The West is rewriting the phrase
"as safe ashouses", considering the drop
in real estate values. But in India, real estate
continues to make sense as a retirement savings option.
Three factors
that support real estate as a retirement savings option are: India's housing
shortage, favourable demographics and a tax regime that favours borrowing to
buy a house. While this is clearly not an option for a large section of the
population because of steep realty prices, it is viable for those with enough
savings and good cash flows. A sharp correction in property prices in late '90s
and immediately after the Lehman Brothers crisis in 2008 may have raised doubts
in the minds of some, but financial planners continue to support real estate as
a retirement tool. With an entry barrier for a two-bedroom apartment within the
Mumbai city limits nudging Rs 1 crore, this is clearly not an option for all.
But given that there is a sizeable population with high disposable incomes and
tax liabilities, real estate makes an interesting proposition. "For those
who don't yet own a home, buying a house has to be a top priority. But even for
homeowners in a high tax bracket, there are a number of factors such as tax
savings, capital appreciation and cash flow that would tempt them to definitely
look at a second home," says Pankaj Mathpal, a certified financial planner.
This may seem
as surprising advice, considering that in the West houses are depreciating as
soon as they are built. But there is a marked difference between the West and
India. In the US, the average members in a household are 2.6. In India,
although numbers are not available, there is a shortage of 21 million housing
units. According to a report by Credit Suisse, Indians will continue to migrate
to cities and 50% of the country will be urbanized by 2044.
According to
Brigitte Miska, head of international pensions with German insurer Allianz, who
has done a study on the preparedness of various countries to look after retired
citizens, real estate has its risks. "The elderly live in small cities and
villages while the young move to larger cities. As a result demand for houses
in smaller cities shrinks. We are already seeing that in the West," she
said. Miska points out that demand for houses come largely from young couples.
"If you
have a second house in which you do not live in the notional rent that you
could earn from is taxable. What most people do is to take a housing loan and
rent out the place," says Arnav Pandya, a certified financial planner. He
points out that the advantage of taking a home loan on a second home is that
there is no limit on the interest expenditure that can be set off against
income from the flat. "If the borrower is earning a rent income and
simultaneously paying interest on a home loan, the rental income can be set off
against the interest expenditure,"
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