The Home Buyer’s Dilemma

Buying a home is undeniably a major highlight of one’s life. And rightfully so – home ownership probably tops the list of aspirational goals for every Indian. Yet, it’s a matter of consternation for financial planners when their clients liquidate their hard-won goal based savings to purchase a home. Speaking from a Financial Planning standpoint, is this the correct approach?

How Goal Based Savings Work
It’s a well-known fact that people tend to be gung-ho about planning for their goals. And why shouldn’t they be? It’s quite a fascinating exercise to do the math, visualize the outcome for a moment and feel the determination to achieve the goal surge deep inside.Owning the goal, on the other hand, is quite another matter. As the initial excitement of goal planning fades, most people digress from their long terms plans. If you’ve saving for your retirement in a SIP, for example, you can bet that you’ll face the temptation to liquidate it midway at least a few times.

Harsh Gahlaut, CEO of Delhi based FinEdge, believes that Goal Ownership is a dual responsibility of clients and Advisors. “Clients should take a committed stance towards their long term goals, and Advisors should leverage systems, technology, processes and relationship management skills to help them stay the course”, he says.

The Myth Of “I Can Always Start Off Again”
Say you’ve saved up 20 lakhs in Mutual Funds towards your retirement, and the prospect of home ownership comes up. It’s natural to feel that you can just liquidate this money to buy a home, and start over. Perhaps that’s true, but have you done the math? 20 lakhs, growing at a compounded rate of 12 per cent per annum over 20 years, could grow to 2 crores! That’s the actual amount of retirement corpus you’ll be throwing away in the process.

Gahlaut believes that a poor understanding of delay costs often prompts savers to deviate from their Financial Plans. “While home ownership should be a key priority for an individual, it makes sense to do the math with respect to precisely how much one would be sacrificing in the bargain by liquidating their goal based savings”, he says. “All too often, this turns out to be too heavy a price to pay”

Real Estate Comes Down Too
Ask yourself, are you planning to buy the said property as an end user (occupant) or as an investment? While Real Estate continues to be considered as he proverbial ‘safe haven’ of the investment world, you should keep in mind that home prices do come down too;and if you’re unlucky, they could come down heavily. Take for example, areas such as Greater Noida, Ghaziabad, Mumbai, Navi Mumbai and Chennai, where it’s estimated that it’ll take another 3 years just to clear out existing supplies of unsold inventory!

Add to that the associated costs of maintenance and property taxes, and a home as a pure investment begins to lose its sheen.

Over the long term, very few asset classes have outperformed equities, although they admittedly lack the ‘touch and feel’ lure than real estate does. Bottom line: think twice before you exit your equity Mutual Funds to purchase a home as a pure investment. “It’s a myth that Real Estate prices never come down”, says Gahlaut of FinEdge. “Add to that the lower liquidity and higher indivisibility of Real Estate as an asset class; and it becomes clear why an investor should avoid going lock, stock and barrel into a single piece of property with their Goal Based savings”.

What’s The Best Course Of Action?
Grandmother knew best when she created ‘buckets’ of money by putting away pools of money in biscuit cans towards specific planned expenditures. Goal based saving works, but it’s a long term commitment. The ramifications of liquidating your goal based saving midway extend farther than you can imagine. If you really still must buy that home right away, seek alternative solutions – perhaps your family can extend you some support, or you could opt for a lower down payment if your cash flows permit. Alternatively, you could delay your home purchase goal depending upon when you expect a lump sum cash flow (such as a yearend bonus). In our experience, it’s best to hang on to that goal based investment for dear life. “Your Goal Based investment must be considered sacrosanct, and only a dire emergency should prompt its liquidation”, says Gahlaut in conclusion.