Earlier I wrote a post to convince you that you should buy a house against renting, Today let’s build a case of buying house on EMIs vs investing equated monthly investment (EMI ) in capital markets
Base case
Cost of house – INR 60,00,000
Down payment – INR 12,00,000
Term – 15 years
Rate of interest – A quick search would tell you ~10% floating rate is the going rate , See below snapshot from www.bankbazaar.com
Typically as an economy scales up the interest rate goes down, See an example of South Korea , A nation which has moved from being a developing nation to a developed nation
Therefore for our base case example we can say that consumer is likely to pay a lower EMI in future however to be conservative I will assume EMI to be constant
EMI – INR 51,463 /month or INR 6,17,564 / Year
To complete my calculation I need to make few more assumptions , Rent yields let take a look at what are rent yields across the world now
In 15 years India as an economy should be closer to China / Singapore in real terms so I can only make an educated guess
Rent Yield – Year 1 3.80% , Year 15 – 2.50% (as interest rates would drop) , We need rent yield to calculate how much consumer would be paying rent in case he is not buying house but renting a similar one
Growth rates in India’s property prices had been phenomenal , read this article for more insights
In long-term as we know real estate is good hedge against inflation, The cost of owning a similar house should we today’s price multiplied by long-term inflation forecasts
Let’s review few forecasts
IMF – forecasting inflation rate to be 6% by 2019
OECD – GDP Forecast
EIU – forecasting inflation rate to be 6% by 2018
To be on conservative side I would take the following assumption
Property price appreciation – 8% per annum for next 15 years
The final jigsaw in my puzzle is long-term equity returns, A normal investor is not Warren Buffet so he has to take assistance to invest his money intelligently in equity markets this is were he turns to great Indian money managers
Who are they ?
Some on top of head
This is SIP return for his fund for last 15 years a staggering 23.67%
He has done a CAGR return of 23.78% return in last 10 years as SIP on his funds
I just gave two examples but there are few more money managers who have a fantastic long-term record
Look at below performance of select 10 year performance of few funds (all in CAGR)
What is the point I am trying to make ?
Over long periods of time in past sticking to good funds and fund managers have given a regular investor CAGR return in range of 20%
Would it happen for next 15 years, With economy expanding, opportunities increasing the likely hood is high but I would moderate my expectation
Long term return on equity investments – 18% CAGR
Putting this all together 🙂
In 10 years,
The amount invested with a reputed money manager with long-term record would grow to a sufficient amount to buy the same house today – Debt Free !
In 15 years,
You would have almost 50% more than what would be required to buy a similar house
This is where I end my base case on proving why instead of paying your home loan EMI if you invest in equity markets you will become debt free faster
How many people reading this would do it ?
May be 1 in 50 reason,
- Equity returns are not in straight line so they would not advance as shown in table above, it would require huge courage to be disciplined with EMI to markets ( for home loans we don’t have a choice)especially in times when you see prices dropping everyday
- Having an owned home has huge emotional satisfaction so people would happily opt for being borrowers for long-term
- Family pressures – Investing your EMI in share market would bring you scathe of your wife , children & parents who might label you as gambler 😉
- What are the odds that MF or Indian companies would do well in next 15 years let me go back to my cocoon and own a house
- This is a risky strategy and might leave me homeless after 15 years when my earning power would be low and my financial commitments would be high
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Will you do this in your personal situation ?
Share your thoughts below
I bought a house on loan due to parental pressure. Paid the EMI for about 8 years… slowly realised its not the wise thing to do… withdrew my PF amount, closed the loan, sold the house, moved to rented house… slowly deploying the capital into equities. Feeling great and looking forward to a prosperous future. Will buy a house again only if I can pay in full cash if my financial situation justifies the expense. Yes, I will treat buying a house like any other expense like buying a TV, Fridge, AC or a car.
BTW excellent post.. keep posting and continue the good work!
Regards,
Balaji.
Thanks for sharing your story
Hi Vivek,
As usual, a fantastic article. Your logic also makes a lot more sense. However consider a hypothetical situation where i invest the money i chose to buy a house in the two funds you mentioned (or rater any of the the other funds you have listed). The punt you are taking here is Mr. Prashant Jain or Mr. Andrade would continue to deliver 23% returns over the period of which you were supposed to pay your EMI…..two points that don’t enthuse me to make this swap (house to mf)
1) Given, that HDFC Top 200 and IDFC premier equity are one of the most top performing funds, and as their AUM increases, delivering the same level of returns as historical performance will not be easy i.e Size will act against their returns. Plus, you never know if Mr. Jain and Mr. Andrade would continue to manage the funds for the next 20 years, thus two points to think about, increasing AUMs and also durability of Mr. Jain and Mr. Andrade.
2) Also over the last 20 years, Indian markets have developed a lot more depth compared to 1990/2000’s and hence information flow may not help you make out sized returns. Thus, overall returns over the next 10/15/20 years may not match historcials. Also it may be an interesting exercise to know which were the best years for Mr. Jain and Mr. Andrade (were it in their first half of their fund management decade or their later half), will give us a more convincing picture of their investment performance. That being said, I continue to have an SIP in both these funds :). So I certainly do hope that they outperform their historical performance.
Lastly, I totally agree that investments in RE binds you for the next 20 years of your life. However, family pressure does not let many people trade a house for a MF.
Many Thanks
Thanks Nikhil for liking stuff here
Mr.Jain & Mr. Andrade were examples if you choose to go this route you have to be very selective in selecting MFs to attain debt free house it not easy but doable for someone who is still in 20’s – I am trying to put together a real example on this will post soon
Nice post, simple and easy to observe. May be you can make another post with little bit more complicated, by adding the tax advantage on principal and interest paid on house loan. And if the saved tax money goes into the mutual fund (not sure if that may balance the 50% extra amount of house).
Ayush – I did this analysis from cash flow perespective. Yes I would try to add in this tax factor and see how much difference it makes thanks for suggestion
Hello Vivek
That is a wonderful post…
two things which i found interesting for middle class investors in real estate is the tax advantage in the first few years due to high interest. Most of the ppl actually try to payoff homeloan in the first 7 to 9 yrs,which according to me is not correct. They need to push some money into equity…Second thing with indian real estate is we dont have good infra development so if you would like to buy same kind of flat 10 yrs later you need to go out of the city for atleast another 10 to 20 kms. So ideally the land appreciation in the CBD cannot be linear but it will be a bit exponential.
For me buying a house made sense
Thanks Srikanth for sharing your experience
chances of property prices going up is future is less. Home wont be a better investment
I’m that 1 in 50..and the reasons are given here :)..http://www.safalniveshak.com/your-house-is-not-best-investment/
Thanks Nishanth glad to found you (1 in 50) , Do you want to do a write up a case we can share this here for everyone’s benefit ?
Sure thing ..where do you want me to mail it to ?
vivek[dot]bothra[attherate]outlook[dot]com Thanks