What is the true cost of buying a house?

Published: November 26, 2023 at 6:00 am

For most of us, buying a house – defined here as a primary residence meant for immediate self-occupation – is an emotional decision. There is nothing wrong with that. However, there is no free lunch. To get something, we have to lose something. What is the true cost of buying a house? How many of us stop and evaluate this cost before taking the plunge?

Life has taught me that most human beings (incl me) will not be at peace unless they have a space they can call their own.

Yamini Sood, Head Institutional & Family Office Business, DSP Mutual Fund, argues that buying a house is more important than investing or building wealth as it is an animal instinct in this fantastic post: Home IS where the holy grail is. Here is an edited quote:

I had come across these beautiful lines by Prof Robert Shiller in one of the articles “A rental doesn’t have the same permanence as an owned property. There is an instinctive sense of territoriality shared by people and animals that a rental probably can’t fully satisfy”. Did you know many animals mark their territory by micturating in that area? We are then humans for god sake. The most evolved thinking animal. Homo sapiens have that natural tendency to mark their area too. Not by micturating of course but by buying it. We are quite decent that way.

So buying a house is certainly not the wrong choice, and I am all for it. As a kid who spent the first 14 years of my life in what is a bungalow/mansion  (by today’s standards) and was forced to abandon it for a flat, I can empathize with the urge to own a roof (at least a part of it). Growing up, I was surrounded by relatives who lived in rented matchbox-style houses in Triplicane/Parry’s areas of Chennai. I knew how they felt, and when their kids grew up, the first thing they did was to get a house.

So this is not a buying vs renting argument. However, we must also appreciate that buying comes with its own set of consequences.

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Most people who buy a house start paying EMIs before ever having done a retirement planning calculation. They have a dekh lenge attitude.

So the biggest risk in buying a house with a hefty EMI is an insufficient retirement corpus. Please note I am not talking about achieving financial independence early. I am referring to not being financially independent ever – that even after normal retirement.

Considering that most home buyers buy a 15-20Y loan with a large EMI and spend most of the time actively repaying it as soon as possible in about 10-12 years with future cash flows and existing investments, the chances of ending up with a retirement corpus lower than necessary is pretty steep unless salaries increase sharply – which is not the case for all.

This, unfortunately, is not a priority for those eager to buy a house – a decision often driven by FOMO. We are emotional about a roof of our own but are not emotional enough (or at all) about our financial health in future. Then there are other goals like college fees for children etc.

So what is the solution? (1) At the very least, it should be an appreciation of the true cost of owning a house. (2) Saving up for a part down-payment to reduce loan burden – at least 30-40% of the house property.

(3) The couple buying the house should tell themselves that “the EMI is huge and our investments will suffer. Still, we will make up for it by (a) increasing investments in future as our salaries grow, (b) by being frugal and decreasing wants, (c) by trying to increase our income with our skills, and (d) we will continue working longer than expected (God-willing) to make up for the deficient in retirement investments”. 

If necessary, get help from one of the fee-only SEBI-registered investment advisors from our curated list. If we are not emotional about retirement, who else would be?

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