Should you buy a house now or later ?

Understanding Housing Prices and Income Growth

Housing prices have always been a key topic in many countries. Over the years, the cost of homes has increased significantly, often outpacing the growth of household incomes. A look at the last 60 years of data from the US shows a clear trend. This trend is not limited to the US alone. As economies mature, they often follow a similar path, with rising home prices creating challenges for buyers. India, for example, is experiencing an even sharper increase in housing prices compared to income growth.

Home Prices vs. Household Income

For several decades, the ratio of home prices to median household income in the US remained relatively stable, between four to five times. This meant that if a family earned $50,000 a year, the average home price would be around $200,000 to $250,000. However, with the introduction of easy money policies, housing prices started to rise rapidly. At the peak of the housing bubble in 2008, the ratio had soared to nearly eight times the median income. After a brief collapse following the financial crisis, home prices have once again been climbing, making it harder for families to afford homes.

A Similar Path in India

India is seeing a similar trend, but with an even more intense rise in prices. While the exact ratio of home prices to income may vary, the overall trajectory is the same. Home prices in many parts of the country are growing much faster than household incomes. This is because, in most cases, incomes grow only slightly faster than inflation, while real estate tends to grow at a significantly higher rate. Over time, this creates a widening gap between the ability to afford a home and the actual cost of buying one.

The Challenge of Buying a Home

The main issue for many buyers is that while home prices keep rising, incomes do not grow at the same pace. This means that the dream of owning a home can seem farther and farther away as time passes. For those whose income is growing faster than the average, buying a home may not be as challenging. However, for the majority of people, the gap between their income and the price of homes continues to widen, making it more difficult to save enough to buy a house.

Is Renting a Better Option?

Some people choose to delay buying a home and instead invest their money while living on rent. The idea is that over time, their investments will grow at the same or a higher rate than real estate. In theory, this can work, but there are many uncertainties involved. Investment returns are not guaranteed, and factors like interest rates, stock market performance, and personal spending habits can affect the outcome. It requires careful planning, and there is no certainty that the investment will perform as expected over the long term.

Making the Right Decision

One major difference between renting and buying a home is the financial discipline required. When you take out a home loan, you are committed to paying monthly EMIs, which forces you to budget and save. On the other hand, when renting, there is no such obligation to invest or save a set amount each month. This can lead to financial instability if one is not disciplined. For young people considering whether to buy their first home or delay it in favor of investments, these are important factors to think about.

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