How does home loans works?
Oh it works really good. It has allowed so many people to afford homes, which they would not have had the chance to otherwise. We all know how significant part of life home ownership is in India.
But ofcourse its also means, you are taking on a lot of responsibility on yourself as well. One needss to make sure that those 10-20 years that will go in paying back the loan, one stays on top of the game financially.
Story time, I actually had this friend, who didn’t manage this very well. His business failed and he had kept his home as collateral. He had a kid, a wife and everything. He had to evict his house at 11.30 pm. His son was watching the re-run of Pokemon on Toonami. This is 2003 by the way. So just like that the family was out of their house. Their house broke up because of this, the couple got divorced, son went to boarding school. Broken estranged family and all that jazz. I met that boy recently, he has grown up quite a bit now, this dude refuses to take any loans at all. Says I will only buy things in Cash. Upfront. Refuses to take any help from other people for anything. Feisty, Dennis the Menace type but also a good decent kid.
So a lesson well learned from this parable. Loans are amazing but the EMI amount should never exceed 25% of the monthly income and there should always be at least a 6-12 month buffer amount always in savings.
It works good for banks. It’s also good for us because Interest payments , greed and spending is what moves the economy.
Frankly home loan never works. You never actually own a house you simply rent it. The only thing you are trying to do by owning house is simply reduce the rental amount. You still pay for property tax , maintainenace and utility adjusted to inflation.
Just do buy index funds on qutaterly basis in lumpsum and hold it during all the way till 40. Then decide where you want to settle. Frankly everyone has to move due to job/career, kids school location, parental issue , abroad opportunities one way or other.
2 Likes
This is the correct way to think about it but only if someone was maximizing for financial utility. For someone who knows about finance and is a rational economic actor. Who does the right moves, and has an above average IQ. But this does not take into account that most participants in the real economy are not financially savvy and discards a huge part of asset ownership completely. The human aspect of the economy, which is maximizing Static happiness.
Now these are the concepts which I use in my mind, so would require some illustration.
Static Happiness : The kind of happiness one receives just by the sake of its existence. This belongs to the category of “it aint much but its honest work” domain eg :
- Well, my life is a hot mess right now, but hey, atleast I own this house.
- Well, I don’t have a house, but I got good wife and kids.
- Well, I don’t have a house, and my family is cringe, but atleast I received a good education.
- Well I got none of the above, but atleast my health is great.
So House, Health, Family, Education, Basic Quality of Life all constitute a person’s static happiness. This is more “static” in nature and is harder to lose once gotten.
Dynamic Happiness : Happiness that is fleeting, temporary, excessive or derived out of conspicuous consumption.
This includes fineries, veblen goods, luxuries, travel and overall “richness” of life.
Now don’t get me wrong both are equally important to lead a full, wholesome life. A deficiency of either one can lead to an unfulfilled life. But the goal here is clear, to maximize static happiness and as an optionally maximize dynamic happiness whenever one gets the chance.
Discouraging asset ownership, or atleast the pursuit of asset ownership right from a young age can lead to some very mixed results. Some of which shall be :
-
House ownership forms the bedrock of all static happiness.
-
Keeping people tied down on the asset ownership treadmill actually works good in many cases, as it puts a hard iron condor around their financial discipline. Which if the money was left to them to handle, they would spend on dynamic pleasures instead.
-
It forces young people choose a city, and stay there for a long time, thus organically growing many cities at the same time, with their own culture and personalities, rather than artificially growing one to its brink and then watching it become a wasteland once everyone flies to the next big thing city.
-
In many expensive cities, home ownership is impossible until both married partners are pitching in funds, thus promotes early marriages, reducing hippie behaviour , and overall degenerate behaviour which may continue until late 30s if left unchecked. And also requires for both partners, to atleast not be completely hostile to each other, else you lose the house and everything else keeping that partnership. So reduces domestic abuse significantly and increases female partnership in the economy.
-
As years clock down and the loan begins to wind down, there is a general sense of action and excitement which forms a small part of the everyday rather than, I will get a lot of money in 20 years, and I will buy something from it does. It acts as a training montage of sorts to life. Better than the financial montage because you can actually touch the house, and keep making false ceilings and changes to interior. Actual Tangible improvements rather than my portfolio is up 0.32%
There are 50 other benefits but it will become too long to discuss them here.
What is the risks of not promoting early asset ownership to capitalism :
By the time you actually go to buy property, Whale Consolidators such as NRIs, Black Rocks of the worlds, Local Daimyos , would have atleast bought the best neighborhoods, if not the entire city and inflated its price artificially to the extent that you would get a good house at 45, but so far away from the actual city that you may as well live in Siberia. And you would help in the acceleration of an Asset Singularity where few owners own Earth.
So this was half baked attempt at defending Asset ownership across all age groups. hope you will agree with atleast few of the points proposed herein.
"I could’ve bought a place in Dumbo before it was Dumbo / For like two million / That same building today is worth 25 million / Guess how I’m feeling? Dumbo "
Shawn “Jay-Z” Carter
4 Likes
My man spitting facts!
4:44