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Times may have changed but the 3 basic rules remain the same if you are buying a house

By Dhirendra Kumar

Over the years, while observing the saving and spending choices of people, I’ve come to believe that perhaps most major decisions are driven by the saver’s psychology rather than financial factors. The biggest of these is almost always the house that a family buys. Human beings are territorial animals and space we occupy seems to play a big role in our view of who we are. This is as true for a jhuggi dweller as it is for business families who have built some of the most ostentatiously expensive residences in the country.

Real estate developers do their best to exploit this aspect of human psychology. A few days back, I came across a twitter thread someone had started by pointing out that a leading Mumbai developer used to examine the financial position of buyers before allowing them to buy apartments in their ‘by invitation only’ complex in Lower Parel. Now, just a few years later, the complex is still empty, the asking price has dropped to half or less, and the ‘by invitation’ sounds like a joke. Yet, there was a time when people used to fall for this.

Developers used to advertise that their projects were ‘by invitation only’ and no one would laugh at them like they laugh now. Why did this happen? Clearly, developers were clever enough to exploit the aspirational longing for a grand house that people have. There is nothing particularly unique about this kind of selling. Everyone who has something to sell does it, from clothes to smartphones to cars.

Housing is qualitatively different because of the scale of the expense. Even the most overstretched young person who splurges on an overpriced phone will climb out of the financial hole in a few months. Those who do an equivalent splurge on a house are not so fortunate. The financial damage takes years to repair, and sometimes destroys lives and prospects of families.

No matter how distressed developers are, and no matter how reasonably priced apartments look in 2019 compared to 2008 or 2013, the three basic rules of buying a house are just as relevant as when I discussed them first.

One, buy just one house in which you will live. Do not think of buying any more for investment. The first house is a need. When you take into account the fact you can stop paying rent and get a tax break on EMIs, it’s a big financial advantage.

Two, don’t stretch yourself. No matter how much you’d love a fancy house, the EMI should not be more than one third of your family income. That’s the UPPER limit. If you can get by with less, then you must do so. Ignore the lure of real estate marketing. If you’re much richer at some later date, you can always trade up to a better house.

Three, buy a house, not a promise. With the operationalising of RERA, this should, in theory, not be a problem. However, once bitten is twice shy. The biggest source of sorrow for people has not been houses that cost too much but houses that have not been delivered. Going by history and the kind of distress developers are in, do not believe in any promises. Buy a practical house that actually exists, instead of being led astray either by one’s own dreams or developers’ promises. As long as savers keep this in mind, they’ll be fine.

(The writer is CEO, Value Research)
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