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Is renting a house more cost-effective?

Is renting a house more cost-effective?

In the current scenario, yes. It's a better option than buying a house as the real estate market is overheated and speculation has driven up the prices, while rental values have not kept pace with this trend.

If you are an Indian, it's a given that you will buy a house. Living on rent is mostly considered infra dig, paying rent is perceived a waste of money. If it isn't a compulsion you derive from your DNA, there are enough number of family members and well-wishers to hammer it into you.

Buying a house would be an ideal move in most cases, but in the current context, it may be better to rent. In the past decade, property prices have shot up dramatically and rental values have not kept pace. In a recent survey by ICICI Direct across Indian cities, 37.3 per cent of the respondents said there had been no increase in their rents in the past year.

Another 27.2 per cent reported less than 5 per cent increase, while 25.5 per cent had to pay only 5-10 per cent more. The tardy rise in rental values means that instead of tying down a huge amount to buy a house, you can rent one for just a fraction of this sum. Even in the most populous urban pockets, the monthly rent is less than 0.3 per cent of the price of the property.

For instance, a loan of Rs 40 lakh for 15 years at 10 per cent would require an EMI of Rs 43,000. But the same property can be taken on rent for about Rs 12,000 a month, a saving of Rs 31,000.

Apart from cities like Mumbai, where very little land is available, investment in real estate is leading to a huge growth in housing capacity. This is expected to keep rents in check. Another factor in favour of renting is the improving affordability levels.

"Staying on rent means you lock up a much smaller part of your funds. This implies that you can invest the surplus amount and make your money grow."
Shobhit Agarwal
Joint MD, Capital Markets, Jones Lang LaSalle Meghraj
According to data compiled by HDFC, affordability levels (property prices divided by annual income) have come down from 22 times in 1995 to 4.8 times in December 2009. This means that in 1995, a buyer had to spend 22 times his annual salary to buy a property compared with only 4.8 times in December 2009. This can be attributed to growing incomes. With capacity additions and economic growth, affordability levels will continue to be low.

Thirty-year-old Amarnath realised this accidentally. Soon after his marriage in 2008, he began to look for a house to buy in Hyderabad. After hunting for six months and following the economic slowdown, he got cold feet. So he shelved his plans and began to stay on rent.

Two years into the recovery, he was contacted by the same brokers he had met during his house hunt and offered flats at Rs 400 less than the price quoted in 2008. "It's a good thing I did not buy at that time," says Amarnath.

Currently, he is paying a rent of Rs 7,500 per month, stays close to his office and is planning to wait for some more years before he picks a house. Increased supply and improving affordability levels will ensure he will get a decent place when he is ready to buy his dream house.

Living on rent doesn't mean you can never own a house. What you save on the EMI can be used to build a corpus to buy when your priorities are clear. It is prudent to pick a house early in life only if you are sure of settling in a particular place.

If you are unsure, don't hasten the process. Besides, staying on rent offers the flexibility of location, especially if you have a transferable job. So don't let those well-wishers get to you. Staying on rent may not be a bad idea for now.

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