ArthaYantra Buy vs. Rent Score (ABRS)-Mumbai

ArthaYantra
A CFO FOR EVERYONE

BUY VS. RENT
A PERSONAL FINANCE PERSPECTIVE

Mumbai 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 20
7. Conclusion 21
8. Limitations and Concerns 21
9. Appendix 22

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www.arthayantra.com

BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Summary
Property cost vs Rental Value : The Residential Property prices in Chembur and Borivali West
are not being translated to their rental value. Though the average residential property
values of Chembur is higher than Ghatkopar by 32%, the average rental value is less by
nearly 21%. The same case goes with Borivali West and Bhandup West. Though their
average residential property values are identical, their average rental values differ by
nearly 19%.

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 Virar and Kalyan. In Mira Road and Kharghar it takes 5 years
and in Ghodbunder Road it takes 6. In Pokaran Road a professional has to save for 7 years
and in Ghatkopar and Bhandup West a professional has to save for 8 years to afford the
down payment amount required. It takes 9 years to save for a house down payment in
Borivali West and 10 years in Wadala, Andheri and Chembur. It takes the longest to save in
Lower Parel (14 years).

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 24 per INR 1 lakh
in Virar makes it the place where you can get the highest area for the same amount of
money compared to other 12 localities. This implies that for a given price one can get the
largest space in Virar followed by Kalyan, Kharghar, Mira Road, Ghodbunder Road,
Pokaran Road, Ghatkopar, Bhandup West, Borivali West, Chembur, Andheri and Wadala.
Lower Parel offers 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 0.43 shows that the rental values in
Ghatkopar are higher and makes it an “immediately buy when you can afford” place. The
ratio of 0.33 for Lower Parel 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 12 years for Ghatkopar, 14 for Wadala and
Andheri, 15 for Lower Parel and Kharghar and above 15 years for Bhandup West, Borivali
West, Chembur, Ghodbunder Road, Kalyan, Mira Road, Pokaran Road and Virar. 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.

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Andheri : The rent to buy ratio of 0.34 meant that the rental prices are high. A professional
with a salary range of 8-14 lakhs cannot afford to buy or rent in this locality. A salary range of
15-25 lakhs allows a professional to rent but not buy.

Bhandup west : A rent to buy ratio of 0.29 and high property prices makes it a place to rent. It
is advisable to rent for a professional with a salary range of 8 – 25 lakhs.

Borivali west : A rent to buy ratio of 0.23 and high property prices and cheaper rental values
when compared to the prices makes it a place to rent. It is advisable to rent for a
professional with a salary range of 8-25 lakhs.

Chembur : Though the average residential property values of Chembur is higher than
Ghatkopar by 32%, the average rental value is less by nearly 21%. A rent to buy ratio of 0.26
and high property prices makes it a place to Rent.

Ghatkopar : The rent to buy ratio of 0.43 meant that the average rental value of residential
property is high compared to the average property price. This makes Ghatkopar a place to
buy. The moderate prices make it a place where in you need to buy a house as soon as you
can afford it. The out of pocket costs also in favor of buy with the breakeven being
achieved at 12th year (fastest of the thirteen localities).

Ghodbunder Road : A rent to buy ratio of 0.27 and moderately high property prices and
cheaper rental values makes it a place to rent. A professional with a salary range of 8-15
lakhs should rent. 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.

Kalyan : A rent to buy ratio of 0.27 and moderately high property prices and cheaper rental
values makes it a place to rent. A professional with a salary range 8-11 lakhs is advised to
rent. A professional with a salary more than 12 lakhs can afford to buy a house, but because
of the low rents, renting is a better option.

Kharghar : The rent to buy ratio of 0.32 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 an affordable locality.

Lower Parel : The rent to buy ratio of 0.33 meant that the rental prices are high and one is
advised to buy. But even the property prices are very high. A professional with a salary
range of 8-25 lakhs cannot afford to buy or rent in this locality.

Mira Road : The rent to buy ratio of 0.25 meant that the rental prices are cheaper
compared to EMI to be paid in case of ownership. A professional with a salary range of 8-15
lakhs should rent. 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.

Pokaran Rd : The rent to buy ratio of 0.24 meant that the rental prices are cheaper
compared to EMI to be paid in case of ownership. 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.

Virar : A professional with a salary range 8-11 lakhs is advised to rent. He should rent even
with the high rents because he can't afford the EMI associated with a home loan. A
professional with a salary more than 12 lakhs can afford to buy a house, but because of the
low rents, renting is a better option. A rent to buy ratio of 0.26 meant that renting is better in
this locality.

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Wadala : The rent to buy ratio of 0.35 meant that the rental prices are high. A professional
with a salary range of 8-14 lakhs cannot afford to buy or rent in this locality. A salary range of
15-25 lakhs allows a professional to rent but not buy.

Buy Vs. Rent in Mumbai
Place Salary ABRS Score Sq feet No of Years
Place range per Lac ( ) to Buy
Lacs ( ) (1000 Sq feet)
8 - 11 55
Virar 12 - 14
15 - 25
67.5
80
24.04 4
8 - 11 55
Kalyan 12 - 14
15 - 25
67.5
80
21.97 4
8 - 19 65
Kharghar
20 - 24
24 - 25
77.5 16.95 5
90
Mira Road 8 - 19 55
20 - 24 67.5
80
16.90 5
24 - 25
Ghodbunder
8 - 19 55
Road 20 - 24
24 - 25
67.5
80
14.29 6
Pokaran Rd
8 - 24 55
24 - 25 67.5 11.19
7
Ghatkopar 8 - 11 50
12 - 25 75 9.30 8
Bhandup west 55
8 - 25
8.99 8
Borivali west
8 - 25 55 8.27 9
Chembur
8-9 30
10 - 25 55 7.05 10
8 - 14 40
Andheri
15 - 25 65 6.90 10
8 - 14 40
Wadala 15 - 25 65 6.45 10
40
Lower Parel 8 - 25 3.64 14
RENT NEUTRAL BUY
Figure 1: Graphical Representation of Buy Vs. Rent in Mumbai

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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 eight localities in Mumbai: Andheri, Bhandup West, Borivali West, Chembur,
Ghatkopar, Ghodbunder Road, Kalyan, Kharghar, Lower Parel, Mira Road, Pokaran Road,
Virar and Wadala.

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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

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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.

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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 different zones of the city. Figure 1 shows the historical NHB Residex values since
its inception in 2007.

NHB Residex of Chennai
Mumbai

400 Zone 1
350 Zone 2
300
250 Zone 3
200 Zone 4
150
Zone 5
100
50 Zone 6
0 Navi Mumbai
x x x x x x x x x x x Thane
de de de de de de de de de de de
In In In In In In In In In In In
07 10 10 10 10 01
1
01
1
01
1
01
1 12 12 Kalyan
20 20 20 20 20 2 2 2 2 2 0 20
ar un ep ec ar un ep ec ar ep Mira Byander
n-
M r-J n-
S
ct
-D n-
M r-J l-S ct
-D n-
M
r-S
Ja Ap Ju O Ja Ap Ju O Ja Ap Virar Vasai
Other Muncipalities

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

Mumbai as a city has recorded a raise of 97% in it NHB Residex value compared to the base
year of 2007. Zone 2 has recorded the highest raise in the index value by 243%. Zones 3 and
1 followed up with a 119% and 110% raise respectively. All the other zones except Other
Municipalities have recorded raise in their index value ranging from 2% to 96% when
compared to their base year. Other Municipalities Zone has recorded a decline of 9%
when compared to the base year of 2007.

Lower Parel falls under Zone 2, Andheri under Zone 3 and Chembur under Zone 4. Borivali
West and Bhandup West fall under Zones 5 and 6 respectively. Kharghar comes under the
Navi Mumbai Zone. Pokaran Road comes under the Thane Zone. Kalyan cones under
Kalyan Zone and Mira Road under Mira Byander Zone. Virar falls under the Virar Vasai Zone.

It is evident that each of the zones has different real estate market 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.

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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 thirteen localities of Mumbai. 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. 100,000,000
Rs. 30,000,000.00
Rs. 25,000,000.00 Rs. 80,000,000
Rs. 20,000,000.00 Rs. 60,000,000
Rs. 15,000,000.00
Rs. 10,000,000.00 Rs. 40,000,000
Rs. 5,000,000.00
Rs. 0.00 Rs. 20,000,000
Rs. 0.00
r n r ar t t r ri a l
ra ya ha oa
d
oa
d R
d
es es bu he al re
Vi l g n op w w m ad a
Ka ar R rR ra at
k
up al
i he An
d
W rP
Kh ira e ka h riv C e
M nd Po
G nd w
u a Bo Lo
db Bh
ho
G

Locality
Average Price of Residen alProperty Average Rental Value

Figure 3: Average property price and rental values across thirteen major localities of Mumbai

Lower Parel's property prices as per NHB Residex have grown two and half times. This
locality has seen the highest increase in Mumbai city and this is shown in its property price of
INR 27,500,000. Andheri whose property prices (INR 14,500,000) doubled as per NHB Residex
are identical with that of Chembur (INR 14,183,500) which recorded a 54% raise in its index
value.

The most important factor that stands out from the rental value of the properties across the
thirteen localities is the anomaly of the property values not being translated to the
corresponding rental values. Ghatkopar's average property value (INR 10,750,000) is less
than that of Chembur (INR 14,183,500) by 32%. But the Average rental value of Ghatkopar
(INR 40,000) is higher than that of Chembur (INR 31,500) by nearly 21%. The same can be
said about Borivali West and Bhandup West. Though their average residential property
values are almost similar, the average rental value of Bhandup West (INR 28,000) is higher
than that of Borivali West (INR 23,500) by 19%.

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Locality Affordability to Rent Rank Affordability to Buy Rank

Andheri 11 11

Bhandup west 8 8

Borivali west 7 9

Chembur 9 10

Ghatkopar 10 7

Ghodbunder Road 5 5

Kalyan 2 2

Kharghar 4 3

Lower Parel 13 13

Mira Road 3 4

Pokaran Rd 6 6

Virar 1 1

Wadala 12 12

*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 thirteen major
localities of Mumbai. Virar stands out as the most affordable place to buy and rent. Lower
Parel stands out to be the least affordable place in both scenarios. Kalyan is the second
most affordable place and Wadala is the second least affordable place. Ghodbunder
Road and Pokaran road take the 5th and 6th place respectively in both scenarios. Bhandup
West and Andheri take the 8th and 11th place respectively in both scenarios. This means
that the high/low property prices of the 8 localities are translated to their relative rental
prices.

Mira Road ranks 3rd on the affordability to rent where as it ranks 4th on affordability to buy.
Kharghar ranks 4th on the affordability to rent where as it ranks 3rd on affordability to buy.
This means that the average property price in Kharghar is less than that of Mira Road but the
rental value is higher. Borivali West ranks 7th on the affordability to rent where as it ranks 9th
on affordability to buy. Chembur ranks 9th on the affordability to rent where as it ranks 10th
on affordability to buy. Ghatkopar ranks 10th on the affordability to rent where as it ranks 7th
on affordability to buy. This means that the average property price in Ghatkopar is less than
that of Chembur and Borivali West but the rental value is higher. This signifies the fact that
people of different localities have different expectations from their real estate markets.

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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

Lower Parel
Chembur
Andheri
Wadala
Locality

Borivali west
Bhandup west
Ghatkopar
Pokaran Rd
Ghodbunder Road
Mira Road
Kharghar
Virar
Kalyan

12 14

Figure 4: No.of years required to save the corpus for down payment across thirteen major localities
of Mumbai
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 Virar and Kalyan in 4 years. In order to own a house in Mira Road and Kharghar
professional has to save for 5 years. To buy a house a professional will need to save for 6 and
7 years in Ghodbunder Road and Pokaran Road respectively. A professional can afford
the down payment required to buy a house in Ghatkopar and Bhandup West in 8 years. In
order to own a house in Borivali West a professional has to save for 9 years. To save for the
down payment of a house in Wadala, Andheri and Chembur a professional will need to
save for 10 years. To buy a house in Lower Parel a professional will need to save for 14 years.
Figure 3 is in sync with the assigned affordability ranks for ownership.

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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 thirteen major localities in Mumbai.

Average No.of sqft per INR 1lakh

Lower Parel
Wadala
Andheri
Chembur
Locality

Borivali west
Bhandup west
Ghatkopar
Pokaran Rd
Ghodbunder Road
Mira Road
Kharghar
Kalyan
Virar
5 10 15 20 25

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

Lower Parel being the costliest locality offers a space of 3.63 sq ft per INR 1 lakh. Virar being
the cheapest locality offers a space of 24 sq ft per INR 1 lakh. Kalyan offers a space of 21.97
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 Lower Parel has to spend at least 7 times the amount he spends in
Virar and Kalyan. A professional gets 16.95 sq ft space for INR 1 lakh in Kharghar and Mira
Road. Ghodbunder Road and Pokaran Road offer a space of 14.29 sq ft and 11.19 sq ft per
INR 1 lakh respectively. Ghatkopar and Bhandup West offer a space of 9.30 sq ft and 8.99
sq ft per INR 1 lakh respectively. Borivali West and Chembur offer a space of 8.27 sq ft and
7.05 sq ft per INR 1 lakh respectively. Andheri and Wadala offer a space of 6.90 sq ft and
6.45 sq ft per INR 1 lakh respectively. Figure 4 attuned to the Affordability to Buy Ranking
mentioned above.

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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 Ra o Urgency to
out of pocket out of pocket buy rank
cost(Ren ng the cost(Owning the
house) (INR) house) (INR)

Andheri 43,500 12,9226.2751 34% 3

Bhandup west 29,000 99,367.23942 29% 6

Borivali west 24,500 10,7936.2919 23% 13

Chembur 32,500 12,6427.4051 26% 10

Ghatkopar 41,000 96,064.30744 43% 1

Ghodbunder Road 17,000 62,902.33973 27% 7

Kalyan 11,000 41,258.6288 27% 8

Kharghar 17,000 35,3174.8292 32% 5

Lower Parel 81,000 24,4187.7632 33% 4

Mira Road 13,500 35,3311.89867 25% 11

Pokaran Rd 19,290 80,031.60145 24% 12

Virar 10,000 37,787.67618 26% 9

Wadala 48,500 13,8069.4665 35% 2

*On a scale of 1 to 7 based on the monthly cost of renting and monthly cost of buying with 1 means buy as soon as
possible and 7 means renting is better than buying.
Table 3:Rent to Buy ratio and Urgency to buy rank of twelve major localities across Mumbai
Borivali West has the least rent to buy ratio. This signiﬁes the fact that the higher property
prices of the locality are not being translated to the rental value in the locality. Renting is
cheaper than owning a house by at least 77%. Mira Road and Pokaran Road also have low
rent to buy ratios. Ghatkopar has high rent to buy ratio.

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 0.43
and the average monthly out of pocket cost of Owning house being moderate, rents
being relative higher Ghatkopar ranks high in the urgency to buy ratio. Wadala and
Andheri are also ranked high on urgency to buy rank.

Lower Parel and Kharghar 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 Bhandup West and Ghodbunder
Road respectively. Kalyan and Virar take the 8th and 9th positions respectively. The 10th
position in the urgency to buy rank is taken by Chembur.

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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 thirteen 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 Ghatkopar is 12 years. The cost matchup in Wadala and Andheri happens in
14 years. In Lower Parel and Kharghar, it takes 15 years. It takes more than 15 years in
Bhandup West, Borivali West, Chembur, Ghodbunder Road, Kalyan, Mira Road, Pokaran
Road and Virar. The planned length of stay in the house becomes an important aspect in
deciding whether to buy or rent.

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Break Even Horizon

Current Average stay 7 years

Wadala
Virar
Pokaran Rd
Mira Road
Lower Parel
Kharghar
Locality

Kalyan
Ghodbunder Road
Ghatkopar
Chembur
Borivali west
Bhandup west
Andheri

2 4 6 8 10 12 14 16

Figure 6: Break Even Horizon for the thirteen major localities of Mumbai

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 And Bhand Boriv Che Ghatk Ghod Kaly Khar Lowe Mira Pokar Virar Wad
Income/ heri up ali mbur opar bunde an gharR Road an Rd ala
Cities west west r Road oad r Parel

8 Lakhs 40 55 55 30 50 55 55 65 40 55 55 55 40
10 Lakhs 40 55 55 55 50 55 55 65 40 55 55 55 40
12 Lakhs 40 55 55 55 75 55 67.5 65 40 55 55 67.5 40
15 Lakhs 65 55 55 55 75 55 80 65 40 55 55 80 65
20 Lakhs 65 55 55 55 75 67.5 80 77.5 40 67.5 55 80 65
25 Lakhs 65 55 67.5 55 75 80 80 90 40 80 67.5 80 65

Table 5: ArthaYantra Buy vs. Rent scores for different salary ranges across thirteen major cities
of Mumbai

Andheri : A professional with a salary range of 8-14 lakhs cannot afford to stay in this locality.
A professional with a salary range of 15-25 lakhs has a score of 65. The score of 65 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.

Bhandup west : 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.

Borivali west : 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.

Chembur : 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.

Ghatkopar : A professional with a salary range of 8-11 lakhs cannot afford to stay in this
locality. The ABRS score of 75 for a salary range of 12-25 lakhs signifies the fact that the rental
value is critically high but a professional in this salary range cannot afford to buy.

Copyright 2012


Ghodbunder 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. 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.

Kalyan : A professional with a salary range 8-11 lakhs is advised to rent. He should rent even
low rents, renting is a better option.

Kharghar : The score of 65 for a professional with a salary range of 8-15 lakhs 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. A professional with
a salary more than 16 lakhs is advised to buy.

Lower Parel : A professional with a salary range of 8-25 lakhs cannot afford the rents or the
EMI associated with a home loan in this locality.

Mira 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.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.

Pokaran Rd : 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.

Virar : A professional with a salary range 8-11 lakhs is advised to rent. He should rent even
low rents, renting is a better option.

Wadala : A professional with a salary range of 8-14 lakhs cannot afford to stay in this locality.
A professional with a salary range of 15-25 lakhs has a score of 65. The score of 65 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.

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19


6 Key Factors
Here are some important numbers to look at before making the decision:

Cities Andhe Bhand Boriva Chem Ghatk Ghodb Kaly Khar Lower Mira Poka Virar Wadal
ri up li west bur opar unde an ghar parel Road ran a
west r Road Road Rd

50
Initial
Corpus
required 2,900,000 2,224,700 2,418,500 2,836,700 2,150,000 1,400,000 910,5001,180,000 5,500,000 1,183,100 1,787,400 832,000 3,100,000
for
owning (INR)
*

No of
Years to
save for 10 8 9 10 8 6 4 5 14 5 7 4 10
the
corpus
Average
No.of
sq.ft per 6.90 8.99 8.27 7.05 9.30 14.29 21.97 16.95 3.64 16.90 11.19 24.04 6.45
INR
1lakh

Initial
Corpus
required 425,000 280,000 235,000 315,000 400,000 160,000 100,000 160,000 800,000 125,000 182,900 90,000 475,000
for
renting **

Average
out of 0.34 0.29 0.23 0.26 0.43 0.27 0.27 0.32 0.33 0.25 0.24 0.26 0.35
pocket
cost ***

Break
Even 14 15+ 15+ 15+ 12 15+ 15+ 15 15 15+ 15+ 15+ 14
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

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7 Conclusion
Based on the current real estate markets, Virar and Kalyan are the best places to own a
house. The property prices and rental values in these two cities are low, thus making them
the most affordable places for a professional to rent or own a house. The larger residential
spaces offered by Virar and Kalyan provide a better lifestyle option. The real estate market
of Ghatkopar favors the home owners because of its moderate property prices and high
rental value. Though the moderate property prices of Mira 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 Borivali West make the decision to
rent easier. Lower Parel 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 Mumbai 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 of Mumbai:

Andheri, Bhandup West, Borivali West, Chembur, Ghatkopar, Ghodbunder Road, Kalyan,
Kharghar, Lower Parel, Mira Road, Pokaran Road, Virar and Wadala.

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 1.2 lakh both in the case of
house ownership and renting.

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9. Appendix
FIGURES:

Figure 1: Graphical Representation of Buy Vs. Rent in Mumbai

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

Figure 3: Average property price and rental values across thirteen major localities of Mumbai

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

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

Figure 6: Break even horizon for the thirteen major localities of Mumbai

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 thirteen major localities of Mumbai

Table 4 : ArthaYantra Buy vs. Rent Score Explanation

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

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

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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)-Mumbai

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