Buy or take a house on rent: Which is better in Mumbai?

Every Mumbaikar's grouse is that he/she missed a chance of becoming a millionaire.

"Ten years back, I was offered this flat in Bandra (or any area) for Rs 30 lakh only. But I thought it was too expensive. Today, it costs Rs 5 crore," is the common angst.

One can understand the lament. Today, Rs 30 lakh, or even Rs 50 lakh, would not get you a two-bedroom, hall, kitchen (BHK) flat anywhere in the city.

One has to travel to the distant suburbs, over 50 km from Nariman Point (where many companies have their offices), to get a flat at that cost. How they wish they had bought that property 10 years back.

That's not all. With the Reserve Bank of India capping the loan-to-value ratio - the amount that banks can lend to a borrower - to 80:20, the initial capital required to purchase a property has also gone up significantly.

Say, a family of four wants to purchase a two-BHK flat in Mumbai, the cost would be as much as Rs 50 lakh, even in the distant suburbs. To purchase it, you need to raise Rs 10 lakh cash as initial payment.

In addition, there will be an equated monthly instalment (EMI) of Rs 38,000-40,000 a month.

Banks, typically, cap the total EMI-to-salary (take home) at 40-45 per cent, including all loans (home as well as any personal loan). So, the borrower needs a salary of almost Rs 1 lakh (take home) to purchase the flat.

In effect, it means a gross or pre-tax salary of Rs 1.3-1.5 lakh a month or Rs 15-18 lakh annually. One wonders how many Mumbaikars can boast of such salaries to purchase a flat, even in the distant suburbs.

In the last four-five years, several experts have pointed out that property prices need to correct. Housing Development Finance Corporation (HDFC) Chairman Deepak Parekh has expressed a desire to see a correction in property prices for years, and in many forums. But, sadly, nothing has changed.

What is more baffling is that property prices seem to be just going one way, despite the slowdown in sales.

Newspapers and research reports inform us that property registrations are down for a while now.

February this year saw registrations of 4,716 sale deed agreements - down 22 per cent - as compared to same period last year, according to data compiled by brokerage Prabhudas Lilladher.

In comparison, leasing seems to be the preferred option. Mumbai has seen 8,055 lease agreements in February 2011 - 20 per cent higher than in February last year.

Recently, there were expectations that due to slow sales, the real estate industry may be forced to get rid of their inventory to service loans - around Rs 10,000-15,000 crore (Rs 100-150 billion) - from banks by March. But nothing happened.

According to real estate consultants, most were able to service loans by raising cash from non-banking financial institutions and private equity (PE) players at whopping interest rates of 25-30 per cent a year.

Here's the best one that I heard. Early this year, a PE head was approached by a real estate company for a loan of Rs 75 crore (Rs 750 million) for three months.

The real estate company said the company was willing to give a post-dated cheque of Rs 100 crore(Rs 1 billion), which could be encashed after three months. Stunned by the rate - 120 per cent a year - being offered, the PE head rejected it.

Financial planners berate a retail investor, if he/she is taking a loan to pay another, by calling it a debt trap. But many companies in a critical sector are surviving on it.

As a result, they have held on or even raised prices of flats.

Unless an early 1990s happens again, when property rates crashed by one-third, it is really difficult to purchase a house. I will continue to rent.