Real estate good savings tool for retirement

MUMBAI: The West is rewriting the phrase "as safe as houses", considering the drop in real estate values. But in India, real estate continues to make sense as a retirement savings option. Three factors that support real estate as a retirement savings option are: India's housing shortage, favourable demographics and a tax regime that favours borrowing to buy a house. While this is clearly not an option for a large section of the population because of steep realty prices, it is viable for those with enough savings and good cash flows. A sharp correction in property prices in late '90s and immediately after the Lehman Brothers crisis in 2008 may have raised doubts in the minds of some, but financial planners continue to support real estate as a retirement tool. With an entry barrier for a two-bedroom apartment within the Mumbai city limits nudging Rs 1 crore, this is clearly not an option for all. But given that there is a sizeable population with high disposable incomes and tax liabilities, real estate makes an interesting proposition. "For those who don't yet own a home, buying a house has to be a top priority. But even for homeowners in a high tax bracket, there are a number of factors such as tax savings, capital appreciation and cash flow that would tempt them to definitely look at a second home," says Pankaj Mathpal, a certified financial planner. This may seem as surprising advice, considering that in the West houses are depreciating as soon as they are built. But there is a marked difference between the West and India. In the US, the average members in a household are 2.6. In India, although numbers are not available, there is a shortage of 21 million housing units. According to a report by Credit Suisse, Indians will continue to migrate to cities and 50% of the country will be urbanized by 2044. According to Brigitte Miska, head of international pensions with German insurer Allianz, who has done a study on the preparedness of various countries to look after retired citizens, real estate has its risks. "The elderly live in small cities and villages while the young move to larger cities. As a result demand for houses in smaller cities shrinks. We are already seeing that in the West," she said. Miska points out that demand for houses come largely from young couples. "If you have a second house in which you do not live in the notional rent that you could earn from is taxable. What most people do is to take a housing loan and rent out the place," says Arnav Pandya, a certified financial planner. He points out that the advantage of taking a home loan on a second home is that there is no limit on the interest expenditure that can be set off against income from the flat. "If the borrower is earning a rent income and simultaneously paying interest on a home loan, the rental income can be set off against the interest expenditure," he says. source: http://economictimes.indiatimes.com/markets/real-estate/realty-trends/real-estate-good-savings-tool-for-retirement/articleshow/12783632.cms