NOTE :- This was written nearly 40 years back. The amounts mentioned in it are out dated. The principle of the advantage in building your own house at the beginning of your career rather than towards the end however still holds true, notwithstanding the builder-government nexus in raising the cost of your shelter.
A friend of mine once asked me whether he should build a flat in a multi-storeyed building in a metropolitan city. It was a three bed-roomed flat priced at Rs. 50,000/- only. After some calculations, I told him that he should immediately buy the flat as he was losing Rs.750/- per month by not buying it. I can see that you are not believing this statement. My friend too did not. At least till he saw my calculations. So here goes............
For a flat of Rs. 50,000/- you need to make a down payment of Rs. 16,667/- . For the balance, Rs.33,333/- , either the Life Insurance Corporation or the State Housing Finance Corporation would give you a loan.
You would have to pay approximately Rs. 290/- per month towards repayment of the loan for a period of 20 years. In addition to that, you would have to pay a house tax to the Municipal Corporation, the rate for which varies from place to place. For the purpose of this calculation, it is taken to be Rs. 60/- per month. You would also have to spend on an average about Rs. 30/- per month towards maintainance of the flat. Thus, you would be spending about Rs. 290+60+30=Rs.380/- per month.
As against this, you would get about Rs. 500/- per month as rent. If you are staying in the flat that you now own, you would be saving the same amount that you would have paid as rent, had you been living in a rented accommodation. So you are already getting Rs.500-380=Rs.120/- per month or Rs. 1440/- per year even when the loan is being repaid. This works out out to a return of about 8.6 % per year on the amount of Rs.16,667/- initially invested by you. One can not deny that this is a fairly good rate of interest.
The loan would be repaid within 20 years and thereafter the net return that you would get is about Rs. 500-60-30= Rs.410/- per month or Rs. 410x12=Rs. 4920/- per year. This is without considering any increase in the rent during the period of 20 years. The return after 20 years, thus works out to be 29.5 % per year on the amount of Rs. 16,667/- initially invested by you. Not bad ! eh !
However, this return is not the crux of the issue. The main point is that you would have to pay about Rs. 200,000/- for the same flat after 20 years, since the cost of land as well as cost of construction would have gone up 4 times judging from past experience as well as the current rate of rise in price index. Apart from this, you would get a house farther away from the centre of the city as the city would have expanded hugely in the span of 20 years.
Thus, by buying now, when you are still earning, you get a house for Rs. 16,667/- for which you would pay Rs. 200,000/- after 20 years. So you have saved Rs. 200,000-16,667=Rs. 183,333/- over a period of 20 years. This would work out to Rs. 9000 per year approximately or Rs. 750/- per month. You are surprised. Aren't you ? well, work it out for yourself, if you still do not believe me.
So, gentlemen, book a flat this month and stop losing money at the rate of Rs. 750/- per month !
P.S.:- If I had told you that by building a house, you would help solve the nation's housing problem or that you would help in holding the price line or that every generation must build a house for the succeeding one, you might have taken me for a politician in power. Hence, I have put this to you in terms of hard chips. If you do pay heed to my advice, you would also be doing these things apart from preventing the loss of your money.
P.P.S.:- Don't tell me, charity begins at home........ I have already built one. While the data was still valid !
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There was a letter to the Editor on the above article delineating the usual objection that comes up almost reactively rather than reflectively whenever a new idea is mooted, which is reproduced below.
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A LETTER
While Mr. Desai should be congratulated for writing an excellent article ( SAVE Rs. 750 P.M. - May 1971 issue ) , a point may be raised against the profitability of the proposed investment.
In calculating the monthly expenses after buying the flat, he has not considered the so called "Opportunity Cost". Here the appropriate opportunity cost would be at least the interest that could have been drawn on Rs. 16,666.67 from Govt./Bank securities at the rate of say seven and a half per cent and the income tax ( minimum 11 % ) that could have been avoided on this. Unlike the income from the flat, the interest on Govt. securities would be tax free ( within limits ).
On calculation, this comes to Rs. 1250 and Rs. 140 per year i.e. Rs. 116 per month. So the actual monthly cost adds upto 290+60+30+116= Rs. 496 per month and the immediate advantage of such an investment is negligible. The balance sheet, of course, changes after 20 years , when the investor will possess valuable flat ( Rs. 2,00,000 ?) instead of securities worth Rs. 16,666.67, should he choose this alternative. Moreover, I feel, for such investment calculations, one should not overlook the time value of money.
S. Ray Chaudhari
A.E. Barauni
This letter was replied to as follows:-
SIMPLE WATER
Dear Editor,
I was happy to read Shri ray Chaudhari's letter in the June issue for one reason. It is better to be contradicted than to be ignored ! Pardon me, if I am unable to reply with as much jargon as used by him. I am one of the simple types who term AQUA PURA as water.
The "opportunity cost" that Shri Ray Chaudhari talks about is an euphimism for comparative return on the capital. As for income tax, is it not avoidable ? My calculations may not have taken these into account , but I have also not taken into account the increased rent that may accrue with the passage of time. In my opinion, the omission of 'opportunitycost' and income tax is more than balanced by this increased rent.
To illustrate, the flat which carried a rent of Rs. 350 p.m. in Delhi till 1967 was leased to me on Rs. 400 p.m. and in 1970 when I left it, the next tenant paid Rs. 500 p.m. Let me cite another case, this time of a smaller town. The ground floor portion of a house that I know, fetched a rent of Rs. 80 p.m. in 1957. Today it fetches Rs. 200 p.m. The rental value of the balance two floors occupied by the owner was Rs. 120 p.m. in 1957 and is Rs. 300 p.m. today. The house was purchased for Rs. 26000 in 1957 whereas some time back, a sum of Rs. 65000 was offered for it. By the way, the title of the house being in the name of a lady who has no other income, there is no payment of income tax involved.
These are, of course only two instances but it is not difficult to find many more such examples. The point is that neither investment nor the income from Government securities or similar investments appreciate in value. In the case of a house, both do. Actually in terms of purchasing power, the value of the return as well as the investment in Government securities depreciates.
Then, there is, what my scientifically minded friend would like to call as a " purpose cost". The working man, for whom this article was written, has as his highest ambition, the ownership of a house on retirement. In my article, I had tried to advise him how he can fulfill this ambition while in service and save some money in the bargain. Text book advice on investment is meant for industrialists, businessmen and others of their ilk.
- R.N.Desai
Haldia.
EPILOGUE
This was originally published in my public sector company's house journal. Some doubting Thomases had raised objections which were effectively rebutted. Many of my colleagues took my advice seriously and built houses or bought flats. They are all happy today. Some of the doubters took 10 years to understand and paid a much higher price at that time. In course of time, the company itself started giving house loans to employees. Many other companies followed suit. Some of them use house loans partly as an employee retaining strategy. The down side is that a builder lobby has sprung up which corners land and tries to raise costs with or without help from corrupt bureaucrats/politicians. Despite their machinations, the concept outlined here still holds true. The housing boom across Indian cities and towns testifies to it. A lot of jobs in the construction industry as well as in the financial institutions have been created. The difference between highly intelligent but not so sagacious people and those with a moderate intelligence but some earthy wisdom is perhaps the difference between negativity and positivity.
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