Why Indian rent their house in 20s and 30s

There are three reasons behind this first rental housing offers flexibility for the last few decades, more Indians have been staying in urban areas.

The increased urbanization soared the demand for rental housing Why?

The young generation has different perspectives on homeownership than the previous generation.Our parents and grandparents followed a traditional mantra of success like marrying at a certain age, having children, sticking to one job, and buying a house.But the current generation doesn’t follow this mantra.

For example, rather than staying in the same city, they want to change cities along with their jobs.According to JLL Research, in 2018, 40% of millennials who were working in India's top 7 cities were migrants.

In such a situation, renting offers more flexibility as people can move to other cities if they find a better job.

Hence, renting a house is a better option than buying one.That’s why co-living spaces have grown popular too.The second factor is that millennials are investing in other asset classes rather than real estate.we  saw in Varun’s case.

Prashant Thakur, Director at a Property Consulting company said thatmillennials tend to avoid large investments and instead invest in small but more asset classes. Moreover, there’s been a shift in current generations’ views on other asset classes

For instance, mutual funds, which were considered a risky asset class by the earlier generation have been favored by the younger ones.And the advantages they offer, compelling many to move away from real estate.

“Investing in the mutual funds is perfect for the retirement planning.”

“Because I’ve done it too.”

Apart from mutual funds, the interest in investing in direct stocks has also risen among our generation.

The pandemic has intensified this trend we discussed this in a previous video. Take a look at this graph.

It shows the rise in the Demat accounts in India in 2020.

According to SEBI, majority of the new demat accounts in the country were opened by Millennials.In the previous video, we discussed several reasons why young Indians are investing so much in stocks now, Especially after pandemic.

Firstly, the lockdown gave people extra time to learn more about stock investing.

Second, people saved more money as they didn’t have the means to spend it.Third, the series Scam 1992 soared people’s interest in stock investments.And finally, there has been a rise of platforms that have made it easy for people to invest.

For example, many people think that they require knowledge of all the companies in the index to invest in the stock market.

But that’s not true.Consider using smallcase which has sponsored this video.Small Cases are collections of stocks or ETFs which reflect a theme or strategy.

How does smallcase solve the problem we were talking about?

Let’s take an example.

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Say, you think that the automobile companies investing in electric vehicles will give high returns in the future.

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So if you wish to invest in smallcases, you can check out the link mentioned in the description.Keep in mind to do your own research as everyone's risk profile and investment portfolio are different.

Thus, a single piece of financial advice doesn’t apply to everyone.

Let’s come back to the topic.

Despite the previous two reasons, it's not as if millennials don't want to buy a house. Surveys show that they do want to buy a house.But they can't because of the high prices. For example, Ankush Khandelwal is a 27-year old engineer who works at L&T in Mumbai.

He earns Rs 60,000 per month. He says, "Many people such as me move to Mumbai, struggle for 10 years and at the end of it, when they want to settle down, they have to move away from Mumbai because they can't afford a house."

Between Dec 2010 and Dec 2019, home prices across India rose by nearly 12% per year. We can infer why people can’t afford a house in India from the EMI-to-rent ratio i.e. the ratio of the EMI you would pay to buy a house and the rent that you would pay for that place.

According to JLL research, in some areas of the country, the EMI ratio can be more than 3 That’s why it’s not surprising that the growth of housing demand has been declining.

For example, this graph shows the growth in home loans for banks. As you can see, this growth has been falling for a while.And that's why there are many unsold houses in the country.

According to JLL Research, across India's top seven property markets, as of March 2020, 4.55 lakh units worth Rs 3.7 lakh crore were unsold. If there are unsold houses, one would assume that eventually, the sellers would decrease the price to sell them.

At least, that’s what basic economics suggests. But that's not happening And to understand this we would need to grasp how the property market works in India.There are three reasons for this First, over the past few years, the builders have been taking loans from private banks, public banks, and non-banking financial institutions.

And as you can see, the loans have increased over time.To obtain the loans, the developers had to pay collateral to the banks.And the collaterals were the homes they had built and not sold.

In this scenario, if the builders and developers reduce the prices of the homes, the value of the collateral would fall and they would have to pay additional collateral to the banks. This was about the builders and the developers.

Let’s talk about the individual buyers.

Between 2012 and 2015, individual buyers paid high prices to buy houses. Apart from the high prices, they also paid maintenance costs. Thus, they don’t want to sell their houses at a lower price.They’re waiting for people to buy their houses even at a higher price. Third, the property market rates are lower than circle rates

what are circle rates?

The state governments decide a fixed circle rate for different areas, During any real estate transaction, stamp duty needs to be paid on this circle rate, irrespective of the market price.

For example, these are the circle rates for different colonies in Delhi.

In the absence of the circle rates, the buyer and seller might lie to the government and say that the transaction took place at a low price, hence paying less stamp duty.

When the market price of a property is higher than the circle rate, there are no problems.But when the market price goes below the circle rate, it creates some problems.

If this apartment is sold, the buyer will have to pay stamp duty at the price of Rs 60 lakh And the buyer will also have to pay income tax for the difference of Rs 10 lakh.

The capital gains tax to be paid by the seller will be calculated for Rs 60 lakh and not Rs 50 lakh. That's why when market prices fall below circle rates, people stop buying and selling properties.And that’s the current situation of the Indian property market.You might ask: Why don’t state governments reduce the circle rates? As it will lower the prices and facilitate transactions.

So due to these reasons, young Indians aren't buying houses.Actually, the pandemic is creating a change. According to a survey by a real estate platform, around 82% of respondents said that they’re planning to buy a property in 2021.

Last year, 49% of property buyers belonged to the age group 25-40 The figure has risen to 63% this year, meaning more and more young Indians are planning to buy a property.

What’s the reason behind this?

Anuj Puri, a property consultant, said that due to work-from-home and online education, people are now seeking larger homes, even if it’s located in the peripheral areas. 

As people are spending more time in their homes, they’re planning to own them this could be possible for some but for many, it’s impossible to afford a house in a major Indian city.