Affordable housing vs. renting: Which is better?

The growth of better employment prospects or educational opportunities compels people to move to newer locations. Secure accommodation is the first thing one must consider when moving to a new city. In India, the housing sector caters to the diverse housing needs of different sections of society. This entails luxury housing options such as bungalows or villas, modern apartments in gated projects for most of the urban population and various rural housing schemes. 

Moreover, the rental housing market caters to the ever-increasing housing demand while offering flexibility and convenience to those who cannot afford to purchase a property. In addition to these, there are emerging asset classes such as co-living spaces that attract a lot of investors. However, with home prices and rental rates steadily rising in India, home seekers often become indecisive when faced with the option of renting a house vs. investing in an affordable housing option.

What is affordable housing?

Purchasing a house is one of the major financial goals for most Indians. However, the impact of rising inflation, skyrocketing property values and high home loan interest rates is some key factors that make home ownership difficult for many. The term ‘affordable housing’ may hold a specific meaning for different people. Broadly, affordable housing refers to residential properties that comfortably fall within the budget of families having income below the median income levels. The disposable income of a household is a primary factor for determining affordability. In India, affordable housing is primarily aimed to benefit the economically weaker sections (EWS) and low-to-middle-income households.

The affordability factor varies based on the specific region. In metro cities, homes with prices below Rs 65 lakh are considered affordable. On the other hand, in smaller cities like tier-2 and tier-3 cities, an affordable home is one priced below Rs 45 lakh. 

Click to read about affordable housing in India and key trends across major cities

Benefits of affordable housing

Affordable housing may be beneficial, especially for low- and moderate-income families, as it allows them to fulfil their dream of owning a home without straining their resources. Access to proper homes enables social inclusion, besides providing these families with a better quality of life. As a result, it promotes economic stability and minimises the risks of financial crises. 

Another major advantage of buying a property is the opportunity for wealth creation and achieving financial stability. Real estate is considered one of the safest investment options. Property values appreciate over time and promise higher returns for the buyer. 

Government’s push for affordable housing

The Indian government is driving efforts to provide affordable housing to people through various schemes such as the Pradhan Mantri Awas Yojana (PMAY). In addition, there are several financial incentives and benefits, such as the Interest Subsidy Scheme (ISS), wherein eligible borrowers can get a subsidy on loan interest payments. 

Further, there are various tax advantages of investing in affordable housing. Tax deductions of up to Rs 1.5 Lakh per year on the home loan principal repayment are also available under section 80C. First-time homebuyers can also avail themselves of tax benefits of up to Rs 50,000 annually under Section 80EE. 

Rental market in India

India’s rental housing market has seen robust growth in recent years. Some of the key drivers for this growth trend include:

• Expanding economy and creation of job markets in key cities. This has led to a steady influx of professionals to other cities, increasing the demand for housing. 
• An evolving lifestyle is one in which some people prefer renting a home owing to the flexibility and convenience of relocating compared to a long-term investment. 
• High property prices, especially in urban centres, make renting a practical solution. 
• Government’s efforts to streamline the rental market through laws such as the Model Tenancy Act aim to protect the interests of tenants and landlords. 

Benefits

For many, renting a property may be a feasible option owing to factors such as:

• Flexibility and ease of moving or relocating, especially for working professionals
• Lower upfront expenses compared to purchasing a property, given the high interest rates and property costs and downpayment.
• Convenience without long-term commitment or any responsibility towards maintenance of property, repairs, property taxes, etc.

Affordable housing vs. renting: Cost comparison

Expenses involved when investing in affordable housing

Purchasing a property is a complex process as there are several hidden expenses involved. In addition to the actual cost of the property, other significant costs include:

• Home loan processing fees 
• EMI payments
• GST charges
• Stamp duty and registration charges
• Brokerage costs
• Property valuation and legal fees
• Parking and maintenance charges
• Location preference charges
• Cost of moving or relocating
• Interior design and miscellaneous expenses

More importantly, homebuyers need to be aware that banks do not finance the entire cost of the property. Loans are offered to cover 80% to 90% of the property cost. The remaining 20% amount is upfront expenses, also called a down payment. Homebuyers need to bear this cost from their funds. However, buyers under the government’s affordable housing schemes may be eligible to get a home loan with down payments as low as 5% to 10%. This can significantly reduce one’s financial burden when going for a huge investment like homebuying.

Calculating ROI

The returns on investment (ROI) is an important aspect of property buying that should not be overlooked. ROI is expressed in percentage and calculated based on the formula:

ROI = (Current value of investment – cost of investment/cost of investment X 100

Calculating ROI helps buyers to ascertain the profitability of an investment and identify an option that may fetch better returns. 

Expenses involved when renting a house in India

Like property investment, renting a home also involves certain hidden expenses. In addition to the monthly rent that a tenant has to pay to the landlord, there are several other costs. These include:

• Security deposit – Typically, landlords charge an amount equivalent to two months’ rent, which must be paid at the time of signing the lease agreement. However, this may differ in some cities. So, prospective tenants should keep this in mind when calculating their expenses.
• Brokerage fee – If one is finding a rented home through a broker, they may have to pay an amount equal to one month’s rent or higher, depending on the location. 
• Costs of moving and interiors – This could add up to significant costs for a tenant and must be calculated beforehand when renting a property.
• Recurring costs – Besides the monthly rent, there are several recurring costs a tenant has to pay. These include utility bills (electricity, water, cooking gas, telephone, etc.), parking and maintenance charges, minor repairs, etc. 

Property rental values in a locality are influenced by several factors. Location is a huge driving factor in the rental housing market. Proximity to city centres, business hubs or educational institutions can lead to high rental rates in an area. Similarly, the demand-supply dynamics need to be considered when assessing rental values. When the demand exceeds the supply of rented homes, rent tends to go up. On the other hand, landlords may lower the rent in a slow market with less demand. Other factors that impact rental rates of properties include the presence of social infrastructural facilities, amenities in the property, age and type of property. 

Prospective tenants can approach a broker to understand the market trends and arrive at the right rental costs. 

It is crucial for home seekers to evaluate and compare the costs involved in buying vs renting to make an informed decision.

Housing.com News Viewpoint

Both buying and renting come with their own set of advantages. However, when making a choice, it is essential for a home seeker to take into account several factors, including their financial situation, income levels and job stability and their family’s housing needs. 

In homeownership and renting, long-term expenses may need to be considered when planning the budget. At the same time, one cannot overlook the one-time but significant expenses that come with buying or renting a house. 

If you are going for investment in an affordable housing scheme, make sure you have determined your affordability. You can consult a financial expert to make a well-thought-out investment move.

FAQs