Selling tenancy

Paying rent could be a smarter option than buying a house, given the improving affordability and flexibility that tenancy offers.

R. Sree Ram        Print Edition: October 2010

Buying a house is often seen as the smartest investment decision in one's life. It not only gives the owner a sense of security, but there is also very little chance of losing money in a property deal. Even if you buy during a peak, say at a premium of 10-25 per cent to the market value, you will be compensated for as the value of property appreciates over time.

On the other hand, living on rent is perceived as a waste of money. This is not always true, especially in the current situation. While property prices have shot up dramatically in the past decade, rental values have not kept pace.

In a recent nationwide survey by ICICI Securities, 37.3 per cent of the 2,044 respondents said that the rent they paid had not increased in the past one year. Another 27.2 per cent of the respondents reported a hike of less than 5 per cent, while 25.5 per cent had to pay an increase of only 5-10 per cent.

This tardy rise in rental values means that instead of tying down large funds to buying a house, you can rent one for just a fraction of this amount. Even in the most competitive urban pockets, the monthly rent is just 0.5 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 nearly Rs 43,000. The same property can be had on rent for about Rs 20,000, a saving of Rs 23,000 every month.

Another factor that favours not buying a house immediately is the considerable improvement in affordability levels. According to data compiled by HDFC, affordability levels (property prices divided by annual income) have come down from 22 in 1995 to 4.8 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 his annual salary in December 2009. This can be attributed to growing incomes. With capacity additions and economic growth, affordability levels will continue to remain low.

There is another argument for considering tenancy. With the bustling economy throwing up interesting opportunities, many people now have the option of picking jobs that keep them motivated. In the process, they are shifting bases or jobs every couple of years.

For them, it is better to live as a tenant because it offers them greater flexibility. They can move from one city to another on short notice and don't have to worry about leaving their houses vacant or finding a tenant. They can even shift to a more suitable location within a city to be closer to their place of work.

Of course, living on rent does not mean you will never be able to own a house. What you save on the EMI can be used to build a corpus to buy a house later in life. Sure, it will cost more than what it does today, but increased supply and improving affordability levels will ensure that you will be able to buy a decent place.

Going by the current industry trend of heavy investments in the real estate sector, there is a fair chance of India having an improved, sizeable housing capacity in the next 15 years. This addition will keep the prices in check, or at least prevent them from reaching the runaway levels that were witnessed in 2002-05.

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