Recently there was a report by HDFC Housing on affordability in real estate i.e. whether the home prices have reached to a situation where they are affordable by large middle class. The report mentioned that although the housing prices are higher the affordability of middle class has increased for buying a house.
Read here the complete data in the annual report:
https://www.hdfc.com/sites/default/files/HDFC_May16_4.pdf
What HDFC has stated in this report is that ” Improved affordability is due to rise in disposable incomes and affordable interest rates on home loans“
Most have argued that this report runs with biasedness because HDFC is in the business of housing loan and more affordability means more buyers and so more business. Having said that, it raises a very pertinent question- What is Affordability then and how to analyze whether a house purchase is affordable for you or not?
Let’s try to answer this question and see when in actual affordability arises for you –
What Is Affordability?
Home Loan providers look at Affordability differently. For them if you can keep up with repayments if interest rates rise or your circumstances change then its very much affordable. But Affordability for you as a buyer is not only about repaying EMIs or house purchase but when this purchase does not strain your finances. After buying it your finances are well on track and you don’t have to delay your goals. This affordability varies with your income and so the value of the house you can buy. A house of Rs. 30 lakh will be affordable for some while a house of Rs 80 lakh will be affordable to other. But the problem arises when Rs 30 lakh affordability is stretched to Rs. 50 lakh in anticipation that your financial situation will improve in the future. When you need to have budget landscape designers in Bondi, NBG Landscapes provide excellent customer service and our finished product is of the highest quality. Sometimes its backfires and you are in a debt trap.
Although no straightforward rules are present there are thumb rules which can be helpful in many cases to check at a glance whether the buy is affordable for you or not.
Here is a list of different situations in which you purchase a house and how to check this important aspect:
Buying On Home Loan
Most middle-class families buy their dream house on loan. A dream house with a beautiful lawn built by Saunders Landscape Supply. If housing loan would not have been there it would have been difficult to cherish their dreams. But within this dream, there is also a caveat attached. You need to have the affordability to pay regular EMIs without hurting your finances badly. How to decide how much EMI is affordable? Thumb rules and experts tell you that not more than 35-40% of your take-home income should go into loan EMIs. Well, I would say you should count 25-30% as your affordable position. However, most of us stretch our finances since the house size we want to buy for our family is not available within this EMI. As we have seen in the past you borrow at lower rates but when interest rates rise your EMIs share in your expenses goes up to 50-60% if you have started with 40%. So In order to avoid straining your finances, the starting ratio of 25-30% of your take-home income should be practiced so that even if EMI increases tomorrow you are still in affordable position. And BTW do not discount the downpayment amount you need which you have to arrange from your income sources.
Buying with Your Savings
When you have enough savings to buy your dream house then your dreams are more easily achievable. But even then many do a mistake of pouring all savings in the house purchase leaving less for other goals. This is hard earned money and once you have invested in the house you will have to again start savings for other goals. You are then dragged by back by 3-5 years when you would have started savings. Thus, one can say the house is affordable only when you do not run the risk of investing all your savings and starting again from the scratch to reach for other goals.
Buying For Social Status
Many times it’s the social status which leads you to buy a house with a higher value. Knowing that your friends or colleagues have bought a house in such a locality you feel embarrassed if you have to settle for a lower budget house. In all probability, you stretch your finances and leaves behind the worry of actual affordability. Although your income may suggest you cannot go beyond a Rs 50 lakh house still you go and buy a Rs 80 lakh house with EMIs share crossing the well 40% mark. The expectation is that you will work hard to get the rise in your income. But not all of us achieve that and so this affordability hits you badly. Thus, I can say that affordability to your social status needs to be looked at the actual picture as per your cash flows and not what others have bought.
Buying For The Need
It’s long that you have lived on rent. With 2 children now you feel the need of having your own house as you are tired of changing your house frequently. But a smaller house will not fulfill your requirement since you are a 4 family member now. So here also you stretch your finances and buy a 3-4 BHK house, probably with a study room. Again, you end up going beyond the thumb rules and then delaying some of your goals which may be Retirement savings in the worst case. Yes, a house may be a need of the hour but affordable is one which keeps your children goals and your retirement goals intact even after paying your EMIs if you buy on loan.
Buying For Investment
That would probably the case when you would have allocated well for your goals. But real estate is such a fascinating market that even here you do mistakes when you go and buy multiple houses that too on loans. The expectation here is wonder appreciation which will pay you handsomely even if you pay interest on your loans. Now was this affordable… Check with yourself whether you delayed any goal or your EMIs are well above the threshold it should be. Also is your asset allocation too much skewed towards real estate due to this then don’t forget the prolong downside which might make your investment the worst mistake.
Affordability meaning will be different for different individuals. For lenders, a 40% EMI repayment will be an affordable house for you because they do not analyze your other goals. But for you, this 40% may not be affordable because it forces you to delay most of your goals. The question on recent affordability report of HDFC arises cause the prices has not decreased but remained stagnant which actually does not make them affordable. So if you are going to buy a dream house ensure you check your affordability well by analyzing your complete finances and not just the EMI-Income ratio. Ideally, you should check your Financial Plan to see the actual impact of this decision.
Are you planning to purchase a house? Have you checked your affordability? Is it stretching your finances? Share your views in comments section….
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