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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