If you ever have thought of buying a property, we are sure you might have thought of whether to buy a house in tier 2 or tier 3 cities in Inida. Property prices in India are skyrocketing, especially in metro cities. If we classify people living in metro cities, we can divide them into five broad categories:
- Those who can afford multiple properties, whether in metro cities or tier-two towns.
- Those who can afford to buy a home in a metro city, but it might not be their dream home. They may need to make adjustments, like buying a 2 BHK instead of a 3 BHK, or choosing a locality where they can afford to live.
- Those who cannot afford to buy a home in a metro city but can comfortably purchase one within a tier-two or tier-three city.
- Those who already own a home in a metro city but are looking for investment properties. However, they are unable to find anything within their budget in the metro city.
- Those who cannot afford to buy a home or prefer to rent instead of buying.
Categories two, three, and four have the highest number of people, and they are often the most confused about what to do. Should they wait and save money to buy a home in their metro city, or should they invest in a tier-two or tier-three town? Today, we will explain you whether you should buy a home in your metro city now or invest in a tier-two or tier-three town instead.
If you cannot afford to buy your dream home, should you consider buying a home in a tier-two or tier-three city now, or should you wait for some time?
First, let's look at the numbers for metro and non-metro cities in India. Currently, there are 104 metro cities and tier-two cities, while all other cities fall under tier-three and tier-four categories. Popular tier-two cities include Shimla, Amritsar, Chandigarh, Karnal, Dehradun, Lucknow, Kanpur, Jaipur, Raipur, Nagpur, Vadodara, Mysore, Mangalore and Vijayawada.
There's a significant price difference between metro cities and tier-two cities. In the same price range where you might get a budget property in a metro city, you could get a premium or luxury property in a tier-two city. For example, in the budget for a 2 BHK apartment in a metro city, you could get a 3 or 4 BHK apartment in a tier-two city.
Now, for example, the suburbs of Mumbai have similar property prices to prime locations in Nagpur. This situation is prevalent in other tier-two cities as well. Economically, tier-two cities are much more affordable.
Talking about price growth, there has been significant appreciation in property prices across India since COVID-19. Prices in different locations within metro cities have increased by 30% to 80% since 2020, and the price growth in tier-two cities has been almost similar.
So, why are prices increasing in tier-two cities? It's because the demand is rising. When there's demand, developers respond by increasing supply, which leads to price appreciation. Comparatively, prices in metro cities are slightly higher, but the gap isn't significant.
If you're considering buying a property, analysing the current market trends and understanding your own financial situation are crucial factors to consider.
When prices increase, the question arises: why is there an increase in demand in tier-two cities? There are three major reasons for the rising demand for property in tier-two cities.
Firstly, there's an increased focus from the government. A tier-two city is either the state capital or the second most important city in terms of political and economic viewpoints. For state governments, these locations are crucial, so they're working on infrastructure development.
They're improving local connectivity, building new highways to enhance connectivity with metro cities, and either running or planning metro rail projects. State governments are also trying to create job opportunities at the local level, supporting startups, and promoting local industries, thus focusing entirely on economic growth.
The second reason is the change in public mindset. Due to economic opportunities at the local level and the influence of social media, the mindset of tier-two city residents is changing. Many people are tired of the struggles in metro cities and prefer the lifestyle in their hometowns.
Those who already work in metro cities are frustrated with their lifestyles and want to return home. With the rise of remote work, it doesn't matter where you live, so people are migrating to their hometowns to reduce their cost of living.
We know many people who are working in international firms like Jaipur, Lucknow, and Shimla, residing in tier-three cities, and experiencing the culture of nuclear families and an independent lifestyle.
Gradually, demand for property and the apartment culture is increasing. The third reason is that real estate developers have been launching many projects within tier-two and tier-three cities over the last few years. Many major developers, who previously only worked in metro cities, are now launching their projects in tier-two and tier-three cities.
It's important to understand that in today's market, demand can be created through marketing for any product. Therefore, many real estate developers are launching projects in tier-two cities, conducting extensive marketing, and creating new markets.
Now, the question arises: why are they doing this? The answer is simple. They have realized that the cost of construction is increasing within metro cities, land prices are already high, and consequently, their potential buyers are limited. People cannot afford general housing, so they are launching limited projects that only a few people can afford.
If they want to expand their business, they need to create new territories and new markets. That's why they are launching projects in tier-two and tier-three cities, which are affordable for the masses.
Interestingly, between January 2022 and October 2023, developers purchased almost 3000 acres of land, with 44% located in tier-two and tier-three cities. This indicates that developers will bring new projects to these cities and conduct extensive marketing there. This will create a market where demand will increase, and consequently, property prices will rise.So, this brings us back to the primary question: should you buy property within tier-two and tier-three cities?
If you cannot afford to buy a house within a metro city today, and you feel that you won't be able to afford it even in the next 5 years, or if you don't want to live in the house that fits your budget, then you should consider buying property in a tier-two or tier-three city. Even if you don't belong to a tier-two or tier-three city and it's not your hometown, and if you're only thinking of investing, you should still consider investing today. There are three reasons for this.
First, let's discuss why you should buy property in a tier-two city. Let's look at why people generally buy homes. The first reason is that "my home, my freedom." They can live the way they want to. Second, it's a social status symbol to own a home. Third, it provides social security for retirement.
If you have your own home, you won't have to worry about paying rent after retirement. Fourth, it's an asset for your children. And fifth, if you receive rent from a property, it's a source of fixed income. Despite all these reasons, people often struggle with the decision to buy property, saying it's not the right time, or the right price, or the right property, and they miss opportunities.
We've all heard stories about how our parents or grandparents had seen land that is now worth millions. If they had bought that property back then, they would have become millionaires today. This is the first reason why you should invest in property today. Without waiting for the right time, you shouldn't miss today's opportunity. 20 years ago, what was Gurgaon? It became Noida.
Locations like Navi Mumbai, Panvel, and Kalyan didn't have much development or connectivity in the past, nor were the property prices as high as they are now. Pune, Ahmedabad, and Surat weren't even considered metro cities. Today, the demand for properties in tier-two cities has already started increasing. We shouldn't make the mistake that our parents or grandparents made.
Within the next 10-20 years, tier-two cities will completely transform. If I think 10 years ahead, it may seem like a long time, but looking back, it feels like yesterday's discussion. The locations that seem affordable today may not be so in the future. Therefore, if you have the money today, you shouldn't miss this opportunity.
Another reason is that whether it's a metro or non-metro city, rental yields are similar. In residential cases, you can get a rental yield of 2-4%, and in commercial cases, it's 6-10%. In metro cities, because property values are higher, rental income seems more significant.
However, rental yields are similar in both metro and non-metro cities. If we talk about capital appreciation, it's slightly higher in metro cities compared to non-metro cities, but this gap isn't significant. Once the boom starts in non-metro cities, you'll get the same growth story there too.
Some people think they can earn more profit by investing in mutual funds in the stock market and then use that money to buy property in metro cities. If you also think so, reconsider this only about 3% of people in India invest in mutual funds in the stock market; the remaining 97% don't understand the stock market well.
They believe that mutual funds in the stock market can fetch them more profit, but investing in property in non-metro cities might be a more secure and straightforward option for them.
Many people find the stock market too risky and prefer investing in property. They see real estate as a safe option, believing that they should at least have one property. Anyways, over a period of time, generating fixed income from property always seems appealing.
Finally, people's biggest apprehension is about jobs, which they believe are only in metro cities. If I buy a house in a non-metro city, I might live there after retirement, but what about my children? This raises a simple question: Did we think 20 years ago that the world would change so much? There were no smartphones, computers were rare, the internet was slow, there was no digital marketing, and there wasn't as much information available.
Job opportunities were limited, and people had less knowledge. In the last 20 years, the world has changed completely, and it will change again in the next 20 years. Many people don't understand what jobs will be available, how they will be, or in what format. But one thing is certain: the world will change again in the next 20 years.
Those who bought property 20 years ago are either considered very wise or very lucky. And those who couldn't buy property either blame their parents, say they lacked vision or guidance, or blame their bad luck. Unfortunately, we are going to do the same thing again. In the next 20 years, India will change, new cities will be created, micro markets will be created, new locations will develop, and we will have growth opportunities.
Personally, our simple approach to real estate is that your vision should always be long-term. If you feel that you can't afford a home in a metro city today and you also feel that you won't be able to buy one here in the next 5 years, then you should consider buying a house or land in a tier two or tier three city. This way, you can build your own asset.
If you feel that you can buy a house today but it won't be your dream home, consider it an adjustment. However, if the location of this house is good and the property is sound, you should start by buying a home in a metro city. After that, build your capacity for future investments in non-metro cities so that you don't regret missing out on any opportunities.
When we say you should buy property today, it doesn't mean you should immediately invest in a tier two city. What we mean is that you should start studying the market of tier two cities. Don't ignore the opportunities in tier two cities while focusing on metro cities. If you think there is overpriced property in tier two cities or those cities are still underdeveloped and it will take time for price appreciation, then wait. But start researching and studying the market. When you eventually buy property, keep your long-term vision in mind.
Now, the question arises: with 104 tier two cities in India, which city should you invest in? How should you evaluate a city? This is a big topic in itself, and we will discuss it in detail later. But for now, in simple terms, if your hometown is a tier two or tier three city, or if your hometown is undergoing development and has potential for growth, it might be a good option for investment.
If there's a city nearby, start doing your market research with that city first. We will cover this topic in detail in the future. We hope you found today's article interesting. If you liked it, do share it with your friends and family so that they can also enhance their understanding of real estate. We will continue to write more about Indian real estate market. Thank you for reading.
