A number of factors combine to make a house purchase a minefield for most of us.
For many years now India’s real estate has been under what is called a ‘time correction’. It’s been something like a decade. Time correction is a slightly fancy (actually, misleading) way of saying that prices are stagnant. At some point, this stagnation will end and real estate prices will head upwards.
There are many reasons behind these years of stagnation. Obviously, the major one is that prices rose too fast and too far on the strength of investors who had more money than sense. For some years, these investors kept selling apartments to each other at higher and higher prices and finally the prices got too high for real buyers, those who would buy to actually live in the houses. So this stagnation is just the phase when the buying capacity of real users is slowly catching up with prices. In many parts of the country, another factor has been the tremendous distrust that buyers now have for real estate developers for reasons that are known to everyone.
As time goes by, a greater and greater proportion of potential buyers will turn into actual buyers. Unlike other investments, real estate is unique in that one house is a necessity for every family and it’s only with the second house onwards that the buyer becomes an investor with all the risks and the baggage that it brings.
Unfortunately, a number of psychological and financial factors combine to make a house purchase a minefield for most of us. In our modern consumerist economy, sellers of every product try to make you buy the most expensive version of whatever they are selling. Real estate developers also try to sell everyone the dream house—grand and aspirational—the like of which the buyer has never lived in before.
The problem is that buying a dream house is a very different activity from buying a dream watch or a dream vacation. Housing is qualitatively different because of the scale of the expense. If you splurge on other things you will climb out of the resulting financial hole in at most a few months. However, if you make an equivalent splash on a dream house then the financial damage could take years to repair, and during that time you and your family will have to face many hardships, some of them with permanent effect.
There are many ifs and buts in buying a house and it’s a topic that I often come back to simply because it’s probably the most important financial decision in the lives of every one of my readers and so getting it right is absolutely critical. There are many mistakes that homebuyers can make but overstretching one’s finances seems to be the most common. When one goes to look for a house, somehow the temptation to like something aspirational rather than something practical is just too strong for most of us. Human beings are such territorial animals that this seems to have roots deep in our psyche. There’s a simple thumb rule, which is that the monthly repayment must not be more than a third of your stable family income.
If, later in life, you become much richer than you are now, then you can always sell the current house and buy a flashier, more expensive one. However, at any point, the most damaging thing to do is to buy for your future, hoped-for, income rather than the current real one.
Like in so many products, this phenomena is a byproduct of easy credit. In our parents’ generation, housing loans were difficult to come by so people did not have the choice to stretch themselves. They bought whatever they could afford to pay for at the moment. The EMI culture is great for the consumer economy, but not so great when it lures you into that dream house that will become a financial nightmare.