Nikhil Kamath, beloved startup poster boy and perennial podcast performer, has received much hate on social media over the past few days. The reason is that Mr Kamath bought a house, after advocating against it for a long time.
His logic was that real estate prices in India were ‘ridiculous and retarded,’ and rental yields were extremely low for realty to be a good investment.
In purely financial terms, this makes complete sense. Here is why.
Imagine you want to buy a 4 BHK apartment in Gurgaon today, in a mid-level condominium, you would have to shell out about Rs 3 crore. Suppose you have Rs 1 crore in savings, you would need to borrow the remaining Rs 2 crore.
You would think that your monthly cost of buying the house is your EMI, but in reality, you would also have to add the interest that you lost by spending your savings.
If you had kept your savings in a fixed deposit, you would have earned roughly Rs 60,000 per month in interest. If you took a home loan for 20 years, you would be paying another Rs 1.75 lakh in EMI. So, your total monthly cost of buying the house is actually Rs 2.35 lakh per month.
But how much would it take you to rent the same house? Just Rs 75,000 per month. In effect, you lose Rs 1.6 lakh a month by buying the house, in the first year. If we assume rents go up by 5 percent every year, then by the 19th year, you would have gained Rs 5000 per month. This is because while rents go up, EMIs remain the same.
Now imagine you invested the money saved every year in an index fund that tracks the Nifty 50. In the past 20 years, Nifty has given an average annual return of 14 percent. If we assume a similar return over the next 20 years, the money you saved by renting would become Rs 1.5 crore rupees.
But you also had Rs 1 crore in savings to start with. If you put all of that in the index fund, it would become Rs 13.7 crore. Add the Rs 1.5 crore saved by renting over a 20-year period, then your net gain is more than Rs 15 crore.
In comparison, real estate prices in Gurgaon rose at the rate of five percent per year over the past 10 years. If I assume a similar rate of gain for the next 20 years, the Rs 3 crore apartment would be worth Rs 8 crore. Add to that the rent saved by living in the house, and deduct the cost of repairs, maintenance, and upgrades over a 20-year period, then your net return on the house would be about Rs 10 crore.
Rs 15 crore versus Rs 10 crore. Which means, buying a house would amount to a notional financial loss of Rs 5 crore over a 20-year period.
Then why did Nikhil Kamath go against this sound financial logic and buy a house?
He has given his reasons in a recent podcast. Mr Kamath said that, while renting makes better financial sense, it comes with the headache of having to shift homes just when you are settling down.
What he has realised now is something that every middle-class household has always known. Contrary to what social media influencers will have you believe; life is not just a series of financial investments. It is actually about living.
Any family, that has young kids and old parents, knows how moving homes disrupts the rhythm of everyday life. That bookshelf you bought no longer fits, the sofas have to be placed at odd angles, and you have to re-remember where the light switches are in the bathrooms.
That is not all. Homes are often passed on from one generation to another, not just as a store of wealth, but also as a roof over one’s head. If you lose your job, or your business isn’t doing well, a rented house is an additional thing to worry about. If you have a home, that has no EMI hanging over it, that becomes your much-needed source of security.
More fundamentally, comparing real estate and stock market returns is meaningless for most middle-class households. They are unlikely to have the risk appetite that comes with stock market investments. That means they would never have actually earned the returns that the stocks can offer.
To make it more realistic, one would have to assume that at least half the savings made from renting a home would go into long-term debt. Once you do that, all the gains from renting a home disappear entirely.
The problem is not that Nikhil Kamath has made a U-turn on his views on buying a home. The problem is that social media makes the average middle-class person believe it is worth following in Nikhil Kamath’s footsteps. The man has over $3 billion in net worth. You have Rs 30 lakh. His choices cannot be yours. He could buy 10 high-end homes and not feel a thing. Your compulsions are entirely different.
Every family should be able to have a house of their own. Right now, it is a distant dream for much of India’s middle-class. This is not just because homes are so expensive in India. It is also because people are scared of losing their jobs and worried about inflation eating into the dismal pay hikes they get. In such an uncertain economic environment, people are scared to commit to home loans.
So, whether they like it or not, the average middle-class family is forced to live in rented homes, and then go through the pain of shifting every few years.
Unfortunately, this scenario is unlikely to change anytime soon. This is because of India’s extreme income and wealth inequality. Much of our national income and wealth is concentrated in the hands of a minuscule minority at the top. They have to constantly invest and reinvest in new assets. So, even if they don’t need new homes, they will park a certain proportion of their wealth in real estate. This means real estate prices will continue to be inflated and beyond the reach of the middle-classes.
Actually, someone as rich as Nikhil Kamath was doing us a favour by not buying a house till now. If India’s super-rich stop investing in real estate, prices will correct. Then, and only then, would an average Indian family be able to afford homes; not as financial assets, but to live in.
(The author was Senior Managing Editor, NDTV India & NDTV Profit. He now runs the independent YouTube channel ‘Desi Democracy’. He tweets @Aunindyo2023. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)
