Over the years, while observing the saving and spending choices that people make, I've come to strongly believe that many, perhaps most, major decisions are driven by the saver's psychology rather than any financial factors. The biggest of these decisions is almost always the house that a family decides to buy. Human beings are territorial animals and the space we occupy in this world seems to play a big role in our own view of who we are. This is as true for a jhuggi dweller as it is for business families who have built some of the most ostentatiously expensive residences in the country.
Real estate developers do their best to exploit this aspect of human psychology. A few days back, I came across an amusing Twitter thread where someone pointed out that a leading Mumbai developer used to examine the financial position of buyers before allowing them to buy apartments in their 'by invitation only' complex in Lower Parel. Now, just a few years later, the complex is still empty, the asking price has dropped to half or less, and the 'by invitation' sounds like a joke. And yet, there was a time when people used to fall for this.
Developers used to advertise in newspapers that their projects were 'by invitation only' and no one would laugh at them like they laugh on Twitter now. Why did this happen? Clearly, developers were clever enough to exploit the aspirational longing for a grand and magnificent house that people have in their hearts. Of course, there is nothing particularly unique about this kind of selling. Everyone who has something to sell, from clothes to smartphones to cars, does it.
Even so, housing is qualitatively different because of the scale of the expense. Even the most overstretched young person who splurges on an overpriced phone will climb out of the financial hole in a few months. Those who make an equivalent splurge on a house are not so fortunate. The financial damage that they create takes years to repair, and sometimes does permanent damage to their lives and their family's prospects.
No matter how distressed developers are, and no matter how reasonably priced apartments look in 2019 compared to 2008 or 2013, the three basic rules of buying a house are just as relevant as when I discussed them first.
One, buy just one house in which you will live, and which will save you rent. Do not think of buying any more just for investment. The first house is a need and when you take into account the fact you can stop paying rent and get a tax break on the EMIs, you'll get a big financial advantage.
Two, don't stretch yourself. No matter how much you'd love a fancy house and how great the hype is, the EMI should not be more than one third of your family income. And that's the UPPER limit. If you can get by with less, then you must do so. The bottomline is that you should ignore the lure of real estate marketing and avoid buying the house of your dreams. If you're much richer at some later date, you can always trade up to a better house.
Three, buy a house, not a promise. With the operationalising of RERA, this should, in theory, not be a problem. However, once bitten, twice shy. The biggest source of sorrow for people has not been houses that cost too much but houses that have not been delivered. Given the past of the real estate business and the kind of distress developers are in, do not believe in any promises.
Basically, one should buy a practical house that actually exists, instead of getting led astray either by one's own dreams or developers' promises. As long as savers keep this in mind, they'll be fine.