“Hello, my name is Rameshwar Yadav. I hail from Parasi. I come from a farming family and thanks to my parents and my own efforts, I was able to attend Kathmandu University and graduate with a BS in computer engineering. At graduation at the age of 22, I was lucky enough to get a job as a trainee with a reputed software firm. My starting salary was 10,000 rupees per month and 12 years later at age 34, I am now a senior software engineer and earn a monthly take home pay (after taxes) of 48,000 rupees which becomes 52,000 rupees if I prorate my Dashain allowance. Along the way I married and live with my wife and two children a boy who is in grade 1 and a girl who is in grade 3. Both of them go to a private school.
When I first started work, I used to live in a one studio apartment at 3,000 rupees per month. Now with family and all, I rent a 2 bedroom apartment for about 12,000 rupees a month. I have been lately thinking of purchasing a home in Kathmandu. For the last 16 years I have been living in and near Kathmandu. While I occasionally go to my home town of Parasi to visit my parents, it is unlikely I will be returning there permanently in the future. My children have been born and raised in Kathmandu and for them this is their home.
Before I look for a house, I think I need to do a little homework and find out what I can afford to pay as mortgage towards the purchase of a house on a monthly basis. While I know that I can afford to pay the rent that I currently pay towards mortgage, since I am purchasing my first home I do not mind paying a little more if I can since I will be building my own equity.
My children's education comes first and for that I need a minimum of 10,000 rupees. I could have saved this had the government public schools been better but considering my children’s future I have no choice but to send them to a private school. For utilities, I need to set aside 1,500 for cooking gas, 1,000 for electricity, 1,000 rupees for telephone, and 1,000 rupees for internet and cable TV for a total of 4,500 rupees. My monthly food bill will cost me approximately 9,500 rupees (1,500 for milk - 1 liter/day at Rs. 50/liter; 1,350 for rice - 0.75kg per day at Rs. 60/kg; 1,000 for meat – 1kg chicken per week at Rs. 250/kg; 1,500 for vegetable and fruits at Rs. 50/day; 1,150 for lentils, spices, cooking oil, other ingredients and food items; 3,000 for two restaurants outings). I go to see movies with my family once a month and for that I will set aside 1,000 rupees. I own a motorcycle and average about 20 km a day for which I need to set aside 1,800 rupees for fuel. For clothing and other household expenses, 1,000 rupees should be enough. For medical expenses, I should set aside another 1,000 rupees and hope that no body really gets very sick. For unanticipated emergencies I should keep at least 5,000 rupees a month. Who knows what will happen in Nepal so I need to be prepared for any contingencies. So far my anticipated total expenses and reserves are 33,800 rupees. This leaves me with 18,200 per month which I could afford to pay towards the purchase of my new house.
The 18,200 rupees monthly mortgage will allow me take on a loan of 16.53 lakhs for 20 years with an annual interest rate of 12%. Since this would be 70% of my investment, the home that I would be able to afford would have to be valued at 23.61 lakhs. I will pay for equity partially through my savings and partially by selling some land that has been transferred to me by my parents. I could probably afford a better house if I pay more upfront using up all of my savings and the income generated from sale of my land in Parasi.
I reviewed the real estate advertisements in various papers. I did come across some partially finished apartments at or below my threshold price but those were mostly suitable for non married single persons. I have been hard pressed to find a single home that would adequately meet my needs for my threshold price so for now I have decided to postpone my planned purchase and wait for the markets to be more favorable.”
While Mr. Yadav and the scenario he is faced with are purely fictional and do not cover all facts with respect to living in Kathmandu, I am pretty sure his story represents some facets of many middle class residents of Kathmandu Valley. If a salaried person who has a disposable income of NPR 52,000 finds it difficult to own a home in the Valley, then it would not be unreasonable to say that owning a home for most salaried people in the valley is at the moment a pipe dream since they earn a lot less than our actor here. This level of income would exclude most of the civil servants and many in the private sector as well.
There is however a paradox. The Valley has seen a tremendous growth in homes in the last decade indicating that people at least in the past have bought homes. How does one explain this phenomenon? The answer is very simple, those who have bought their homes have done so using or supplementing their salaried income by secondary sources. Some legitimate secondary sources could be spouse’s earnings, earnings from ancestral properties, additional salaries as a result of foreign postings, legitimate business profits and remittances. I leave it to the vivid imagination of the reader as to what other secondary sources there could be.
One factor responsible for the significant growth in the number of homes in the Valley is the decade long conflict where people were forced to or chose to leave their ancestral homes and move into Kathmandu for safety reasons. Many sold their larger properties in the villages and invested in smaller properties in the Valley. Remittances from abroad have also played an important role in the growth of homes. However I would also argue that the majority share of the money from the displaced people and remittances have not gone directly into purchasing units in the real estate projects that have mushroomed in the Valley and of which I wrote about in an earlier article since most of them are targeted to a different class of people and much of it is a recent phenomenon.
In Japan and the US, two countries where I have resided, market mortgage rates and rental rates are not that different from each other and are within the reach of the average mid-career salaried person. A person in the same stage of his career as our actor above would easily be able to purchase a home and finance it through the banking system from his main source alone. For those less fortune, the governments have schemes whereby affordable homes are made available either for purchase or for rental at below market levels obviously with strings attached.
Here, the government neither has an affordable housing scheme for the less fortunate nor does the market favor the average mid-career salaried person in owning a home. The real estate market has been taken to such a height first driven by the excessive demand for property by displaced people and then by easy money from the financial institutions fueling a belief in people that property prices can only go up despite no economic rationale behind them. Thus to bring the market into equilibrium, either the income levels of the average citizen has to go up significantly or the market has to fall drastically. For what it is worth, I would put my money in the latter than the former. The banks have yet to aggressively start calling in their loans or disposing of their properties at less than their estimated distressed values. When that begins to happen you will see a downward pressure on real estate prices. For those of you who are considering investing or purchasing your first home, my advice for you is to wait. You have waited so long, so a couple of more years of waiting will not make a difference. You should see more discounts in the offing as these projects try to off load their homes. But please remember, the final decision is yours and yours alone.