Is this a good time to purchase a house?
At a time when many people are losing their jobs, experiencing salary cuts, or seeing the income from their businesses decline, people are often asking themselves this question: Should I go ahead and buy the house that I had planned to purchase before the pandemic broke out? Or should I postpone my purchase until the economic outlook improves? The short answer to this question is that each one of us needs to assess one’s own financial capacity before taking on this liability. And if you do decide to undertake this tightrope walk, make sure you have a safety harness in place, as we shall explain.
Of course, there are risks in this economic environment of one’s income being lost or curtailed. But there are opportunities, too. Real estate prices have corrected by 20-30 per cent across the country over the past four-five years. Home loan rates are at a 15- year low. The combination of low home prices and low home loan rates makes home purchase an attractive proposition at this point of time.
At present, developers are not announcing any price cuts. But remember that they are facing a massive liquidity crunch. Hence, many of them are willing to negotiate on prices with serious buyers. They may not offer a straightforward discount on prices, but they are ready to throw in several freebies, like waiving the charges for club house, parking lot, registration and GST fees, or they are willing to offer a free modular kitchen. All of these can amount to a discount of anywhere between 5-15 per cent of the cost of the house. The bottom-line, however, is that you must have the necessary financial heft to make the purchase at this point of time.
Who should buy and what precautions they should take?
People who were planning to buy a house before the pandemic struck, and who have already collected the down payment money, may continue with their search. However, they should ensure they have at least 15 months’ worth of EMI and household expenses. This is to ensure that in case of a job loss, they have a cushion to fall back on.
In this environment, prepare yourself for a salary reduction as well. Suppose that your take home salary is Rs. 100.
Be prepared for the fact that it could be reduced by Rs. 30. So, for the purpose of calculating how much to borrow, take your salary to be Rs. 70.
In normal circumstances, we would say that 50 per cent of your take-home salary can be your EMI. But in these times, don’t let your home loan EMI exceed 30 per cent of your take-home salary. In other words, your EMI should not exceed Rs. 21. If you are less leveraged, you will be better prepared to cope with a salary cut.
Who should avoid purchasing a house at this juncture?
If you foresee any risk to your job or to the business you run, then it may be wiser not to take on such a massive liability at present. Those who work in sectors that have been significantly impacted by the pandemic should not make the jump. Similarly, if you have large liabilities down the road, like a child who will join college soon (which will entail a significant expenditure), in that case also you should postpone the purchase. The decision to purchase real estate is extremely difficult to reverse as it is a very illiquid asset.
How much exposure to real estate should one ideally have?
The answer is that about one-third of your wealth should be in equities and gold, one-third in fixed income, and one-third in real estate (not including your primary residence).
Once you have assessed your financial situation and decided to go ahead with the purchase, you need to do the due diligence. If you are considering buying from a particular developer, see which financial institutions are ready to lend to buyers in that project. If many quality banks and housing finance companies are not willing to lend for buying in that particular developer’s project, be warned. Financial institutions have become very cautious nowadays and they do a lot of due diligence.
Speaking to the more organized brokers will also give you an idea of which developer’s project to go with and which ones to avoid. The real estate sector will be affected by labour shortages due to the massive movement of workers back to their villages. Therefore, it is imperative that you choose a developer who has a reputation for timely completion of projects.
To avoid the risk of delay or non-completion of an under-construction project, you may go with a ready to move in project. What you see is what you get in these projects. Of course, you will have to be ready to pay 6-10 per cent more in such a project.
You may also find good deals in the secondary market. Many people are facing financial stress and are trying to liquidate their real estate holdings. They could offer to sell at an attractive price.
If you are buying a property for end use, give thought to the level of social infrastructure development. The area must be well equipped with schools, hospitals, shopping complexes, etc.
Finally, if you are taking a home loan, hike your term cover so that in case something happens to you, your family does not lose possession of that house.
