Home – Buy or Rent

November 11, 2024 3 min read

Housing Affordability and Rising Prices: A Long-Term Trend

A recent chart shows the National Home Price Index in the U.S. compared with the affordability index over the last few decades. What’s interesting is that while the affordability index remains somewhat similar to where it was 20 or 30 years ago, home prices have skyrocketed, especially in the last 30 years. Even though wages might be increasing, inflation is keeping real income levels fairly constant. In simple terms, while house prices are shooting up, the real buying power of most people isn’t increasing as much.

The Real Estate Scenario in India

In India, the situation is even more extreme. The average real estate CAGR (Compound Annual Growth Rate) is between 8% and 12%, depending on where you are. So, unless your income is growing faster than this rate, buying a house is becoming less affordable with each passing decade. As house prices continue to climb, many people find themselves in a situation where owning a home seems further and further out of reach.

The Debate: Buy vs Rent

There’s a lot of talk around whether one should rent or buy a home. Many influencers advise people not to buy and only rent, but often, you’ll see these same people buying homes a few years later. The truth is, not everyone can become a homeowner. Renting is a necessity for many, and it helps keep the housing market balanced. However, there’s a case to be made for buying if you believe you can outpace housing price increases by investing elsewhere, such as in the stock market or other assets.

The Reality vs Excel Sheets

While it’s tempting to think you can do better by renting and investing the difference in higher-yielding assets, real life doesn’t always work that way. It’s easy to make numbers look good on paper, but when you’re actually living through a market crash or a tough financial time, you may not be as disciplined as you think. For example, when the stock market dips, you might decide to skip investing for a while and spend that money elsewhere. In contrast, a home loan forces you to be disciplined because you have to make those payments every month.

The Discipline of a Home Loan

A home loan can bring a sense of financial discipline that many people find valuable. Even if house prices are only rising by 10-11% annually, and the stock market might give you a 15% return, the commitment to paying off a home loan can help you build stability and control in your finances. The regular EMI payments keep you on track, and over time, this can bring a lot of financial growth and security. Just make sure that the home loan you take is something you can comfortably afford.

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    Home – Buy or Rent