he spends in Faridabad and Indirapuram. A professional gets 21.05 sq ft and 19.61 sq ft space for INR 1 lakh in Noida-Greater Noida Expressway and Noida City respectively. Sohna Road and Golf Course Extension Road offer a space of 15.63 sq ft and 13.07 sq ft per INR 1 lakh respectively. A professional gets a living space of 10.60 sq ft per INR 1 lakh in Delhi East. Rohini Sec-13 and Golf Course Road offer a space of 7.48 sq ft and 7.14 sq ft per INR 1 lakh respectively. The second and third costliest localities, Delhi South and Vasant Kunj offer a space of 5.81 sq ft and 5.43 sq ft per INR 1 lakh respectively. Figure 4 attuned to the Affordability to Buy Ranking mentioned above.

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.

 

 

 

 

*On a scale of 1 to 8 based on the monthly cost of renting and monthly cost of buying with 1 being buy as soon as possible and 8 being renting is better than buying.

Rohini Sec-13 and Delhi South has the least rent to buy ratio. This signifies the fact that the higher property prices of the localities are not being translated to the rental value in these localities. Renting a house is cheaper than owning a house by at least 84%. Golf Course Extension Road, Golf Course Road, Safdarjung Road and Vasant Kunj also have low rent to buy ratios. Indirapuram has the highest rent to buy ratio compared to other localities.

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 0.34 and the average monthly out of pocket cost of Owning house being moderate, rents being relative higher Indirapuram ranks high in the urgency to buy ratio. Noida-Greater Noida Expressway and Noida City are also ranked high on urgency to buy rank.

Faridabad and Delhi East rank 4th and 5th respectively in the urgency to buy rank. The 6th and 7th position in the urgency to buy rank is taken by Sohna Road and Vasant Kunj respectively. Safdarjung Enclave takes the 8th position in the urgency to buy rankings.. The 10th position in the urgency to buy rank is taken by Chembur


4.5 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 twelve 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 Indirapuram is 14 years. The cost matchup in Noida-Greater Noida Expressway, Noida City and Faridabad is 15 years. It takes more than 15 years in Delhi East, Delhi South, Golf Course Extension Road, Golf Course Road, Rohini Sec-13, Safdarjung Enclave, Sohna Road and Vasant Kunj. The planned length of stay in the house becomes an important aspect in deciding whether to buy or rent.

 

Delhi East :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.

Delhi South :The score of 55 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.

Faridabad (Sector 86) :A professional with a salary of 8 lakhs is better of renting even though the rents are high. This is because he can't afford the EMI in this salary range. A professional with a salary range of 9-11 lakhs falls in the neutral zone i.e. he can afford both renting and buying. A professional with a salary range of 12-25 lakhs is advised to buy.

Golf Course Extension Road :A professional with a salary range of 8-20 lakhs can afford to rent but can't afford to buy in this locality. A professional with a salary range of 21-25 lakhs can afford to buy but because of the low rents is advised to rent.

Golf Course Road :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.

Indirapuram :A professional with a salary of 8 lakhs is better of renting even though the rents are high. This is because he can't afford the EMI in this salary range. A professional with a salary range of 9-11 lakhs falls in the neutral zone i.e. he can afford both renting and buying. A professional with a salary range of 12-25 lakhs is advised to buy.

Noida City :A professional with a salary range of 8-12 lakhs is better of renting. A professional with a salary range of 13-15 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. The professionals with a salary range of 16-25 lakhs are advised to buy.

Noida-Greater Noida Expressway :A professional with a salary range of 8-11 lakhs is better of renting. 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. The professionals with a salary range of more than 15 lakhs are advised to buy.


Rohini Sec-13 :The score of 55 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.

Safdarjung Enclave :A professional with a salary of 8 lakhs cannot afford this locality. He will not be able to pay the rents nor will he be able to afford the EMI payments. A professional with a salary range of 9-25 lakhs can afford the rents in this locality but can't afford the EMI associated with home loans.

Sohna Road :The score of 55 for a professional with a salary range of 8-15 lakhs signifies that the monthly cost of renting is cheaper than buying by more than 70%. The low rental prices also meant that though the professional with a salary more than 16 lakhs can afford to buy a house renting is a better option.

Vasant Kunj :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.

 

*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.

7 Conclusion

Based on the current real estate markets, Faridabad (Sector 86) and Indirapuram 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 Faridabad (Sector 86) and Indirapuram provide a better lifestyle option. The real estate market of Noida City favors the home owners because of its moderate property prices and high rental value. Though the moderate property prices of Sohna 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 Rohini Sec-13 make the decision to rent easier. Safdarjung Enclave 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 thirteen major localities of Delhi 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 Delhi:

Delhi East, Delhi South, Faridabad (Sector 86), Golf Course Extension Road, Golf Course Road, Indirapuram, Noida City, Noida-Greater Noida Expressway, Rohini Sec-13, Safdarjung Enclave, Sohna Road and Vasant Kunj.

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 lakh both in the case of house ownership and renting.


FIGURES:

Figure1: Graphical Representation of Buy Vs. Rent in Delhi

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

Figure 3: Average property price and rental values across twelve major localities of Delhi

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

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


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 twelve major localities across Delhi

Table 4 : ArthaYantra Buy vs. Rent Score Explanation

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

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


 

ArthaYantra is a young and innovative company started by a group of alumni of the Indian School of Business (ISB) Hyderabad. It provides integrated personal finance services using its unique proprietary framework, Personal Financial Lifecycle Management (PFLM)TM, which helps clients achieve their financial goals. ArthaYantra's vision is to provide independent, high quality, customized financial planning solutions and their efficient execution to individuals. It employs proprietary financial models and enable investments through well balanced passive investment strategies. ArthaYantra's clientele includes individuals from India, US, Europe and Middle East.


For more information on this report please contact ArthaYantra Corporation Pvt. Ltd.


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Monday, 01 April 2013 00:00

Buy Vs Rent Research Report Mumbai-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. Conclusion 21
8. Limitations and Concerns 21
9. Appendix 22


Summary


Property cost vs Rental Value :The Residential Property prices in Chembur and Borivali West are not being translated to their rental value. Though the average residential property values of Chembur is higher than Ghatkopar by 32%, the average rental value is less by nearly 21%. The same case goes with Borivali West and Bhandup West. Though their average residential property values are identical, their average rental values differ by nearly 19%.

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 Virar and Kalyan. In Mira Road and Kharghar it takes 5 years and in Ghodbunder Road it takes 6. In Pokaran Road a professional has to save for 7 years and in Ghatkopar and Bhandup West a professional has to save for 8 years to afford the down payment amount required. It takes 9 years to save for a house down payment in Borivali West and 10 years in Wadala, Andheri and Chembur. It takes the longest to save in
Lower Parel (14 years).


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 24 per INR 1 lakh in Virar makes it the place where you can get the highest area for the same amount of money compared to other 12 localities. This implies that for a given price one can get the largest space in Virar followed by Kalyan, Kharghar, Mira Road, Ghodbunder Road, Pokaran Road, Ghatkopar, Bhandup West, Borivali West, Chembur, Andheri and Wadala.Lower Parel 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 0.43 shows that the rental values in Ghatkopar are higher and makes it an “immediately buy when you can afford” place. The ratio of 0.33 for Lower Parel 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 12 years for Ghatkopar, 14 for Wadala and Andheri, 15 for Lower Parel and Kharghar and above 15 years for Bhandup West, Borivali West, Chembur, Ghodbunder Road, Kalyan, Mira Road, Pokaran Road and Virar. 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


Andheri :The rent to buy ratio of 0.34 meant that the rental prices are high. A professional with a salary range of 8-14 lakhs cannot afford to buy or rent in this locality. A salary range of 15-25 lakhs allows a professional to rent but not buy.

Bhandup west :A rent to buy ratio of 0.29 and high property prices makes it a place to rent. It is advisable to rent for a professional with a salary range of 8 – 25 lakhs.

Borivali west :A rent to buy ratio of 0.23 and high property prices and cheaper rental values when compared to the prices makes it a place to rent. It is advisable to rent for a professional with a salary range of 8-25 lakhs.

Chembur :Though the average residential property values of Chembur is higher than Ghatkopar by 32%, the average rental value is less by nearly 21%. A rent to buy ratio of 0.26 and high property prices makes it a place to Rent.

Ghatkopar :The rent to buy ratio of 0.43 meant that the average rental value of residential property is high compared to the average property price. This makes Ghatkopar a place to buy. The moderate prices 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 12th year (fastest of the thirteen localities).

Ghodbunder Road :A rent to buy ratio of 0.27 and moderately high property prices and cheaper rental values makes it a place to rent. A professional with a salary range of 8-15 lakhs should rent. The low rental prices also meant that though the professional with a salary more than 16 lakhs can afford to buy a house renting is a better option.

Kalyan :A rent to buy ratio of 0.27 and moderately high property prices and cheaper rental values makes it a place to rent. A professional with a salary range 8-11 lakhs is advised to rent. A professional with a salary more than 12 lakhs can afford to buy a house, but becauseof the low rents, renting is a better option.

Kharghar :The rent to buy ratio of 0.32 meant that the rental prices are moderately high and it is advisable to buy. The years required to save for down payment (5 years) and the property prices being in an affordable range make it an affordable locality.

Lower Parel :The rent to buy ratio of 0.33 meant that the rental prices are high and one is advised to buy. But even the property prices are very high. A professional with a salary range of 8-25 lakhs cannot afford to buy or rent in this locality.

Mira Road :The rent to buy ratio of 0.25 meant that the rental prices are cheaper compared to EMI to be paid in case of ownership. A professional with a salary range of 8-15 lakhs should rent. The low rental prices also meant that though the professional with a salary more than 16 lakhs can afford to buy a house renting is a better option.

Pokaran Rd :The rent to buy ratio of 0.24 meant that the rental prices are cheaper compared to EMI to be paid in case of ownership. A professional with a salary range of 8-20 lakhs can afford to rent but can't afford to buy in this locality. A professional with a salary range of 21-25 lakhs can afford to buy but because of the low rents is advised to rent.

Virar :A professional with a salary range 8-11 lakhs is advised to rent. He should rent even with the high rents because he can't afford the EMI associated with a home loan. A professional with a salary more than 12 lakhs can afford to buy a house, but because of the low rents, renting is a better option. A rent to buy ratio of 0.26 meant that renting is better in this locality.

Wadala :The rent to buy ratio of 0.35 meant that the rental prices are high. A professional with a salary range of 8-14 lakhs cannot afford to buy or rent in this locality. A salary range of 15-25 lakhs allows a professional to rent but not buy. Buy Vs. Rent in Mumbai


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 Mumbai: Andheri, Bhandup West, Borivali West, Chembur, Ghatkopar, Ghodbunder Road, Kalyan, Kharghar, Lower Parel, Mira Road, Pokaran Road,Virar and Wadala.

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 Mumbai: Andheri, Bhandup West, Borivali West, Chembur, Ghatkopar, Ghodbunder Road, Kalyan, Kharghar, Lower Parel, Mira Road, Pokaran Road, Virar and Wadala.

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.

Income tax savings under section 80c and 24 b


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

4.1 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. Mumbai as a city has recorded a raise of 97% in it NHB Residex value compared to the base year of 2007. Zone 2 has recorded the highest raise in the index value by 243%. Zones 3 and 1 followed up with a 119% and 110% raise respectively. All the other zones except Other Municipalities have recorded raise in their index value ranging from 2% to 96% when compared to their base year. Other Municipalities Zone has recorded a decline of 9% when compared to the base year of 2007.

Lower Parel falls under Zone 2, Andheri under Zone 3 and Chembur under Zone 4. Borivali West and Bhandup West fall under Zones 5 and 6 respectively. Kharghar comes under the Navi Mumbai Zone. Pokaran Road comes under the Thane Zone. Kalyan cones under Kalyan Zone and Mira Road under Mira Byander Zone. Virar falls under the Virar Vasai Zone.

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.

 

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 thirteen localities of Mumbai. The bar graph depicts the average property price in the locality and the line graph depicts the average rental value in the locality.


Lower Parel's property prices as per NHB Residex have grown two and half times. This locality has seen the highest increase in Mumbai city and this is shown in its property price of INR 27,500,000. Andheri whose property prices (INR 14,500,000) doubled as per NHB Residex are identical with that of Chembur (INR 14,183,500) which recorded a 54% raise in its index value.

The most important factor that stands out from the rental value of the properties across the thirteen localities is the anomaly of the property values not being translated to the corresponding rental values. Ghatkopar's average property value (INR 10,750,000) is less than that of Chembur (INR 14,183,500) by 32%. But the Average rental value of Ghatkopar (INR 40,000) is higher than that of Chembur (INR 31,500) by nearly 21%. The same can be said about Borivali West and Bhandup West. Though their average residential property values are almost similar, the average rental value of Bhandup West (INR 28,000) is higher than that of Borivali West (INR 23,500) by 19%.

 


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 thirteen major localities of Mumbai. Virar stands out as the most affordable place to buy and rent. Lower Parel stands out to be the least affordable place in both scenarios. Kalyan is the second most affordable place and Wadala is the second least affordable place. Ghodbunder Road and Pokaran road take the 5th and 6th place respectively in both scenarios. Bhandup West and Andheri take the 8th and 11th place respectively in both scenarios. This means that the high/low property prices of the 8 localities are translated to their relative rental prices.

Mira Road ranks 3rd on the affordability to rent where as it ranks 4th on affordability to buy. Kharghar ranks 4th on the affordability to rent where as it ranks 3rd on affordability to buy. This means that the average property price in Kharghar is less than that of Mira Road but the rental value is higher. Borivali West ranks 7th on the affordability to rent where as it ranks 9th on affordability to buy. Chembur ranks 9th on the affordability to rent where as it ranks 10th on affordability to buy. Ghatkopar ranks 10th on the affordability to rent where as it ranks 7th on affordability to buy. This means that the average property price in Ghatkopar is less than that of Chembur and Borivali West but the rental value is higher. This signifies the fact that people of different localities have different expectations from their real estate markets.

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 Virar and Kalyan in 4 years. In order to own a house in Mira Road and Kharghar professional has to save for 5 years. To buy a house a professional will need to save for 6 and 7 years in Ghodbunder Road and Pokaran Road respectively. A professional can afford the down payment required to buy a house in Ghatkopar and Bhandup West in 8 years. In order to own a house in Borivali West a professional has to save for 9 years. To save for the down payment of a house in Wadala, Andheri and Chembur a professional will need to save for 10 years. To buy a house in Lower Parel a professional will need to save for 14 years. Figure 3 is in sync with the assigned affordability ranks for ownership.

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 thirteen major localities in Mumbai.

 

Lower Parel being the costliest locality offers a space of 3.63 sq ft per INR 1 lakh. Virar being the cheapest locality offers a space of 24 sq ft per INR 1 lakh. Kalyan offers a space of 21.97 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 Lower Parel has to spend at least 7 times the amount he spends in Virar and Kalyan. A professional gets 16.95 sq ft space for INR 1 lakh in Kharghar and Mira Road. Ghodbunder Road and Pokaran Road offer a space of 14.29 sq ft and 11.19 sq ft per INR 1 lakh respectively. Ghatkopar and Bhandup West offer a space of 9.30 sq ft and 8.99 sq ft per INR 1 lakh respectively. Borivali West and Chembur offer a space of 8.27 sq ft and 7.05 sq ft per INR 1 lakh respectively. Andheri and Wadala offer a space of 6.90 sq ft and 6.45 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.

 

Borivali West 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 77%. Mira Road and Pokaran Road also have low rent to buy ratios. Ghatkopar has 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 0.43 and the average monthly out of pocket cost of Owning house being moderate, rents being relative higher Ghatkopar ranks high in the urgency to buy ratio. Wadala and Andheri are also ranked high on urgency to buy rank.

Lower Parel and Kharghar rank 4th and 5th respectively in the urgency to buy rank. The 6th and 7th position in the urgency to buy rank is taken by Bhandup West and Ghodbunder Road respectively. Kalyan and Virar take the 8th and 9th positions respectively. The 10th position in the urgency to buy rank is taken by Chembur.

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.

 


4.5 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 thirteen 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 Ghatkopar is 12 years. The cost matchup in Wadala and Andheri happens in 14 years. In Lower Parel and Kharghar, it takes 15 years. It takes more than 15 years in Bhandup West, Borivali West, Chembur, Ghodbunder Road, Kalyan, Mira Road, Pokaran Road and Virar. The planned length of stay in the house becomes an important aspect in deciding whether to buy or rent.

 

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.

 

 

Andheri :A professional with a salary range of 8-14 lakhs cannot afford to stay in this locality. A professional with a salary range of 15-25 lakhs has a score of 65. 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.

Bhandup west :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.

Borivali west :The score of 55 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.

Chembur :A professional with a salary of 8 lakhs cannot afford this locality. He will not be able to pay the rents nor will he be able to afford the EMI payments. A professional with a salary range of 9-25 lakhs can afford the rents in this locality but can't afford the EMI associated with home loans.

Ghatkopar :A professional with a salary range of 8-11 lakhs cannot afford to stay in this locality. The ABRS score of 75 for a salary range of 12-25 lakhs signifies the fact that the rental value is critically high but a professional in this salary range cannot afford to buy.

Ghodbunder Road :The score of 55 for a professional with a salary range of 8-15 lakhs signifies that the monthly cost of renting is cheaper than buying. The low rental prices also meant that though the professional with a salary more than 16 lakhs can afford to buy a house renting is a better option.

Kalyan :A professional with a salary range 8-11 lakhs is advised to rent. He should rent even with the high rents because he can't afford the EMI associated with a home loan. A professional with a salary more than 12 lakhs can afford to buy a house, but because of the low rents, renting is a better option.


Kharghar :The score of 65 for a professional with a salary range of 8-15 lakhs 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. A professional with a salary more than 16 lakhs is advised to buy.

Lower Parel :A professional with a salary range of 8-25 lakhs cannot afford the rents or the EMI associated with a home loan in this locality.

Mira Road :The score of 55 for a professional with a salary range of 8-15 lakhs signifies that the monthly cost of renting is cheaper than buying.The low rental prices also meant that though the professional with a salary more than 16 lakhs can afford to buy a house renting is a better option.

Pokaran Rd :A professional with a salary range of 8-20 lakhs can afford to rent but can't afford to buy in this locality. A professional with a salary range of 21-25 lakhs can afford to buy but because of the low rents is advised to rent.

Virar :A professional with a salary range 8-11 lakhs is advised to rent. He should rent even with the high rents because he can't afford the EMI associated with a home loan. A professional with a salary more than 12 lakhs can afford to buy a house, but because of the low rents, renting is a better option.

Wadala :A professional with a salary range of 8-14 lakhs cannot afford to stay in this locality. A professional with a salary range of 15-25 lakhs has a score of 65. 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.

 

7 Conclusion

Based on the current real estate markets, Virar and Kalyan 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 Virar and Kalyan provide a better lifestyle option. The real estate market of Ghatkopar favors the home owners because of its moderate property prices and high rental value. Though the moderate property prices of Mira 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 Borivali West make the decision to rent easier. Lower Parel 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 thirteen major localities of Mumbai 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 of Mumbai:

Andheri, Bhandup West, Borivali West, Chembur, Ghatkopar, Ghodbunder Road, Kalyan, Kharghar, Lower Parel, Mira Road, Pokaran Road, Virar and Wadala.

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.
FIGURES:

Figure 1:Graphical Representation of Buy Vs. Rent in Mumbai

Figure 2:Historical values of National Housing Board India Residential Index (NHB Residex)

Figure 3:Average property price and rental values across thirteen major localities of Mumbai

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

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

Figure 6:Break even horizon for the thirteen major localities of Mumbai


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 thirteen major localities of Mumbai

Table 4 :ArthaYantra Buy vs. Rent Score Explanation

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

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+)


 

ArthaYantra is a young and innovative company started by a group of alumni of the Indian School of Business (ISB) Hyderabad. It provides integrated personal finance services using its unique proprietary framework, Personal Financial Lifecycle Management (PFLM)TM, which helps clients achieve their financial goals. ArthaYantra's vision is to provide independent, high quality, customized financial planning solutions and their efficient execution to individuals. It employs proprietary financial models and enable investments through well balanced passive investment strategies. ArthaYantra's clientele includes individuals from India, US, Europe and Middle East. For more information on this report please contact ArthaYantra Corporation Pvt. Ltd.


visit us online: www.arthayantra.com or Write to :This email address is being protected from spambots. You need JavaScript enabled to view it.

Website: www.arthayantra.com

 

 

Monday, 01 April 2013 00:00

Buy Vs Rent Research Report Hyderabad-2013

Written by

 

 

 

 

 

Table of Contents

Summary

1.Introduction

2. Methodology

3.Assumptions

4.Findings

4.1 Historical data of Real estate prices

4.2 Property Cost vs Rental Value

4.3 Down Payment

4.4 Area

4.5 Rent to Buy Ratio

4.6 Break Even Horizon

5 ArthaYantra Buy vs Rent Score (ABRSTM)

6. Other Important Numbers

7.Conclusion

8.Limitations and Concerns

9. Appendix

 

 

Summary

 

Property cost vs Rental Value: The Residential Property price in Tellapur is not being translated to its rental value. Though the average residential property value of Tellapur is higher than Miyapur by 3.8%, the average rental value is higher by nearly 81.82%. The same case goes with Kukatpally and Kondapur.

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 3 years to save for the required corpus in L.B Nagar, Rajendra Nagar, Miyapur and Tellapur. In Kukatpally, Kondapur and Begumpet it takes 4 years. It takes 7 years to afford the down payment amount required in Banjara Hills.


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 37.74 per INR 1 lakh in Miyapur makes it the place where you can get the highest area for the same amount of money compared to other eight localities. This implies that for a given price one can get the largest space in Miyapur followed by Tellapur, L.B Nagar, Rajendra Nagar, Kukatpally, Kondapur and Begumpet. Banjara Hills 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 0.45 shows that the rental values in Kondapur are higher and makes it an “immediately buy when you can afford” place.

 

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 11 years for Begumpet, Kondapur and Tellapur. The costs don't matchup in the case of Banjara Hills, Kukatpally, L.B Nagar, Miyapur and Rajendra Nagar. 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.

 

Banjara Hills : The highest in terms of average property prices and rental values among the eight localities considered. The rent to buy ratio of 0.27 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 eight localities) make it a place to rent.

Begumpet : The rent to buy ratio of 0.44 meant that the average rental value of residential property is high compared to the average property price. This makes Begumpet 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 11th year. A professional with a salary range of 9-25 lakhs can afford to buy in this locality.

Kondapur : The rent to buy ratio of 0.45 meant that the average rental value of residential property is high compared to the average property price. This makes Kondapur 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 11th year.

Kukatpally :The rent to buy ratio of 0.31 meant that the rental prices are moderately high and it is advisable to buy. The years required to save for down payment (4 years) and the property prices being in an affordable range makes it an affordable locality. A professional with a salary range of 12-25 lakhs is advised to buy in this locality.

L.B Nagar : The rent to buy ratio of 0.27 meant that the average rental value of residential property is very less compared to its property price. A professional with a salary range of 9-25 lakhs can afford to buy in this locality but due to the low rents is advised to rent.

Miyapur : The rent to buy ratio of 0.27 meant that the average rental value of residential property is very less compared to its property price. A professional with a salary range of 9-25 lakhs can afford to buy in this locality but due to the low rents is advised to rent.

Rajendra Nagar : The rent to buy ratio of 0.30 meant that the rental prices are moderately high and it is advisable to buy. The years required to save for down payment (3 years, which is least among the eight localities) and the property prices being in an affordable range makes it an affordable locality. A professional with a salary range of 12-25 lakhs is advised to buy in this locality.

Tellapur : The rent to buy ratio of 0.43 meant that the average rental value of residential property is high compared to the average property price. This makes Tellapur is a place to buy. The moderate prices and second highest number of sq ft per INR 1 lakh make it a place where 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 11th year. A professional whose salary range is between 9-25 lakhs can afford to buy in this locality.

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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 isgoing 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 themajor 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 itis 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 Hyderabad: Banjara Hills, Begumpet, Kondapur, Kukatpally, L.B Nagar, Miyapur, Rajendra Nagar and Tellapur.

 

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 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.

 

Factors associated with buying a house

Factors associated with renting a house

Down payment for home loan

Security Deposit

No. ofYears required to save for down payment

Monthly Rent

EMI on home loan

Yearly increase in rent

Monthly property maintenance charges

Monthly property maintenance charges

Annual repairs

Income tax savings under HRAexemption

Annual property tax

 

Income tax savings under section 80c and

24 b

 

Table 1: Factors associated with home ownership and renting

 

 

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


4.1 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.

 

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Hyderabad as a city has recorded a decline of 15% when compared to the base year of 2007. The Other Zone of Hyderabad has recorded the highest raise in the index value by 96%. East Zone followed up with a 20% raise. West and North Zones have recorded a decline when compared to base year by 6% and 19% respectively. South and Central Zones have also recorded a decline of 32% and 36% respectively. Other, East and West Zone have performed better than the city while North, South and Central Zones have not done as well as the city. Banjara Hills falls under the Central Zone. Begumpet falls under the North Zone. Kondapur, Kukatpally, Miyapur and Tellapur fall under the West Zone. Rajendra Nagar falls under the South Zone and L.B Nagar falls under the East 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.

 

 

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 Hyderabad. The bar graph depicts the average property price in the locality and the line graph depicts the average rental value in the locality.
The anomaly of rental prices not being proportionate with the property prices is evident from Figure 2. The average property price in Tellapur (INR 2,750,000) is higher than that of Miyapur (INR 2,650,000) by 3.8% but the average rental price is higher by 81.82%. Similarly the average property price in L.B Nagar is higher than that of Tellapur by 3.5% but the rental value is less by 40%. The same case can be observed in case of Kukatpally and Kondapur. Banjara Hills stands out as the costliest place in terms of both rental value and property prices.

 

 

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The important factor that stands out when from the rental value of the property prices is that in Hyderabad, the rental values are directly proportional to the property prices excluding the area of Tellapur. If we actually exclude the rental prices and property prices of Tellapur and look at the graph, we can observe the rental prices getting higher once the property prices increase

 

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 Hyderabad. Miyapur stands out as the most affordable place in Hyderabad to rent or buy. Tellapur is the second most affordable place to buy but it ranks 5th on the affordability to rent because of its higher rental price. L.B Nagar is the second most affordable place to rent. Banjara Hills is the least affordable place to buy or rent. Begumpet and Kondapur are the second and third least affordable places to buy or rent. As discussed above, excluding Tellapur the affordability to rent and affordability to buy ranks match up for the other eight localities, proving the proportionality of rental prices to property prices in Hyderabad.

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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.

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buy a house

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 L.B Nagar, Rajendra Nagar, Miyapur and Tellapur in 3 years. A professional will need to save for 4 years to be able to afford a house in Kukatpally, Kondapur and Begumpet. In order to own a house in Banjara Hills a professional has to save for 7 years.

 

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.

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Banjara Hills, L.B Nagar and Miyapur have the least rent to buy ratio. This signifies the fact that the property prices of these localities are not being translated to the rental value in the locality. Renting is cheaper than owning a house by at least 73%. Begumpet, Kondapur and Tellapur have 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 0.45 and the average monthly out of pocket cost of Owning house being moderate, rents being relative higher Kondapur ranks high in the urgency to buy ratio. Begumpet and Tellapur rank 2nd and 3rd in the 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 matchup of cost of ownership and renting in Begumpet, Kondapur and Tellapur happens in 11 years. The costs don't matchup in the case of Banjara Hills, Kukatpally, L.B Nagar, Miyapur and Rajendra Nagar. The planned length of stay in the house becomes an important aspect in deciding whether to buy or rent.

 

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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.

 

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Banjara Hills : The score of 55 for a professional with a salary range of 8-20 lakhs signifies he can't afford to buy but can afford to rent. A professional with a salary range of 21-25 lakhs can afford to rent and buy. But the low rental prices compared to the high EMI payments mean that the professional should rent.

Begumpet : The ABRS score of 75 for a professional with a salary of 8 lakhs signifies the fact the rental value is critically high but a professional in this salary range cannot afford to buy.A professional whose salary range is between 9-25 lakhs is better off owning a home than renting it.

Kondapur : The ABRS score of 75 for a salary of 8 lakhs signifies the fact the rental value is critically high but a professional in this salary range cannot afford to buy. A professional whose salary range is between 9-25 lakhs is better off owning a home than renting it.

Kukatpally : A professional with a salary of 8 lakhs can afford to rent in this locality but cannot afford to buy. A professional with a salary range of 9-11 lakhs is rent neutral, that means that he can afford both renting and buying in this locality but is advised to rent. A professional with a salary range of 12-25 lakhs is advised to buy.

 

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L.B Nagar : A professional with a salary of 8 lakhs is rent neutral, that means that he can afford both renting and buying in this locality but is advised to rent. A professional with a salary range of 9-25 lakhs is advised to buy as the rents are higher when compared to the property prices.

Miyapur : A professional with a salary of 8 lakhs is rent neutral, that means that he can afford both renting and buying in this locality but is advised to rent. A professional with a salary range of 9-25 lakhs is advised to buy as the rents are higher when compared to the property prices.

Rajendra Nagar : A professional with a salary range of 8-11 lakhs is rent neutral, that means that he can afford both renting and buying in this locality but is advised to rent. A
professional with a salary range of 12-25 lakhs is advised to buy.

Tellapur : The ABRS score of 77.5 for a professional with a salary of 8 lakhs signifies that he is in a neutral zone. He can afford to rent and buy. A professional whose salary range is between 9-25 lakhs is better off owning a home than renting it.

 

6. Key Factors

Here are some important numbers to look at before making the decision:

 

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7. Conclusion

Based on the current real estate markets, Miyapur and L.B Nagar 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 Miyapur and L.B Nagar provide a better lifestyle option. The real estate market of Tellapur and favors the home owners because of its moderate property prices and high rental value. Though the moderate property prices of Rajendra Nagar and Kukatpally make a strong case of ownership for professionals with higher salaries, the low rental values make renting a better option. Banjara Hills 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 Hyderabad 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:

Banjara Hills, Begumpet, Kondapur, Kukatpally, L.B Nagar, Miyapur, Rajendra Nagar and Tellapur.

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:

Figure 1: Graphical Representation of Buy Vs. Rent in Hyderabad
Figure 2: Historical values of National Housing Board India Residential Index (NHB Residex)
Figure 3: Average property price and rental values across eight major localities of Hyderabad
Figure 4: No. of years required to save the corpus for down payment across eight major
localities of Hyderabad
Figure 5: Average no. of sq ft per INR 1lakh across eight major localities of Hyderabad
Figure 6: Break even horizon for the eight major localities of Hyderabad

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 Hyderabad
Table 4 : ArthaYantra Buy vs. Rent Score Explanation
Table 5 : ArthaYantra Buy vs. Rent scores for different salary ranges across eight
major Localities of Hyderabad.
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+)

 

 

ArthaYantra is a young and innovative company started by a group of alumni of the Indian School of
Business (ISB) Hyderabad. It provides integrated personal finance services using its unique
proprietary framework, Personal Financial Lifecycle Management (PFLM)TM, which helps clients
achieve their financial goals. ArthaYantra's vision is to provide independent, high quality,
customized financial planning solutions and their efficient execution to individuals. It employs
proprietary financial models and enable investments through well balanced passive investment
strategies. ArthaYantra's clientele includes individuals from India, US, Europe and Middle East.
For more information on this report please contact ArthaYantra Corporation Pvt. Ltd.

Our Mission
To positively impact the future of our customers & their families.



For more information on this report please contact ArthaYantra Corporation Pvt. Ltd. visit us online: www.arthayantra.com or Write to : This email address is being protected from spambots. You need JavaScript enabled to view it.

 

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Phone : +91- 040-66588131, Fax : +91-040-66245. www.arthayantra.com, This email address is being protected from spambots. You need JavaScript enabled to view it.

 

Our name is inspired from the famous historical book Arthashastra, written by the great Indian philosopher Kautilya (also known as Chanakya, c. 350-275 BCE) over 2,000 years ago. In Sanskrit, Artha means wealth and Yantra means an Instrument. Literally translated, ArthaYantra means an Instrument that enables the creation of wealth and all round prosperity

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