Should you rent or buy a house? Many young families face this decision when they move out of the joint family to be on their own or when they shift to a new city for work. Notice that this is not an invest-or-not question, to which the answer will be very different. This is a should-I-rent-a-house-that-I-will-live-in or should-I-buy-now question. For others already on rent, the family conversation about ‘rent or buy’ comes up each time the math is done on how much rent flows out of the family budget each month. “If we had bought our own house, we’d be owning it soon rather than all this money getting wasted in rent” is something most renting families stress over. I’ve had this conversation at home many years ago; especially when money is tight and the growing family’s needs are many, the rent vs buy decision seems even more crucial. Why not put money down for something you will own rather than down the drain in rent?
If real estate markets were efficient, there should be almost no arbitrage between the decision to rent a house or buy it. The rent and the equated monthly instalment (EMI) would be not all that far away and you would be able to stretch just a bit to compensate for the mortgage cost to turn the rent into an EMI. But real estate markets in India are far from this utopia and follow no rational rules for valuations for residential real estate. At current market prices where the rental yields (annual rent divided by value of property, or the return you get from the asset if you were to rent it out in percentage terms) are just 1-2%, renting is clearly better than buying. Look at it this way— what you can rent for Rs25,000 a month will cost you at least Rs1.2 lakh in EMI in Delhi and Mumbai.
I have a friend who lives well when she earns more and gets into a frugal mode when business is bad. An artist, her income fluctuates, so does her lifestyle. Up when there is more and down when there is less. Her mood, though, is quite delinked from her financial status—always up. Last year, she said she wanted to start systematic investment plans (SIPs). Why? Because everybody around her was starting SIPs, and it seemed a cool thing to do—getting financial security is good, no? Yes, sure, but it has taken her the first 40 something years to get to even talk about financial security. Better late and all that. The first thing I asked her to do was to put down a number that she needed each month to live. It’s very difficult to pin down an average monthly expense for a person who matches expenses to earnings every few months. But the budgeting exercise, which is the building block for most plans, takes on much bigger importance for people with fluctuating incomes. Without knowing what you spend each month, there is no financial plan.
Why Indian households remain in financial behaviour that is ‘regressive’ is a question that has wrinkled the brows of many a policy maker. ‘Regressive’ behaviour is the over-exposure of Indian households to cash, gold and real estate instead of financial assets. This behaviour includes a reliance on the moneylender for debt, rather than the formal financial system, and the use of ex-post borrowings to deal with medical and other emergencies rather than purchasing an insurance contract. With the mandate of the Reserve Bank of India (RBI), the Tarun Ramadorai committee set out to find answers to some of these questions in 2016. While other committees have looked at the same issue of the strange behaviour of Indian households from the supply side and found serious problems in the way formal markets have been set up, the Ramadorai Committee was asked to look at the problem from the demand side and provide solutions to it. In short, the committee found (read the report here: bit.ly/2iC3GKU) that Indian households are indeed globally unique in their financial behaviour. Not only do they rely heavily on gold and real estate, they are under-insured, have very little pension corpus build-up, take home mortgages much later in life than their mature-market counterparts, and walk into retirement still carrying the burden of debt on their heads.
Markets are too high, I will wait for them to cool down before I invest. Nifty broke 10,000 and Sensex is at 32,000, is it too high? We’re in bubble territory for sure. Markets are in an overdrive—this ends badly. Markets are looking ahead and pricing in the structural reform the government is doing. Goods and services tax (GST) will cause markets to drop in the next 2 months—we’re just a few days away from a crash. Market is pricing in the long-term benefits of more taxpayers, less black money and better compliance due to GST.
Listen to the voices about the market and you’d imagine people are talking about two very different things. There are two voices that we hear today—one believes that we are already in a stock market bubble. The other believes that small corrections will happen, but we are in a long-term bull run.
A very irate 70-year-old spoke to me sometime back about his bugbear with the inflation stories he was reading in the papers. The inflation numbers had just been announced and the papers had stories about the rising real return on deposits. The stories celebrated the fall of inflation leading to positive real returns. This means that an inflation number of 4% and a deposit rate of 6% gives a ‘real’ return of 2%, as against an inflation number of 8% and deposit rates of 6% giving a negative real return of 2%. People don’t understand that they are better off, said the stories and comments, they just see the lower nominal return and feel poorer even when they are not. “It’s not as if the price of milk or vegetables has come down,” the septuagenarian grumbled. He’s right. The bite of inflation is such that even when inflation numbers go down, it just means that prices are still rising, but not as fast as before. What the commentators forget is that inflation too has a compounding effect. If compound interest on savings makes our money grow faster, the compounding of inflation makes our money buy less and less. For a retired person sitting on a fixed pot of savings and living off its interest, falling rates of inflation also mean falling deposit rates and that means insufficient funds to live on.
How much money we need to retire at age 60 can be answered in many ways. I wrote earlier (you can read it here: bit.ly/2ruHEtK) that you need eight times your annual income at age 60 to retire comfortably. Plenty of people wrote back to say that a more useful benchmark will be an expense multiplier rather than an income multiplier. An expense multiplier is, in fact, a better way to crack the same problem because at the same level of income, different families will have very different expense behaviour. I know families that don’t know where their money goes and others who have tiny expenses because of their chosen lifestyle. An expense multiplier assumes that you know how much you spend. Many families are clueless of their annual expense number—money comes in and money goes out. So get a hold on how much you spend in a year as a first step.
I don’t think there will be many people in urban India who do not have a bank mis-selling story to share. The systemic use of bank branches to mis-sell life insurance products and to churn mutual fund portfolios is now part of the urban Indian discourse. The problem is not new. I remember first raising the issue of banks mis-selling insurance and mutual fund products in 2007 with one deputy governor of the Reserve Bank of India (RBI). I was treated to lunch and anecdotes from those in the room of how people close to them were ripped off by banks. In fact, subsequently, in every committee I served on—Swarup Committee 2009 (bit.ly/2tLat6F) and Bose Committee 2015 (bit.ly/2rS3xmK)—the offline conversations included stories of bank branches turning into dens of tricks and traps. I’ve raised the issue of mis-selling with RBI, and with the ministry of finance, and so have others who work in this space, most notably Moneylife magazine (bit.ly/2t7r5HJ and bit.ly/2sHtN6b), which has raised it on multiple occasions. But the messaging that came down from the towers of oblivion on Mint Street was always the same: not our problem; let the sector regulators deal with this.