Owning a home is one of the hottest topic of discussion these days among Family/Friends. Some feel purchasing a house is a good investment even on loan and there are others who feel staying on rent is a smarter choice for a young Investor.
I personally believe in staying clear of any kind of loan. Be it personal or home loan, it’s like a sword hanging above your head. Let’s see how good/bad an idea it is to purchase a house on loan. For a someone young taking a Home Loan would be probably the only option to own his/her dream house.
Always better buying home with cash ( if a land on your name is part of the deal ). It’s the land that appreciates over time and never the concrete block that stands on it. In other words, Apartments should never be termed as an asset.
Everyone these days is paying exorbitant rates for an apartment believing it to be a great investment. Take Mr.Homie, our energetic young homeowner aspirant, who decides to purchase an apartment for various reasons ( peer pressure , emotional family blackmails , false investment promises … ) .
We shall break down his adventures of buying a home into several stages.
The misadventures at Housing Mela’s
Mr.Homie visits one of those housing Mela’s with his friends/family to get a taste of what’s new in the housing market. Agents at the Mela immediately identify the Bakra and attack him like ants to sugar in summer or seen ants carrying a half dead cockroach on their backs, the cockroach tries to move his legs in vain. Agents are paid by the number of scapegoats they can trap. Not giving time for the bakra to think , he is introduced to several so called dream projects currently available from the best builders in town. The dream projects are 2 BHK apartments which cost “just” 80 Lakhs in “Prime” locations.
These days the adverts read “Only 1.5Cr for a 2BHK Apartment”. The word only is wrongly placed. It should be “Only 2 BHK Apartment for 1.5Cr”.
The so-called luxury apartments have a swimming pool, tennis court , basketball court , play area. The irony is most of us don’t know how to swim and even if we do, don’t have the courage to flaunt our six pack body ;). There would be “only” 200 apartments in total with enough space in the common pool even if 1/10th of the occupants decide to swim at the same time on a given day.
Wow, brilliant investment idea exclaimed a friend of mine!!
“I plan to get rich by buying apartments on loan and renting it out”.
The brilliant idea involved paying EMI at 9% on loan to get a return of 2% through rent 
. And mind you, these are highly educated folks !!
As soon as they have convinced you to board the buses (that take you on a free tour of the apartment complex) parked outside the mela , the brain wash begins! Ever wondered if apartments were such a great investment why are the builders so desperately behind you?
At brokerage Kotak Securities, analysts estimate unsold properties held by a group of leading Mumbai developers now stands at some ₹ 53,400 crore—with an additional ₹ 36,800 crore of project launches in the pipeline.
Gold coins, iPhone , motorbikes are being offered out of desperation to lure in new bakras to buy overpriced apartments.
The Prime location and “just” Syndrome
Every apartment complex is located in Prime locations as per the builder, They are a hop away from everything measured in Kilometres(kms) !
- Just 3kms from upcoming metro station
- Just 4kms from multiplex/mall
- Just 3 kms from IT Park
- 5 international schools in just a radius of 4kms
- And just 100 meters from the cemetery, which they don’t mention for obvious reasons.
Unless your apartment is deep down in a forest, it would mostly satisfy all the above Prime location requirements.
Mouth watering Loans
The Agent at the Housing Mela always points out the special Loan/EMI schemes that will expire this month ( sometimes only valid for the day) and might never come Mr.Homie’s way. Mr.Homie hardly gives a nod and within no time the apartment papers are ready , 50L loan pre-approved for 20 years tenure, a gold coin, a dish connection ( for which u need to pay the rentals). Last but not the least a box of sweets for close to diabetic friends at work place and a small party to you close family and friends to justify and feel happy about the accomplishment. All this for a sign on some papers!
How many of you or your family members/friends have narrated this too good to be true stories. Most are in cloud 9 with the thought of having an own house at such a young age!
Debt is like unknowingly selling your soul to the devil.
Let’s open our eyes to the harsh reality and see how good an investment mess Mr.Homie has got himself into. Mr.Homie took a home loan of 50L. How much do you think he will be paying in interest at 9% ( as of jan, 2019 ) for a tenure of 20 years ?
Home Loan of 50L at 9% interest for 20 years
Mr. Homie would have paid a whopping 57.96 Lakhs in Interest alone ! Let’s do some simple math to see the total cost.
| Apartment Expense | Cost in INR ( Crore ) |
|---|---|
| Base price of apartment | 30L cash +50L Loan = 80Lakh |
| Interest amount paid on loan | 57 Lakh |
| Maintenance of 5K/month increasing at ~5% | 20 Lakh |
| TOTAL cost + expense | 1.57 Crore |
Mr.Homie just paid 1.37 Crores for an apartment that had an MRP of 80 Lakhs. Add to this the maintenance charges to be shelled out every month. Assuming it to be 5K , at an increase of 5% over the period of 20 years would be another 20 Lakhs.Thats brings the cost of Mr.Homies apartment to around 1.57 crores at the end of 20 years.
Mr.Homie has a friend in the same apartment and boasts how good an investment it was 20 years back. Their apartments are now priced at 1.6 crores each in the market, a very good return for their investment.
Please not that apartments never go up in price in 20 years 🙂 . They will always depreciate in value !!
1.6 Crore is just a hypothetical number.Forget 20 year old apartment, You cannot find buyers for a 10 year old apartment these days ! Even if someone is ready, it would be a builder , interested in land. The builder would demolish the apartment and charge the apartment owners extra funds ( the cost of construction would be huge in 20 years ) to build a new one.
By now we might have understood what Mr.Homie has landed himself into. Not just that , assume Mr.Homie with luck finds a buyer for his 20 year old ancient apartment at 1.6 Crores.He signs the papers after 20 years “again” with tears in his eyes ( for that emotional attachment with the home, unfortunately not that he has lost money ).
20% Capital gain tax on long term returns is to be paid even on the interest amount paid as part of loan. One cannot take double tax benefit on the loan amount ( most show the loan to get tax rebate ). It’s a big trend in India these days to avail home loan for tax benefits. Luckily it is calculated on the Indexed Cost of the Property.
Before we calculate the profit and capital gain tax we need to understand CII ( Cost Inflation Index ) .
Cost Inflation Index is an index used to factor in the effect of inflation in the prices of Capital Assets. CII is used while calculating long term capital gains.In order to calculate capital gain on sale we need to calculate the Indexed Cost of property( ICOP )
| Indexed Cost of property = APP * ( Index in year of sale / Index in year of Purchase ) where APP = Actual purchase price ICOP = Indexed cost of property In general the CII ratio for 20 years is around 2.5. |
COST INFLATION INDEX
| # | Financial Year | Cost Inflation Index |
|---|---|---|
| 1 | 2001-02 | 100 |
| 2 | 2002-03 | 105 |
| 3 | 2003-04 | 109 |
| 4 | 2004-05 | 113 |
| 5 | 2005-06 | 117 |
| 6 | 2006-07 | 122 |
| 7 | 2007-08 | 129 |
| 8 | 2008-09 | 137 |
| 9 | 2009-10 | 148 |
| 10 | 2010-11 | 167 |
| 11 | 2011-12 | 184 |
| 12 | 2012-13 | 200 |
| 13 | 2013-14 | 220 |
| 14 | 2014-15 | 240 |
| 15 | 2015-16 | 254 |
| 16 | 2016-17 | 264 |
| 17 | 2017-18 | 272 |
| 18 | 2018-19 | 280 |
| 19 | 2019-20 | 289 |
| 20 | 2020-21 | 301 |
Indexed cost of property is calculated to account for inflation. CII is decided by the income tax department every year.
If a property is bought for 10,000/- and sold in 20 years for around 50,000. The Indexed cost of property would be
10,000 * ( 2.5 ) = 25,000/-
The capital gain would be
50,000 – 25,000 = 25,000/-
on which capital gain tax of 20% has to be paid ,which is 5,000/-.
| Apartment Sale | Cost in Crores |
| Purchase price of apartment | 80 Lakhs |
| Apartment Sold at | 1.6 Crore |
| Indexed Cost of Property | 80 Lakhs * 2.5 = 2 Crores |
| Total Profit/Loss | 1.6 Cr – 2Cr = negative 40 Lakhs |
Mr.Homie has made a profit of around 3 lakh ( 1.6Cr – 1.57Cr) in cash and on paper lost 40 Lakh in the span of 20 years.Of course he can claim the 40 lakh as loss to the Income tax Department over the next several years .
In a city like Mumbai, this would still make sense, due to lack of land. In cities like Bangalore , every year a remote village gets added to it. The appreciation of apartment, as an asset, has stagnated.
The owner does not own a piece of land directly when he/she owns an apartment ( its society owned ).
Nearly 50% of the newly constructed apartments are empty ! When you hear a radio ad telling you about only a few more apartments left… think of it logically.. If there were only a few left, why would the builder waste his money giving ads on Radio and newspaper .
All in all , the days of purchasing home as an investment vehicle are gone. In country like US where the loans are cheap and the interest rates in bank for your savings are less than 1%. Real estate is still a good option. Wait for the market to crash and swoop in to make a purchase !!
Read Next: Avoid Debt
Please read the disclaimer carefully before making any investment based on the articles published on this Blog !!
Avinash.tech(...) 
One response to “The Home loan Bubble”
[…] The Home loan Bubble […]
LikeLike