ArthaYantra Buy vs. Rent Score (ABRS)-Delhi

ArthaYantra
A CFO FOR EVERYONE

BUY VS. RENT
A PERSONAL FINANCE PERSPECTIVE

Delhi Edition
Buy Rent

Copyright 2012
C
www.arthayantra.com

Table of Contents

Summary 3
1. Introduction 6
2. Methodology 7
3. Assumptions 8
4. Findings
4.1 Historical data of Real estate prices 9
4.2 Property Cost vs Rental Value 10
4.3 Down Payment 12
4.4 Area 13
4.5 Rent to Buy Ratio 14
4.6 Break Even Horizon 15
5 ArthaYantra Buy vs Rent Score (ABRSTM) 17
6. Other Important Numbers 19
7. Conclusion 20
8. Limitations and Concerns 21
9. Appendix 22

Copyright 2012
C
www.arthayantra.com

BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Summary
Property cost vs Rental Value: The Residential Property prices in Rohini Sec-13 and Sohna
Road are not being translated to their rental value. Though the average residential
property values of Sohna Road is higher than Noida City by 26%, the average rental value is
less by nearly 23%. The same case goes with Rohini Sec-13 and Golf Course Road. Though
their average residential property values are identical, their average rental values differ by
nearly 17%.

Down payment: The years of saving required to afford the initial down payment i.e. 20% of
the property price determines how sooner we can buy a house. It takes at least 4 years to
save for the required corpus in Indirapuram and Faridabad (Sector 86). In Noida City and
Noida-Greater Noida Expressway it takes 5 years and in Sohna Road and Golf Course
Extension Road it takes 6. In Delhi East and Rohini Sec-13 it takes a professional 7 and 9 years
respectively. It takes 10 years to save for a house in Golf Course Road. In Delhi South and
Vasant Kunj a professional has to save for at least 11 years to afford the down payment
amount required. A professional needs to save for 12 years to buy a house in Safdarjung
Enclave.

Area: The average number of square feet per INR 1 lakh determines the amount you need
to pay for the desired area of occupancy. The average number of sq ft of 28.72 per INR 1
lakh in Faridabad (Sector 86) makes it the place where you can get the highest area for the
same amount of money compared to other eleven localities. This implies that for a given
price one can get the largest space in Faridabad (Sector 86) followed by Indirapuram,
Noida-Greater Noida Expressway, Noida City, Sohna Road, Golf Course Extension Road,
Delhi East, Rohini Sec-13, Golf Course Road and Delhi South. Vasant Kunj and Safdarjung
Enclave offer the least in terms of space.

Rent to Buy Ratio: The ratio compares the monthly cost of renting house to the monthly cost
of owning the same place. The ratio undermines the necessity and urgency with which the
house has to be bought. The rent to buy ratio of 0.34 and 0.33 for Indirapuram and Noida-
Greater Noida Expressway respectively gives ownership of house an advantage over
renting.

Annual out of Pocket Costs: The annual out of pocket costs in case of ownership include
the monthly EMI being paid including the maintenance charges and the amount of tax
being paid. The values have been calculated and compared across the average loan
tenure of 15 years. The year at which the annual costs match determines the minimum stay
period in the house. The minimum stay period is 14 years for Indirapuram, 15 for Noida-
Greater Noida Expressway, Noida City and Faridabad and above 15 years for Delhi East,
Delhi South, Golf Course Extension Road, Golf Course Road, Rohini Sec-13, Safdarjung
Enclave, Sohna Road and Vasant Kunj. The tax beneﬁts received under the HRA
allowance dominate the tax beneﬁts received in case of ownership over the period of
15years.

ArthaYantra Buy vs Rent Score: ArthaYantra Buy vs. Rent Score (ABRS) not only aids in
making the rent vs. Buy decision but also explains the affordability and need to buy or rent
in a given place. The three important factors on which scale is based are: affordability to
rent, affordability to buy and a comparison of rent and EMI.

Copyright 2012
C www.arthayantra.com Page No:3


Delhi East : The rent to buy ratio of 0.23 meant that the rental prices are higher compared to
EMI to be paid in case of ownership. The low rental values compared to high property
prices makes it a place where renting can be easily afforded and the EMI associated with
home loan is high. It is advisable to rent for a professional with a salary range of 8 – 25 lakhs.

Delhi South : The rent to buy ratio of 0.16 meant that the rental price are low compared to
the EMI to be paid, so it is advisable to rent. The years required to save for down payment
(11 years) and the property prices being the third costliest locality (out of the twelve).A
professional with a salary range of 8-25 lakhs is advised to rent.

Faridabad (Sector 86) : The place with least average rental value and average property
price. The rent to buy ratio of 0.31 meant that it is advisable to buy. The lower property prices
and highest number of sq ft per INR 1 lakh (among the twelve localities) makes it a place to
buy.

Golf Course Extension Road : The rent to buy ratio of 0.18 meant that the average rental
value of residential property is very less compared to its higher prices. Renting house is a
better option. A professional with a salary range of 8-20 lakhs can't afford the locality but a
professional with a salary range of 21-25 lakhs can afford to buy but because of the low
rents it is advised to rent.

Golf Course Road : The fourth highest in terms of average property prices. The rent to buy
ratio of 0.18 meant that the average rental value of residential property is very less
compared to its higher prices. Renting house is a better option. The low rental values
compared to high property prices makes it a place where renting is recommended for a
salary range of 8 – 25 lakhs.

Indirapuram : The rent to buy ratio of 0.34 meant that the rental prices are moderately high
and it is advisable to buy. The years required to save for down payment (4 years, which is
least among the twelve localities) and the property prices being in an affordable range
makes it the second most affordable locality (out of the twelve).

Noida City : The rent to buy ratio of 0.31 meant that the rental prices are moderately high
and it is advisable to buy. But a professional with a salary range of 8-12 lakhs is better of
renting, whereas a professional with a salary range of 13-25 lakhs can buy a house in this
locality.

Noida-Greater Noida Expressway : The rent to buy ratio of 0.33 meant that the rental prices
are moderately high and it is advisable to buy. The years required to save for down
payment (5 years) and the property prices being in an affordable range make it the third
most affordable locality (out of the twelve).

Rohini Sec-13 : The rent to buy ratio of 0.16 meant that the average rental value of
residential property is very less compared to its higher prices. ArthaYantra Buy vs Rent score
of 55 signiﬁes that though the rents are high, it is advisable to rent because the property
prices are also high.

Safdarjung Enclave : The highest in terms of average property prices. The rent to buy ratio of
0.18 meant that the average rental value of residential property is very less compared to its
higher prices. Renting is the best option.

Copyright 2012


Sohna Road : The average residential property values of Sohna Road is higher than Noida
City by 26%, the average rental value is less by nearly 23%. A rent to buy ratio of 0.20 and
moderately high property prices makes it a place to Rent.

Vasant Kunj : The second highest in terms of average property prices. The rent to buy ratio of
0.18 means that the average rental value of residential property is very less compared to its
higher prices. Renting is the best option.

Buy Vs. Rent in Delhi
Place Salary ABRS Score Sq feet No of Years
Place range per Lac ( ) to Buy
Lacs ( ) (1000 Sq feet)
8-9 65
Faridabad
(Sector 86) 10 - 11
12 - 25
77.5
90
28.72 4
Indirapuram
8-9 65
10 - 11
12 - 25
77.5 26.67 4
90
Noida-Greater 8 - 10 65
Noida
Expressway
12 - 15
20 - 25
77.5
90
21.05 5
8 - 12 65
Noida City 13 - 15
20 - 25
77.5
90
19.61 5
Sohna Road 8 - 19 55
20 - 24
24 - 25
67.5
80
15.63 6
Golf Course 8 - 20 55
Extension Road 21 - 25 67.5 13.07 6
Delhi East 8 - 25 55 10.60 7
Rohini Sec-13 8 - 25 55 7.48 9
Golf Course
Road 8 - 25 55 7.14 10
Delhi South 8 - 25 55 5.81 11
Vasant Kunj 8 - 25 55 5.43 11
Safdarjung 8-9 30
Enclave 10 - 25 55 5.09 12
RENT NEUTRAL BUY
Figure 1: Graphical Representation of Buy Vs. Rent in Delhi

Copyright 2012


1. Introduction
Buying a home is one of the most important decisions in one's life. It is a tough decision to
make and emotions cloud the decision making process. Often buying a home is given a
high weightage by our family, friends and society at large. People associate the
advantages of housing security, physical asset creation and property appreciation with
home ownership. Renting is associated with expenditure. However, renting on the other
hand gives flexible lifestyle options, high level of mobility and is easy on the purse when
compared to the EMI to be paid.

From a personal finance perspective there is always a tussle between buying a home and
renting it. Is it prudent to buy? Is there an upside to taking a place on rent? How the lifestyle is
going to be affected? What is the impact of the locality chosen? There are numerous other
Questions that crop up when this topic is discussed. This research paper tries to find the
answers for these questions. As a part of this research we aim to objectively address the
major factors which impact the decision of buying or renting.

The common assumption that the residential property always appreciates is inconsistent.
The appreciation of a residential property is dependent on several factors. So one can't
actually determine the rate at which the residential property is going to appreciate or
depreciate. A school of thought supporting the rent argument says the amount invested in
a home when invested in equities for the common horizon of 15 years, yields the same or
better rewards. The real estate market scenario is similar to that of equity markets because it
is unpredictable.

The other common assumption held is buying a home eventually results in increased tax
savings. But provided the fact that the EMI payments accounting for principal payment of
home loan come under the same section as Provident fund and required risk cover for self
and family, one can't enjoy major tax benefits under section 80C. The tax benefits received
under section 24B i.e. the interest payments made towards house loan can be matched up
with HRA allowance in case of renting. So a professional shouldn't base the decision of
buying a house on the tax savings he/she is going to receive.

So eventually the three factors which play a predominant role in making the decision are:
Current Property price which determines the EMI to be paid, current monthly Rental value
and the current gross income. Monthly rent or the EMI being paid shouldn't end up
consuming most of the salary which in turn affects the lifestyle. It is not a good financial
decision to buy if the rental value is low compared to the EMI to be paid in case of
ownership.

As a part of this research we aim to provide a quantitative answer to the question of buying
vs. renting a home. We analyzed the costs associated with owning a house and renting a
house across twelve major localities of Delhi: Delhi East, Delhi South, Faridabad (Sector 86),
Golf Course Extension Road, Golf Course Road, Indirapuram, Noida City, Noida-Greater
Noida Expressway, Rohini Sec-13, Safdarjung Enclave, Sohna Road and Vasant Kunj.

Copyright 2012


2. Methodology
Property prices and rental prices of various residential properties were collected from
multiple data sources to generate the primary and secondary data for the analysis. The
public data sources including the data by National Housing Board (NHB) of India, data
from various real estate reports and data from major real estate aggregators is collated.
The primary research has been performed by collating information from over 100 real
estate agents across the localities considered.

The methodology used for arriving at results considers various key parameters derived from
the initial data collected: Price of the residential property and their rental value. Various
important factors like the years of saving required for a professional to accumulate the
corpus for down payment and the number of square feet per INR 1 lakh are derived from
the average property price.

The main idea behind this research was to quantify the buy vs. rent decision from a personal
ﬁnance perspective. The main factors which drive the decision are: how much more
money does a professional need to shell out for buying a home compared to renting it?
Can the professional afford this additional amount? ArthaYantra's Buy vs. Rent Score tries to
address these questions and come up with a comprehensive scoring system. The scoring
system not only tells whether it's better to buy or rent but also tells whether it's affordable to
buy or rent.

Factors associated with buying a home Factors associated with renting a home

Down payment for home loan Security Deposit

No. of Years required to save for down Monthly Rent
payment

EMI on home loan Yearly increase in rent

Monthly property maintenance charges Monthly property maintenance charges

Annual repairs Income tax savings under HRA exemption

Annual property tax

Income tax savings under section 80c and
24 b

Table 1: Factors associated with home ownership and renting

Copyright 2012


3. Assumptions
 The sale price and rental values are calculated for 1000 sq ft area ready to occupy
residential property.

 20% of the cost of the house is considered as the required down payment to buy a
house.

 The loan tenure is 15 years.

 The lending rate for the loan is 10.50%.

 Average savings rate is 25%.

 The minimum gross income required to buy a house is calculated by considering
50% of monthly take home salary= Monthly EMI to be paid.

 The gross income of the professional increases 10% annually.

 1.5% of the property value is considered as the property tax to be paid.

 10% annual increase in rent is considered.

 Property appreciation is not considered.

Copyright 2012


4. Findings

4.1 Historical data of Real estate prices

National Housing Board India's Residential Index (NHB Residex) tracks the movement of
prices in the residential housing segment across India. Figure 1 shows the historical NHB
Residex values since its inception in 2007.

NHB Residex of Delhi

250
200
150
100
Zone A
50
Zone B
x x x x x x x x x x
de de de de de de de de de de 12 Zone C
In In In In In In In In In In 20
07 10 10 10 10 11 11 11 11 12 un
20 20 20 20 20 20 20 20 20 20 r-J Zone D
ar un ep ec ar un ep ec ar Ap
M -J S -D - M -J -S -D - M
n- pr n- ct an pr ul ct an
Ja A Ju O J A J O J Zone E
Zone F
Zone G

Figure 2: Historical values of National Housing Board India Residential Index (NHB Residex)

Delhi as a city has recorded a raise of 72% in its NHB Residex value compared to the base
year, 2007. Zone C has recorded the highest raise in the index value by 132%. Zones G has
followed up with an 83% raise. Zones A and E have recorded a raise of 77% in their index
when compared to the base year 2007. Zones B, F and D have recorded a raise of 58%, 35%
and 23% respectively. Four zones have outperformed the city average while three zones
have underperformed.

Safdarjung Enclave falls under Zone B, Vasant Kunj under Zone C and Rohini Sector under
Zone E. Golf Course Road, Sohna Road, Golf Course Extension Road, Noida-Greater Noida
Expressway, Noida City and Indirapuram fall under Zone D. Delhi East and Delhi South fall
under Zones F and G respectively.

It is evident that each of the zones have different real estate markets and different
expectations from real estate. The effort is to identify the places that are most affordable
for a professional, given the current scenario. It is important to look at these graphs to get a
high level perspective of the general movement of real estate in each of the zones. We
delve into each zone's prospect in the later sections. The relative nature of the index hides
many interesting facts.

Copyright 2012
9


4.2 Property cost Vs. Rental Value
The graph compares the property price and rental value of 1000 sq ft ready to occupy
house across twelve localities of Delhi. The bar graph depicts the average property price
in the locality and the line graph depicts the average rental value in the locality.

Comparisons of Average Rents and Average Property Prices

Rs. 25,000,000.00 Rs. 35,000,00
Rs. 30,000,00
Rs. 20,000,000.00 Rs. 25,000,00
Rs. 15,000,000.00 Rs. 20,000,00
Rs. 10,000,000.00 Rs. 15,000,00
Rs. 5,000,000.00 Rs. 10,000,00
Rs. 0.00 Rs. 5,000,00
Rs. 0.00
6) m da ity d d
as
t 3 d ut
h
un
j e
r8 ra oi C oa oa -1 oa o av
u
rN R R E c R iS
K cl
ct
o
irap e oi
da
na on el
hi Se se h nt En
e d at si ni r el sa
(S In re y
N
So
h
en
D
oh
i
ou D Va ng
ad
- G wa t R C r ju
ab da ss Ex ol
f
fda
rid oi e rs
e G Sa
Fa N xpr
E ou
Locality fC
ol
G
Average Price of Residen alProperty Average Rental Value

Figure 3: Average property price and rental values across twelve major localities of Delhi

The most important thing that strikes out while assessing the current residential property
prices and NHB Residex is the base effect. Vasant Kunj's property prices (INR 18,408,500) as
per NHB Residex have grown by 132% but still remain less than that of Safdarjung Enclave
(INR 119,648,000) which appreciated by only 58%. Rohini Sec-13 whose property prices (INR
13,262,000) doubled as per NHB Residex are identical with that of Golf Course Road (INR
14,000,000) which recorded a 23% raise in its index value. This means that the property
prices of Vasant Kunj and Rohini Sec-13 in the base year 2007 were less compared to other
localities.

The most important factor that stands out from the rental value of the properties across the
twelve localities is the anomaly of the property values not being translated to the
corresponding rental values. Noida City's average property price (INR 5,100,000) is less than
that of Sohna Road (INR 6,400,000) by 26%. But the Average rental value of Noida City (INR
13,250) is higher than that of Sohna Road (INR 10,750) by nearly 23%. The same case has
been observed with Rohini Sec-13 and Golf Course Road. Though their average residential
property values are identical, the average rental value of Golf Course Road (INR 21,000) is
higher than that of Rohini Sec-13 (INR 18,000) by 17%.

Copyright 2012


Locality Affordability to Rent Rank Affordability to Buy Rank

Delhi East 8 7

Delhi South 10 10

Faridabad (Sector 86) 1 1

Golf Course Extension Road 4 6

Golf Course Road 9 9

Indirapuram 2 2

Noida City 6 4

Noida-Greater Noida Expressway 5 3

Rohini Sec-13 7 8

Safdarjung Enclave 12 12

Sohna Road 3 5

Vasant Kunj 11 11
*On a scale of 1 to 7 with 1 being most affordable and 7 being least affordable based on the average property prices.

Table 2: Locality wise ranking based on the affordability to rent and buy

The above table shows the affordability to rent rank and the affordability to buy rank based
on the average property prices and average rental values across the twelve major
localities of Delhi. Faridabad (Sector 86) stands out as the most affordable locality to buy
and rent. Safdarjung Enclave stands out to be the least affordable place in both scenarios.
Indirapuram is the second most affordable place and Vasant Kunj is second least
affordable place. Golf Course Road and Delhi South take the 9th and 10th place
respectively in both scenarios. This means that the high/low property prices of the above
mentioned 6 localities are translated to their relative rental prices.

Sohna Road ranks 3rd and 5th on the affordability to rent and affordability to buy rankings
respectively. Noida-Greater Noida Expressway ranks 5th and 3rd on the affordability to rent
and affordability to buy rankings respectively. This means that the average property price
in Noida-Greater Noida Expressway is less than that of Sohna Road but the rental value is
higher. Golf Course Extension Road ranks 4th and 6th on the affordability to rent and
affordability to buy rankings respectively. Noida City ranks 6th and 4th on the affordability
to rent and affordability to buy rankings respectively. This means that the average property
price in Noida City is less than that of Golf Course Extension Road but the rental value is
higher. Rohini Sec-13 ranks 7th and 8th on the affordability to rent and affordability to buy
rankings respectively. Delhi East ranks 8th and 7th on the affordability to rent and
affordability to buy rankings respectively. This means that the average property price in
Delhi East is less than that of Rohini Sec-13 but the rental value is higher. This signifies the fact
that people of different localities have different expectations from their real estate
markets.

Copyright 2012


4.3 Down payment

A critical decision in purchasing a home is the down payment required to make in order to
avail the facility of housing loan. It is often a substantial amount of money to be paid
upfront in order to own the house. While some of the professionals depend on their
extended family to provide for this amount, often they do need to save for it. Assuming a
20% of property price as the down payment and saving rate of 25% for a professional with a
gross income of 8 lakhs, based on the current average property prices, the time required to
save the corpus determines how sooner one can afford to buy a home.

No.of Years Required to save corpus for
downpayment of buying a house

Safdarjung Enclave
Vasant Kunj
Locality

Delhi South
Golf Course Road
Rohini Sec-13
Delhi East
Golf Course Extension Road

Sohna Road
Noida City
Noida-Greater Noida Expressway

Faridabad (Sector 86)
Indirapuram
12

Figure 4: No. of years required to save the corpus for down payment across twelve major
localities of Delhi

The average property prices translate to the number of year's professional needs to save
for the required corpus for down payment. Based on the above stated assumption and
average property prices a professional can afford the down payment required to buy a
house in Indirapuram and Faridabad (Sector 86) in 4 years. In order to own a house in Noida
City and Noida-Greater Noida Expressway a professional has to save for 5 years. A
professional will need to save for 6 years to buy a house in Sohna Road and Golf Course
Extension Road. To buy a house a professional will need to save for 7 and 9 years in Delhi
East and Rohini Sec-13 respectively. A professional can afford the down payment required
to buy a house in Golf Course Road in 10 years. In order to own a house in Delhi South and
Vasant Kunj a professional has to save for 11 years. To save for the down payment of a
house in Safdarjung Enclave a professional will need to save for 12 years. Figure 3 is in sync
with the assigned affordability ranks for ownership.

Copyright 2012


4.4 Area

The area of residential occupancy is an important aspect of life style. It determines the size
of the home that is provided for the family. Figure 4 compares the average number of sq ft
that can be bought for 1 lakh rupees across twelve major localities in Delhi.

Average No.of sqft per INR 1lakh

Safdarjung Enclave
Vasant Kunj
Locality

Delhi South
Golf Course Road
Rohini Sec-13
Delhi East

Sohna Road
Noida City

Indirapuram
5 10 15 20 25 30 35

Figure 5: Average no. of sq ft per INR 1lakh across twelve major localities of Delhi

Safdarjung Enclave being the costliest locality offers a space of 5.09 sq ft per INR 1 lakh.
Faridabad (Sector 86) being the cheapest locality offers a space of 28.72 sq ft per INR 1
lakh. Indirapuram offers a space of 26.67 sq ft per INR 1 lakh. This means that for the same
amount of living area, a professional who wants to buy a house in Safdarjung Enclave has
to spend at least 5 times the amount he spends in Faridabad and Indirapuram. A
professional gets 21.05 sq ft and 19.61 sq ft space for INR 1 lakh in Noida-Greater Noida
Expressway and Noida City respectively. Sohna Road and Golf Course Extension Road
offer a space of 15.63 sq ft and 13.07 sq ft per INR 1 lakh respectively. A professional gets a
living space of 10.60 sq ft per INR 1 lakh in Delhi East. Rohini Sec-13 and Golf Course Road
offer a space of 7.48 sq ft and 7.14 sq ft per INR 1 lakh respectively. The second and third
costliest localities, Delhi South and Vasant Kunj offer a space of 5.81 sq ft and 5.43 sq ft per
INR 1 lakh respectively. Figure 4 attuned to the Affordability to Buy Ranking mentioned
above.

Copyright 2012


4.5 Rent to Buy Ratio
The rent to buy ratio explains the additional monthly payments to be paid in case of
ownership compared to renting. The ratio also helps in understanding whether the
property prices are being translated to the rental value or not. The ratio is calculated
based on the average monthly cost of renting i.e. monthly rental value + monthly
maintenance and average monthly cost of ownership i.e. monthly EMI being paid in case
of owning the house + monthly Maintenance charges.

Locality Average monthly Average monthly Rent yo Buy Urgency to
out of pocket out of pocket Ra o buy rank
cost(Ren ng the cost(Owning the
house) (INR) house) (INR)

Delhi East 19,470 84,400.138 23% 5

Delhi South 24,290 15,3173.6374 16% 11

Faridabad (Sector 86) 10,000 31,787.57082 31% 4

Golf Course Extension Road 12,500 68,650.41413 18% 10

Golf Course Road 22,000 12,4804.6795 18% 9

Indirapuram 11,750 34,161.96771 34% 1

Noida City 14,250 46,100.27609 31% 3

Noida-Greater Noida Expressway 14,000 43,005.1591 33% 2

Rohini Sec-13 19,000 11,9162.7233 16% 12

Safdarjung Enclave 32,000 17,4751.0244 18% 8

Sohna Road 11,750 57,596.42489 20% 6

Vasant Kunj 29,500 16,3789.8887 18% 7

*On a scale of 1 to 8 based on the monthly cost of renting and monthly cost of buying with 1 being buy as soon as
possible and 8 being renting is better than buying.
Table 3: Rent to Buy ratio and Urgency to buy rank of twelve major localities across Delhi
Rohini Sec-13 and Delhi South has the least rent to buy ratio. This signiﬁes the fact that the
higher property prices of the localities are not being translated to the rental value in these
localities. Renting a house is cheaper than owning a house by at least 84%. Golf Course
Extension Road, Golf Course Road, Safdarjung Road and Vasant Kunj also have low rent to
buy ratios. Indirapuram has the highest rent to buy ratio compared to other localities.

The urgency to buy rank assigned signiﬁes the fact that higher the rent to buy ratio, the
sooner a professional needs to buy a home in the locality. With a rent to buy ratio of 0.34
and the average monthly out of pocket cost of Owning house being moderate, rents
being relative higher Indirapuram ranks high in the urgency to buy ratio. Noida-Greater
Noida Expressway and Noida City are also ranked high on urgency to buy rank.

Faridabad and Delhi East rank 4th and 5th respectively in the urgency to buy rank. The 6th
and 7th position in the urgency to buy rank is taken by Sohna Road and Vasant Kunj
respectively. Safdarjung Enclave takes the 8th position in the urgency to buy rankings.. The
10th position in the urgency to buy rank is taken by Chembur.

Copyright 2012


4.5 Break Even Horizon
Ignoring the price escalations of the residential property, one important question to be
answered is the breakeven horizon i.e. how long a new home buyer would have to own the
home to justify the decision of buying instead of renting in financial sense. Figure 5 shows the
graphs of the annual out pocket costs incurred in case of ownership and renting based on
the average property prices and average rental prices across the twelve localities. The
annual out of pocket cost in case of renting include the annual amount paid towards the
rent, the annual maintenance charges paid and the amount of income tax being paid.
The annual out of pocket cost in case of ownership include the annual amount paid
towards the EMI payments of the house loan, annual maintenance and repair charges and
the amount of income tax being paid.

The income tax being paid is considered in calculations because most of the professionals
feel buying a home will do a world good for their tax savings. The idea is to compare the tax
benefits received in case of buying a home and renting the home. The payments made
towards the principal amount of the home loan are considered under section 80C. The
payments made towards interest on home loan are considered under section 24b. In case
of renting one can claim tax benefits under house rent allowance.

The provident fund received and required risk coverage for self and family also come
under section 80C. These items do fill up most of the 80C part. Out of the EMI payments
being made, in the initial years most of the amount accounts for interest payments rather
than the principal amount. By the time the payment towards principal increases, one can
also expect the salary of the professional to increase in turn increasing the Provident fund
being received. So, the tax benefit under section 80C in case of ownership doesn't actually
add much of advantage.

Though the tax benefits in case of ownership are higher during the initial years, renting the
same place gives better tax benefits over the next few years. The benefits of renting are
higher especially in the regions where the costs of ownership and renting don't match up
during the average loan tenure of 15 years. The breakeven year i.e. the year at which the
annual cost of owning house is equal to the annual cost of renting the same place is
calculated over the average loan tenure i.e. 15 years. The matchup of cost of ownership
and renting in Indirapuram is 14 years. The cost matchup in Noida-Greater Noida
Expressway, Noida City and Faridabad is 15 years. It takes more than 15 years in Delhi East,
Delhi South, Golf Course Extension Road, Golf Course Road, Rohini Sec-13, Safdarjung
Enclave, Sohna Road and Vasant Kunj. The planned length of stay in the house becomes
an important aspect in deciding whether to buy or rent.

Copyright 2012


Break Even Horizon

Current Average stay 7 years

Vasant Kunj
Sohna Road
Safdarjung Enclave
Rohini Sec-13

Noida City
Locality

Indirapuram
Golf Course Road
Delhi South
Delhi East

2 4 6 8 10 12 14 16

Figure 6: Break Even Horizon for the twelve major localities of Delhi

Copyright 2012 www.arthayantra.com Page No:16


5 ArthaYantra Buy vs Rent Score (ABRSTM)
The property price and rental value of the place speaks volumes about why one should rent
or buy the place. They have an impact on the amount of money being spent on the house
(be it rent or EMI), the tax savings being received and many other important things. But one
can't only rely on the rent to buy ratio and make the decision to buy without assessing his
affordability. Similarly a decision to buy a house just because one can afford the EMI is not
advisable. ArthaYantra came up with a unique scoring system called ArthaYantra Buy vs.
Rent Score (ABRS) which is an effort to seamlessly integrate the above two aspects. We
even added another layer of parameter, the rental value. So given a locality, based on the
income of the professional ABRS describes a suitable action from wide range of options
spanning from why one can't rent to why one has to rent though he/she can afford to buy to
why one should buy.

As a part of this research report we have considered the average property prices and
rental values of the localities and calculated the ABRS score across different salary ranges.
In this research, the scope of the scoring system is conﬁned to rental value and price of the
corresponding property of the same region. It can be extended to compare the rental
value of one region and property prices of a different region. This makes ABRS a powerful
tool to logically gauze the pros and cons of renting and buying a house.

Score Recommended Ac on
100 Buy (Rents are very high)

90 Buy (Rents are high)
87.5 Buy ( Rents are higher)

80 Can afford both ownership and Renting but because of low Rent to
Ownership Rent is recommended.

77.5 Buy/Neutral (Can afford both ownership and rent )

75 It is Advisable to buy but EMI can't be afforded. Have to Rent.

67.5 Rent/Neutral (Can afford both ownership and rent but rent/EMI ratio is low)

65 Rent (Rents are high but can't afford to buy)

55 Can afford to Rent but can't afford to Buy.

<50 Can't afford both ownership and renting.

Table 4: ArthaYantra Buy vs. Rent Score Explanation

Copyright 2012


Gross Delhi Delhi Farid Golf Golf Indir Noida Noida- Rohini Safdar Sohna Vasant
Income/ East South abad Course Cour apur City Greate Sec- jung Road kunj
Cities (Sect Extensi se am r Noida 13 Encla
or on Roa Express ve
86) Road d way

8 Lakhs 55 55 65 55 55 65 65 65 55 30 55 55
10 Lakhs 55 55 77.5 55 55 77.5 65 65 55 55 55 55
12 Lakhs 55 55 90 55 55 90 65 77.5 55 55 55 55
15 Lakhs 55 55 90 55 55 90 77.5 77.5 55 55 55 55
20 Lakhs 55 55 90 55 55 90 90 90 55 55 67.5 55
25 Lakhs 55 55 90 67.5 55 90 90 90 55 55 80 55

Table 5: ArthaYantra Buy vs. Rent scores for different salary ranges across twelve major Localities of Delhi.

Delhi East : The low rental values compared to high property prices makes it a place where
renting can be easily afforded and the EMI associated with home loan in high. It is
advisable to rent for a professional with a salary range of 8 – 25 lakhs.

Delhi South : The score of 55 signiﬁes that though the rents are high, it is advisable to rent
because the property prices are also high. The EMI payments to be made in case of
ownership are not affordable.

Faridabad (Sector 86) : A professional with a salary of 8 lakhs is better of renting even though
the rents are high. This is because he can't afford the EMI in this salary range. A professional
with a salary range of 9-11 lakhs falls in the neutral zone i.e. he can afford both renting and
buying. A professional with a salary range of 12-25 lakhs is advised to buy.

Golf Course Extension Road : A professional with a salary range of 8-20 lakhs can afford to
rent but can't afford to buy in this locality. A professional with a salary range of 21-25 lakhs
can afford to buy but because of the low rents is advised to rent.

Golf Course Road : The low rental values compared to high property prices makes it a
place where renting can be easily afforded and the EMI associated with home loan in high.
It is advisable to rent for a professional with a salary range of 8 – 25 lakhs.

Indirapuram : A professional with a salary of 8 lakhs is better of renting even though the rents
are high. This is because he can't afford the EMI in this salary range. A professional with a
salary range of 9-11 lakhs falls in the neutral zone i.e. he can afford both renting and buying.
A professional with a salary range of 12-25 lakhs is advised to buy.

Copyright 2012


Noida City : A professional with a salary range of 8-12 lakhs is better of renting. A
professional with a salary range of 13-15 lakhs falls in the neutral zone i.e. he can afford to
buy and it is advisable to buy but have to make few adjustments to the current lifestyle in
order to afford the additional amount for EMI payments. The professionals with a salary
range of 16-25 lakhs are advised to buy.

Noida-Greater Noida Expressway : A professional with a salary range of 8-11 lakhs is better
of renting. A professional with a salary of 12-15 lakhs falls in the neutral zone i.e. he can
afford to buy and it is advisable to buy but have to make few adjustments to the current
lifestyle in order to afford the additional amount for EMI payments. The professionals with a
salary range of more than 15 lakhs are advised to buy.

Rohini Sec-13 : The score of 55 signiﬁes that though the rents are high, it is advisable to rent
because the property prices are also high. The EMI payments to be made in case of
ownership are not affordable.

Safdarjung Enclave : A professional with a salary of 8 lakhs cannot afford this locality. He will
not be able to pay the rents nor will he be able to afford the EMI payments. A professional
with a salary range of 9-25 lakhs can afford the rents in this locality but can't afford the EMI
associated with home loans.

Sohna Road : The score of 55 for a professional with a salary range of 8-15 lakhs signiﬁes that
the monthly cost of renting is cheaper than buying by more than 70%. The low rental prices
also meant that though the professional with a salary more than 16 lakhs can afford to buy
a house renting is a better option.

Vasant Kunj : The low rental values compared to high property prices makes it a place
where renting can be easily afforded and the EMI associated with home loan in high. It is
advisable to rent for a professional with a salary range of 8 – 25 lakhs.

Copyright 2012
19


6 Key Factors
Here are some important numbers to look at before making the decision:
Cities Delhi Delhi Farida Golf Golf Indira Noida Noida- Rohini Safda Sohna Vasant
East South bad Course Course pura City Greater Sec- rjung Road kunj
(Secto Extensi Road m Noida 13 Encla
r 86) on Expres ve
Road sway

50
Initial
Corpus
required 1,886,200 3,441,600 696,300 1,530,000 2,800,000 750,000 1,020,000 950,000 2,672,400 3,929,600 1,280,000 3,681,700
for
owning (INR)
*

No of
Years to
save for 4 4 5 5 6 6 7 9 10 11 11 12

the
corpus
Average
No.of
sq.ft per 10.60 5.81 28.72 13.07 7.14 26.67 19.61 21.05 7.48 5.09 15.63 5.43
INR
1lakh

Initial
Corpus
required 184,700 232,900 90,000 115,000 210,000 107,500 132,500 130,000 180,000 310,000 107,500 285,000
for
renting **

Average
out of 0.23 0.16 0.31 0.18 0.18 0.34 0.31 0.33 0.16 0.18 0.20 0.18
pocket
cost ***

Break
Even 15+ 15+ 15 15+ 15+ 14 15 15 15+ 15+ 15+ 15+
Year

*Ini al corpus required for owning = 20% of the Average property price (down payment for house loan)
**Ini al corpus required for ren ng= Amount equivalent to 10 months of rental value
*** (Ren ng the house) / Average out of pocket cost (Owning the house)
The gross income of 8 lakhs per annum is considered.

Table 6: Other important numbers

Copyright 2012


7 Conclusion
Based on the current real estate markets, Faridabad (Sector 86) and Indirapuram are the
best places to own a house. The property prices and rental values in these two localities are
low, thus making them the most affordable places for a professional to rent or own a house.
The larger residential spaces offered by Faridabad (Sector 86) and Indirapuram provide a
better lifestyle option. The real estate market of Noida City favors the home owners
because of its moderate property prices and high rental value. Though the moderate
property prices of Sohna Road make a strong case of ownership for professionals with
higher salaries, the low rental values make renting a better option. The high property prices
and low rental values of Rohini Sec-13 make the decision to rent easier. Safdarjung Enclave
is the least affordable locality for a professional because of its high property prices and
rental values.

The research addresses the fact that Buy vs. rent decision has a huge impact on the
personal finance of a professional. Buying a home is an integral part of every one's dream.
But a very calculated and merit based judgment is needed before taking the decision to
own the house. The comprehensive ArthaYantra Buy vs. Rent Score (ABRS) suggests the
decision a professional should take across the thirteen major localities of Delhi based on the
current rental values, property prices and the salary. If a professional finds himself in the rent
zone as per the ABRS but still wants to buy a house, one has to make sure that their
Emotional Premium attached with buying a house is going to match the EMI premium
being paid.

8. Limitations and Concerns:
The data is related to following localities of Delhi:

Delhi East, Delhi South, Faridabad (Sector 86), Golf Course Extension Road, Golf Course
Road, Indirapuram, Noida City, Noida-Greater Noida Expressway, Rohini Sec-13,
Safdarjung Enclave, Sohna Road and Vasant Kunj.

The property tax to be paid is considered as 1.5% of the property value. The property tax
calculation reforms need some stringent reforms to regulate the process. In most places
the value is calculated based on the rental value. The rental values being shown in the
related local governing bodies website varies from the actual rental prices.

The tax benefits received under section 80C is considered as INR 1 lakh both in the case of
house ownership and renting.

Copyright 2012


9. Appendix
FIGURES:

Figure1: Graphical Representation of Buy Vs. Rent in Delhi

Figure2: Historical values of National Housing Board India Residential Index (NHB Residex)

Figure 3: Average property price and rental values across twelve major localities of Delhi

Figure 4: No. of years required to save the corpus for down payment across twelve major
localities of Delhi

Figure 5: Average no. of sq ft per INR 1lakh across twelve major localities of Delhi

Figure 6: Break even horizon for the twelve major localities of Delhi

TABLE:

Table 1 : Factors associated with home ownership and renting

Table 2 : Locality wise ranking based on the affordability to rent and buy

Table 3 : Rent to Buy ratio and Urgency to buy rank of twelve major localities across
Delhi

Table 4 : ArthaYantra Buy vs. Rent Score Explanation

Table 5 : ArthaYantra Buy vs. Rent scores for different salary ranges across twelve
major Localities of Delhi.

Table 6 : Other important numbers

SOURCES:
 National Housing Board, India: www.nhb.org.in

 Jones Lang LaSalle: www.joneslanglasalle.co.in

 Makaan: www.makaan.com

 Magic Bricks: www.magicbricks.com

 Multiple Primary sources (100+)

Copyright 2012


ArthaYantra is a young and innovative company started by a group of alumni of the Indian School of
Business (ISB) Hyderabad. It provides integrated personal finance services using its unique
proprietary framework, Personal Financial Lifecycle Management (PFLM)TM, which helps clients
achieve their financial goals. ArthaYantra's vision is to provide independent, high quality,
customized financial planning solutions and their efficient execution to individuals. It employs
proprietary financial models and enable investments through well balanced passive investment
strategies. ArthaYantra's clientele includes individuals from India, US, Europe and Middle East.

Our Mission
To positively impact the future of our customers & their families.

For more information on this report please contact ArthaYantra Corporation Pvt. Ltd.
visit us online: www.arthayantra.com or Write to : contactus@arthayantra.com

Website: www.arthayantra.com

: h p://twi er.com/arthayantra

: h p://www.facebook.com/arthayantra

:h p://www.linkedin.com/company/artha‐yantra

Copyright 2012

ArthaYantra
A CFO FOR EVERYONE

Plot #319, Second Floor, Ayyappa Society, Madhapur, Hyderabad - 500081, AP, India.
Phone : +91- 040-66245874, Fax : +91-040-66245. www.arthayantra.com, contactus@arthayantra.com

ArthaYantra Buy vs. Rent Score (ABRS)-Delhi

Recommended

Recommended

More Related Content

Similar to ArthaYantra Buy vs. Rent Score (ABRS)-Delhi

Similar to ArthaYantra Buy vs. Rent Score (ABRS)-Delhi (9)

ArthaYantra Buy vs. Rent Score (ABRS)-Delhi