Why are some people still buying?

- A 1BHK is out of range of educated aam admi ( couple making 10L before taxes), who works on salary and has saved for 5 years.

- Prices are higher than many developed cities across the globe

- Builders are facing liquidity issues

- Banks will not refinance

- In FD like instruments, you can double your money in 7-8 years. Will real estate double from here?

Prices have gone up 6-10X in the last six years!
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  • aam admi with black money is buying the real estate...wait for another year or 2..IT sector is going down pretty hard and real estate regulations, global economy is expecting another recession soon. it would be good to see how many builders survive after that.
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  • Most People buying are selling one property and buying another, some people are selling property/land in other cities/towns and buying in Mumbai (as they work here), and businessmen are always there, all the money black/white they make they put in real estate and will continue until they stop getting returns, for example many diamond merchants have more than 15-20 properties in Mumbai (exlcuding the joint ventures they have with builders), similarly businessmen in other industries, they just keep on buying property. Thats indian culture of buying gold and property.
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  • why are some people still buyin petrol when its 75 bucks a litre? Same is the reason that mango people like me are still buying property, no other option, rent is there but i dont fancy renting due to sentiments.
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  • I can think think of these many reasons. Please feel free to add or even delete from it.

    1. Greed: They expect the exponential growth in prices to go on forever and want to make quick profits in this levered investment.
    2. Fear: They expect the exponential growth in prices to go on forever and fear that they will miss the bus.
    3. Lack of awareness: Most real estate investors don't know much about other asset classes or the concept of diversification or financial literacy. Many EMI-holders in my firms can't even calculate their income tax properly or submit their investment proofs properly.
    4. Lack of alternatives: Most real estate investors cannot invest their unaccounted income in any other asset class.
    5. Herd mentality: speculator do as speculator see
    6. Peer and parental pressure: abhi tak ghar nahi kharida....beechara!
    7. Specious reasoning: My favorite one is - Rent is a waste of money and an EMI creates assets! The moment someone says this, loses all intellectual credibility in my eyes.
    8. Easy availability of mortgages: loan mil raha he toh le lo!
    9. Myopic over-optimism: Most people extrapolate recents events and are over-optimisitc about their capabilities, future prospects and india's growth potential. One is definitely not entertaining the possibility of losing his/her job and falling into financial difficulty when signing on a 20yr loan.
    10. Tax efficiency
    11. Long corruption strategy: It is the best asset class, if you believe that the country will remain corrupt forever.
    12. They can afford it: I mean why do some people still buy diamonds or an Audi or an expensive trip to the most exotic locale or a Breitling or a Dom Perignon or a.....the list goes on.....
    13. They get a good deal: Mostly insiders, institutional investors and HNIs

    Disclosure: I don't own a single property and most probably never would. I am just an innocent bystander.
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  • The comparison with FD is not the correct one. Real estate is a game of leverage especially for people who can get loans. So with 40 lakh in pocket you can buy a 2 cr property and then the appreciation is on entire 2 cr not on 40 lakh. With FD, u wud only be able to double 40 lakh to 80 lakh. But with real estate even a 20% increase on 2 crwould be the same as your gain in FD. thats point no.1.

    Point no. 2 is yes offcourse you pay 10% ineterest on the loan so taken. But it effectively works out for you at 5% if you have bought the property for investment purpose. The calculation is simple:

    Rent : 2% ( after adjustment of maintenance charges)
    Net interest outgo: 7 % ( assuming negative income due to rent adjusted with salary income and 30% tax bracket)

    so net outflow is : 5% of property price. So you would pay about 10 lakh every year. In 5 years you pay about 50 lakh and the potential of property to go up by 25% in 5 years is not a bad assumption. also remember rents will go up or interest rate may come down over a period of time. whereas your outflow remains the same in terms of EMI.

    so thats the investor mathematcis. The challenge starts when an end user has to buy. So how many people will have income 5 yrs hence who would buy for their end us is the calculation you have to do.

    Unless something changes drastically. property is a safe bet for investors who can leverage.



    Originally Posted by new2RE
    Why are some people still buying?

    - A 1BHK is out of range of educated aam admi ( couple making 10L before taxes), who works on salary and has saved for 5 years.

    - Prices are higher than many developed cities across the globe

    - Builders are facing liquidity issues

    - Banks will not refinance

    - In FD like instruments, you can double your money in 7-8 years. Will real estate double from here?

    Prices have gone up 6-10X in the last six years!
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  • Originally Posted by vibes28
    The comparison with FD is not the correct one. Real estate is a game of leverage especially for people who can get loans. So with 40 lakh in pocket you can buy a 2 cr property and then the appreciation is on entire 2 cr not on 40 lakh. With FD, u wud only be able to double 40 lakh to 80 lakh. But with real estate even a 20% increase on 2 crwould be the same as your gain in FD. thats point no.1.

    Point no. 2 is yes offcourse you pay 10% ineterest on the loan so taken. But it effectively works out for you at 5% if you have bought the property for investment purpose. The calculation is simple:

    Rent : 2% ( after adjustment of maintenance charges)
    Net interest outgo: 7 % ( assuming negative income due to rent adjusted with salary income and 30% tax bracket)

    so net outflow is : 5% of property price. So you would pay about 10 lakh every year. In 5 years you pay about 50 lakh and the potential of property to go up by 25% in 5 years is not a bad assumption. also remember rents will go up or interest rate may come down over a period of time. whereas your outflow remains the same in terms of EMI.

    so thats the investor mathematcis. The challenge starts when an end user has to buy. So how many people will have income 5 yrs hence who would buy for their end us is the calculation you have to do.

    Unless something changes drastically. property is a safe bet for investors who can leverage.


    Leverage is a double edged sword. I agree if the asset appreciates you can make returns but if the assets class stays flat and worst case depreciates, the losses are are huge. A 10 % drop in home value will wipe out over 50% of your down payment and the money you have payed towards EMI. So a 10% drop can equate to a 100% loss!
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  • Originally Posted by vibes28
    The comparison with FD is not the correct one. Real estate is a game of leverage especially for people who can get loans. So with 40 lakh in pocket you can buy a 2 cr property and then the appreciation is on entire 2 cr not on 40 lakh. With FD, u wud only be able to double 40 lakh to 80 lakh. But with real estate even a 20% increase on 2 crwould be the same as your gain in FD. thats point no.1.

    Point no. 2 is yes offcourse you pay 10% ineterest on the loan so taken. But it effectively works out for you at 5% if you have bought the property for investment purpose. The calculation is simple:

    Rent : 2% ( after adjustment of maintenance charges)
    Net interest outgo: 7 % ( assuming negative income due to rent adjusted with salary income and 30% tax bracket)

    so net outflow is : 5% of property price. So you would pay about 10 lakh every year. In 5 years you pay about 50 lakh and the potential of property to go up by 25% in 5 years is not a bad assumption. also remember rents will go up or interest rate may come down over a period of time. whereas your outflow remains the same in terms of EMI.

    so thats the investor mathematcis. The challenge starts when an end user has to buy. So how many people will have income 5 yrs hence who would buy for their end us is the calculation you have to do.

    Unless something changes drastically. property is a safe bet for investors who can leverage.


    You are right but not many service class people are buying property thinking on above lines. Concentration of good jobs in few cities is leading to lot of migration which is building up demand in big cities.

    If one claims interest rebate then one has to hold that property for minimum five years.
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  • Originally Posted by new2RE
    Leverage is a double edged sword. I agree if the asset appreciates you can make returns but if the assets class stays flat and worst case depreciates, the losses are are huge. A 10 % drop in home value will wipe out over 50% of your down payment and the money you have payed towards EMI. So a 10% drop can equate to a 100% loss!

    Main success In proprty investment comes from forced monthly commitment towards assets(EMI).its no secret that if you put same amount as EMI compulsorily into mutual funds you will have more returns after 10 years.But nobody puts that big amount with discipline into SIP.
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  • Why people still buying properties ? interesting question..

    Let me try to decode it..
    Very first there is nothing like lack of money or vanishing of money. In this world MONEY never disappears, it only changes the hands. Same principle applied majority are buying ready property to actually live (previously they used to invest for investments, very few play the game).
    THose who have invested, their investment is not selling. There is more supply than demand.
    From the start Indian people are not easy going with other financial tools, so what we listen from childhood, gold and home is safe bet. So everyone is conditioned to buy atleast one self home in his life time.
    In Todays trend there is movement in Luxury homes and below 40 lac homes.

    And its very interesting that why mumbai real estate rates are higher than other major cities because there is cycle of 25 years in real estate, where investment yields grows and drop. About mumbai the cycle is at around 11-12 year point of cycle.. means the prices are gonna increase more and then one point when returns start to fall the RE market will go towards end of cycle.

    And lastly as stated indian economy is increasing, purchasing power is increasing, money will keep changing hands. But sad thing those who really needs home their homes these investors buys off :(
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  • Originally Posted by amarakbar
    You are right but not many service class people are buying property thinking on above lines. Concentration of good jobs in few cities is leading to lot of migration which is building up demand in big cities.

    If one claims interest rebate then one has to hold that property for minimum five years.


    Ok. Further to our discussions few clarifications:

    a. one has to hold the property for 5 years if its an underconstruction property not when its a readymade property and one is putting it up for rent.

    b. I did a very interesting analysis of my own home i bought in kandivili in a premium property in 2007 . All inclusive cost to me at that time including the furnishing i did came to be 90 lacs. today the going rate is about 1.75 cr for the same home. rentals of about 30-32k.

    c. I had taken a home loan @8.5% but practically for the entire duration it was well above 11.5%. currently its at 12%. So assuming a rate of 11% on an average. The compounded cost of 90 lac house comes to 168 lacs as of today. I have assumed 11% payout it over entire 90 lacs assuming that the 20% of mine which i had put on would have given me a return of 11% in case i ahd put it in mutual funds .

    d. Given this scenario, all i have gained is just 7 lacs for a period of 6.. phew............and we are talking of real estate returns being phenomenal.

    e. Offcourse i lived in that house for 6 years. If i was living on rent on that house my average rent fro last 6 years was 25k per month on which i wud have got a tax break of 30% (hra) . so on an average of 17.5 k per month. I would have paid out just 15 lakhs (compounded ) over 6 years.

    f. so if i sell my flat now. I am richer by 22 lakhs than otherwise........

    love it..............
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  • And if property rates hadn't doubled you would have lost lot of money :(. I don't see prices increasing at same rate in near future, investors leveraging to buy homes at current rates will most likely go broke.
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  • Originally Posted by rohu01
    And if property rates hadn't doubled you would have lost lot of money :(. I don't see prices increasing at same rate in near future, investors leveraging to buy homes at current rates will most likely go broke.

    Exactly my thought....2012 to 2017 wont be like 2007-2012, IMO. People can bet as they like...
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  • In my opinion rates are already quoted 2-3 year forward. Builders strategically not launching in mass to curb supply. If someone wants to live it is ok but people who think they will book as investment will suffer. They also have to consider payments made towards VAT , Service tax , stamp duty , registration, payment at the time of possession for club house etc and also add interest towards pre-emi then calculate net rate to them.

    If rate itself is 2-3 year forward , how can someone make money ?

    People have to work on this basics before taking investment call.
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  • Originally Posted by vibes28
    Ok. Further to our discussions few clarifications:

    a. one has to hold the property for 5 years if its an underconstruction property not when its a readymade property and one is putting it up for rent.

    b. I did a very interesting analysis of my own home i bought in kandivili in a premium property in 2007 . All inclusive cost to me at that time including the furnishing i did came to be 90 lacs. today the going rate is about 1.75 cr for the same home. rentals of about 30-32k.

    c. I had taken a home loan @8.5% but practically for the entire duration it was well above 11.5%. currently its at 12%. So assuming a rate of 11% on an average. The compounded cost of 90 lac house comes to 168 lacs as of today. I have assumed 11% payout it over entire 90 lacs assuming that the 20% of mine which i had put on would have given me a return of 11% in case i ahd put it in mutual funds .

    d. Given this scenario, all i have gained is just 7 lacs for a period of 6.. phew............and we are talking of real estate returns being phenomenal.

    e. Offcourse i lived in that house for 6 years. If i was living on rent on that house my average rent fro last 6 years was 25k per month on which i wud have got a tax break of 30% (hra) . so on an average of 17.5 k per month. I would have paid out just 15 lakhs (compounded ) over 6 years.

    f. so if i sell my flat now. I am richer by 22 lakhs than otherwise........

    love it..............


    I did a back of the envelope calculation and my numbers dont match yours.

    I think you made 1.06Cr profit on a 18L investment in 6 years - a 688% increase!

    Here is the math

    1. Investment 20% of 90L = 18L
    2. EMI (only interest) - 12 % = 51L
    3. Tax saving on EMI - (assuming 25% avg tax rate) = 12.5L
    4. Rent you would have paid @17.5 with tax benfits = -12.6L (s0 cancels out)
    5. Property value now: 175L

    Your profit: 175-18-51 = 1.06 Cr
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  • Sir

    Pls seek help of a financial advisor urgently. This is how people assume that they have made huge gains in real estate whereas thats not the case. Some obvious pointers if it helps you:

    a. You still have to pay the loan back.- 72 lakhs. So if you deduct that from your 1.06 cr profit. it reduces to 34 lakhs.

    b. The EMI doesnt save tax@ 25%. the tax saving is restricted to 1.5 lakh of interest payment and if you are in 30% tax bracket its about 45K per year. I havent even assumed that because my maintenance charges for the home are much more than that.

    c. Pls never understaimate the effect of compounding. The amount of interest you pay every month, would have earned you and FD ineterst if you ahd not paid it. So the interest calculation has to be compounded.

    I hope you get it.......else msg me on PM and we can speak on it.


    Originally Posted by new2RE
    I did a back of the envelope calculation and my numbers dont match yours.

    I think you made 1.06Cr profit on a 18L investment in 6 years - a 688% increase!

    Here is the math

    1. Investment 20% of 90L = 18L
    2. EMI (only interest) - 12 % = 51L
    3. Tax saving on EMI - (assuming 25% avg tax rate) = 12.5L
    4. Rent you would have paid @17.5 with tax benfits = -12.6L (s0 cancels out)
    5. Property value now: 175L

    Your profit: 175-18-51 = 1.06 Cr
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