Is buying a house a good investment?

Buying a house in India is generally considered a great decision because prices seem to always go up. However, most Indians buy a house by taking a home loan. Let us see if this makes financial sense..



Consider a simple scenario of Mr. A who buys a house, for 50 lakhs by taking a 20 year loan. By the end of 20 years he will have paid the bank more than 1 crore (assuming a 20% down payment and an EMI per lakh of one thousand).


Now, average property appreciation in India over the last four years has been about 12% (Source: National Housing Bank). But given that effective cost of the house for Mr. A is one crore (and not 50 lakhs) his resulting appreciation is just 8%! Now that is a very poor return for a risky asset like property - especially since State Bank of India will give you more than 9%, virtually risk free.


The above calculations do not factor in the extra costs (over and above the one crore) due to expenses like setting up the house (e.g., furniture), house maintenance and repair, costs like amenities, car parking, association fees, property taxes, etc. It also does not factor in savings due to rentals. However, what is interesting to see is that given the huge costs associated with home loans and the higher risk of owning an asset like property, the resulting appreciation has to be high enough for it to make financial sense. That certainly does not seem to have happened in the last 4 years..