Summary of this article
Hidden costs raise true homeownership expenses.
Real returns require CAGR calculation.
Location and infrastructure drive valuation.
Most Indian homeowners evaluate the valuation of their home by the prevailing market rate of the area where the property is located. But from a financial planning perspective, taking into account other aspects, sudden as the hidden costs of registration, interest on home loans, fluctuating returns, and other benchmarks used for property valuation, in addition to the rates in the locality, will help a homeowner arrive at a correct figure of the property value.
Understanding the true cost of ownership and the real selling value of the property is essential for making smart financial decisions when one plans to sell, refinance, or just evaluate the net value of the property. Homeowners must know the real cost of owning a home, measure the returns and know how property valuation works.
Cost of a House Beyond the Purchase Price
Most people believe that the cost of the house is linked and limited to the downpayment and the monthly home loan interest. In reality, the true cost is much higher and includes both visible and invisible expenses that are piled on over the ownership period. The first and the highest hidden cost is the interest paid on the home loan.
Interest: The equated monthly instalment (EMI) paid by the owner consists of the principal repayment and the interest. Over the loan tenure of 20-25 years, the interest component usually exceeds the original purchase price of the property.
Registration Charges: Another financially straining cost is the stamp duty and registration. In India, homebuyers typically pay a significant percentage of the property value as the stamp duty and registration charges. This amount, even though it is unavoidable, becomes a financial responsibility and a burden if the buyer does not plan accordingly within their financial bandwidth.
Says E. Lakshminarayana Reddy, founder & CEO, EARA Group: “For most homeowners, the purchase price is just the starting point, not the true cost of owning a home. From a financial planning lens, the real cost includes stamp duty, registration, home loan interest, maintenance charges, property tax, renovation expenses, and even opportunity cost of capital.”
Repairs and Maintenance: Maintenance costs also play a role; they show up much later in the process of homeownership, but can affect buyers significantly. These include society maintenance charges, periodic repairs, renovation, and other expenses related to plumbing and electricity. Over time, a commonly accepted estimate is that maintenance costs can average around 1 per cent of the property value annually.
Inflation: Inflation further complicates this. A property that doubles in price in 15 years may not account for inflation. When all these factors come into play, the true costs of homeownership are revealed to the buyers.
Adds Reddy, “To arrive at the actual rate of return, homeowners must consider the net appreciation factors like inflation, holding costs, rental income (if any), and taxes before the sale.”
Calculating the Real Rate of Return on Property
Most people judge the success of residential investment by the rate of appreciation. For instance, if a house bought for Rs 50 lakh is now worth Rs 1 crore, the assumption is that the investment has doubled. In reality, the more meaningful metric is the annualised rate of return, which is similar to how other investments are measured as good or bad.
Net Sale Value: The first step to knowing if the investment has been good or bad is to calculate the net sale value. This is the selling price, excluding the brokerage, capital gains tax, and any other repair or renovation costs that are incurred before the sale. The next step is to calculate the total investments made over the years. This includes the stamp duty, registrations and the total interest paid on the loan amount. Once these numbers are known, the owners can calculate the compounded annual growth rate (CAGR) on the investment.
If the property was occupied by the owners themselves, the rent saved is also a saving.
Circle Rate vs Bank Valuation vs Market Price
Property valuation in India often involves three segments that confuse most homebuyers.
Circle Rate: The circle rate is also known as the stated rate, as set by the state government. It is used to calculate the stamp duty and defines the minimum value at which a property can be legally registered. The circle rate is mostly lower than the actual market price and is set primarily to reduce the under-reporting of property values.
Bank Valuation: Bank valuation is the second aspect, which is conducted when a buyer applies for a home loan. The bank sends a professional to assess the property and determine how much loan can be safely issued. This valuation is usually used to determine risk management.
Market Price: The third component is the market price. This amount is influenced by demand, supply, negotiation, and urgency. The market price is the real selling price. Circle rate and bank valuation act as the reference points for what the price is.
Says Reddy: “There is often confusion between circle rate, bank valuation, and market price; while circle rate is a government benchmark and bank valuation is conservative for lending, the actual selling value is always driven by market demand.”
How Location, Infrastructure and Supply-Demand Cycles Affect Valuation
Irrespective of these, real estate follows a predictable growth pattern that is influenced by development and economic cycles of the market.
Location: Location is the single most important driver of property values. Proximity to employment hubs, schools, hospitals, and public transport significantly changes the value of the property, due to the demand.
Infrastructure: Infrastructural developments also impact the property prices strongly. Announcements of metro lines, rail corridors, expressways, airports, and IT parks often trigger price increases in the nearby markets. Historically, the maximum appreciation occurs between the announcements of such large-scale developmental projects and their completion phases.
Sellers vs Buyers Market: Typically, in a seller’s market, the inventory is generally lower than the demand. This leads to an increase in property prices. In the buyer’s market, oversupply leads to discounts and longer inventory hold timelines. “The location, the upcoming infrastructure, connectivity, and supply-demand cycles have a major impact on appreciation. One can also check the nearby ongoing transactions and rentals and get an insight into the appreciation of his/her own asset rather than assuming the appreciation,” adds Reddy.
A house is not just a financial asset; it is emotional to many Indian homeowners. From a financial planning perspective, understanding how the real cost of the property is calculated and what the selling value is. The real cost includes interest, taxes, maintenance, and opportunity costs. Infrastructure, location, and supply-demand cycles strongly influence the property value.
Regularly tracking how much appreciation has taken place helps in taking smarter decisions about selling, refinancing, or whether to hold the property.
A house is possibly the largest investment an investment makes in his/her life; knowing the real value of how much you are owed from it will help you make better decisions and build long-term wealth.
