On our obsession with homeownership

In some of the most developed countries of the world, the homeownership rate hovers around 45-65 per cent. In the contemporary world, high homeownership appears to characterise less developed nations. Rural India is overwhelmingly dominated by 95 per cent homeowners. In urban India the homeownership rate stands at 67 per cent. This rate beats US, UK, Western Europe, Hong Kong, Australia, and Switzerland, among others. Indian economists must build clarity on why to stress so much on homeownership? While the 'American Dream' proposition continues to push for more homeownership in the US, are the same arguments valid in the Indian context too? I focus on urban middle class in this article.

Western economists stress on social benefits of homeownership. For example, communities with high homeownership exhibit superior civic engagement, and tend to care more about the quality of neighbourhoods. Yet, financial benefits of homeownership are a conundrum. In fact, studies have shown that prudent renters end up wealthier than homeowners in the long run (there may still be exceptions to this finding specific to some localities). But the socio-economic realities in India and other such economies are different. Western research journals could not care less about paying attention to the markets beyond their host countries and other developed markets (that house just around 15 per cent of the world population). Unfortunately, many Indian economists take their findings for granted.

I have argued this before and will briefly elicit again that homeownership is mostly a financially imprudent decision in urban India: Consider Ojhas who own a 2BHK apartment priced at Rs 50 lakh in suburban Pune. After spending a few years in their-own apartments, they move to Hyderabad for employment and rent their apartment out to Raos. Including EMIs, society fees, property taxes and repairs, Ojhas end up paying over Rs 4 lakhs towards ownership per year. In return, they receive around Rs 1 lakh in rents.

The annual cash out flow of Rs 3 lakh equals 6 per cent of the property value. The property price appreciation (of 5-6 per cent) barely helps them breakeven. In real terms, they are likely losing money. However, 20 years later, their asset is worth Rs 1.3 crores due to price appreciation. Raos, on the other hand, have similar income. But they invest their notional saving from rental (i.e. the same Rs 3 lakhs per year) in modestly risky mutual funds yielding 10 per cent return. In 20 years, their investment is worth Rs 1.7 crores. At the time of retirement, Raos can enjoy a superior quality home than Ojhas and will have enjoyed the flexibility to move across the globe. They did not have to deal with the anxieties of property taxes, mortgage payment, variable interest rates, and upkeep of the property or its occupancy. Yet, a serious practical challenge with renting relates to the security of rental tenure. Whether the two parties will respect the lease agreement adds to the anxiety for renters as well as landlords. Renters are anxious about unfair rent escalations or abrupt terminations. Landlords are anxious about irresponsible tenant behaviour and upkeep of their asset.

In the Indian context, where homeowners and renters are often mixed in residential communities, ownership at the individual household level hardly offers distinct social benefits. On the contrary, in our research (with Ed Coulson of San Diego State University and Alan Ziobrowski (of Georgia State University) on the NSS data we found that renters enjoy superior locality compared to owners. Renters tend to live closer to their workplaces reducing the carbon footprint of transportation infrastructure. Yes, some lucky homeowners who buy homes in areas that have potential to grow may tell a slightly different story. But with the same amount of risk, capital markets offer much higher wealth maximisation. My underlying argument is that homeownership may be good for specific types of households if seen as a consumption good, rather than investment. Besides, if the home purchase is not highly leveraged (mortgaged) -as is common- it may not be as bad a financial decision.

Instead of stressing homeownership, our policy measures should focus on adequate housing closer to workplaces. By strengthening the rental housing markets for all social classes, the policy measures can help reduce the suboptimal wealth allocation to homes and the economy. Thankfully, recent policy interventions show increasing appreciation for the merits of rental housing.

(Prashant Das, PhD, Associate Professor and Director of REFE Institute, EHL Lausanne- HES.SO/ University of Applied Sciences and Arts Western, Switzerland. He will soon join the Finance faculty at IIM Ahmedabad)

Classification of Indian cities in terms of risk-versus return tradeoff of home prices