Hereby I will prove how the realty boomers arguments are false.

What are the boomers arguments?

1.) Buy today, houses always increase in value in the long run.
WRONG. House prices cannot increase more than incomes in the long run. This is obvious if you think about it. If house prices go up more than people can afford to pay, buying stops, like it has stopped now.
Even Warren Buffett have pointed out that houses don't increase in intrinsic value. Unless there's a bubble or a crash, house prices simply reflect current salaries and interest rates. If a house is 100 years old, it's value in sheltering you is exactly the same as it was 100 years ago. Then came the maintenance as the house didn't renovate itself. It also has taxes, and insurance - costs that always increase and never go away. The price of the house went up about as much as salaries went up.
To put this is simple perspective, vegetable were costing Rs.5-6/kg when 5 digit salary was a rarity.
Today, the prices have gone up by about 4 times but so have the salaries. So, sounds very much like the reasoning people use now when they talk about how much their father's house appreciated "in the long run" without considering that salaries rose a proportional amount.

2.) Renting is just wastage of money.
WRONG. As said before renting is now much cheaper per month than owning. If you don't rent, you either:

* Have a mortgage, in which case you are throwing away money on interest, tax, insurance, maintenance, costs that increase forever.
* Own outright, in which case you are throwing away the extra income you could get by converting your house to cash, investing in bonds, and renting a similar place to live for much less money. This extra income is sufficient for emergency expenses,retirement etc.

Either way, owners lose much more money every month than renters and that's assuming prices don't correct to very high level & everything is smooth in the economy.

3.) As a renter, you won't have any money left as you will spend them on vacations,cars & hence won't have equity/savings etc.
WRONG. Equity is just money. Renters are actually in a better position to build equity/savings through investing in anything but housing. Renters can get rich much faster than owners, just by investing in conservative stocks & bonds.

* Owners are losing every month by paying much more for interest than they would pay for rent. The tax deduction does not come close to making owing competitive with renting.
* Owners must pay taxes simply to own a house. That is not true of stocks, bonds, or any other asset that can build equity/savings. Only houses are such a guaranteed drain on cash.
* Owners must insure a house, but not most other investments.
* Owners must pay to repair a house, but not a stock or a bond.
* Owners lose their money as house prices reduce. The EMI's remain constant in spite of reduction in rates. At the end of loan tenure, they would have paid almost twice than that of current renters who will buy at logical rates. Keep interest rates in mind. Most of the EMI is not principal amount but interest.

4.) There are great tax advantages to owning a house.
WRONG. Many people believe you can just reduce your income tax by the amount you pay in interest, but they are wrong. Buyers may not deduct interest from income tax; they deduct interest from taxable income. And even then, the tax advantage is not significant compared to the large monthly loss from owning.

If you don't own a house but want to live in one, your choice is to rent a house or rent money to buy a house. To rent money is to take out a loan. A mortgage is a money-rental agreement. House renters take no risk at all, but money-renting owners take on the huge risk of falling house prices, as well as all the costs of repairs, insurance, property taxes, etc.

5.) RE is based on local factors, it's not a national phenomenon. RE of Delhi-NCR,Bangalore & rest of the cities has nothing to do with Pune RE.
WRONG. Lending rates remain the same throughout the country. ALL loans are harder to get. This will drive prices down everywhere.

6.) A rental house provides good income. So, you can rent if you have purchased as investment.
WRONG. Rental houses provide very poor income in hyped areas and certainly cannot cover mortgage payments. Remember there is almost 300% difference between EMIs & rent for the same house.

It's pointless to do the work of being a landlord if you can make more money with no risk, no work, and no state income tax by investing in assured good returns bond.

7.) If owning is a loss in monthly cash flow, but appreciation will make up for it.
WRONG. Appreciation is negative. Prices are going down. It only adds to the injury of already high EMI's.

8.) As soon as prices drop a little, the number of buyers on the sidelines willing to jump back in increases.
WRONG. There are very few buyers left, and those who do want to buy will be limited by increasing difficulty of borrowing now that many house owners are near bankrupt as they don't save anything at the end of the month due to high EMI's.
No one has to buy, but there will be more and more people who have no choice but to sell as their payments rise. That will keep driving prices downward for a long time.

9.) House prices never fall atleast in Pune.
WRONG. If you see the RE scenario of 1996, prices crashed by 50% & took a whole 7+ years to recover.
Exact 1996 scenario may not be there today but strong correction is inevitable across the city.

10.) House prices don't fall to zero like stock prices, so it's safer to invest in real estate.
WRONG. House prices won't be zero, but the equity or the principal amount you paid can be zero or even negative. What you will pay as EMIs later in actual terms is not for the principal amount but only the interest as house prices dip. So, you will be only serving the bank.

11.) Prices will soften gradually, won't crash immediately.
WRONG. Prices are falling off a cliff. No one knows exactly what will happen, but it looks like prices will continue to fall for long time. These are just more manipulation of buyer emotions, to get them to buy even while prices are falling.

12.) The bubble prices were driven by supply and demand alone.
WRONG. Prices were driven by low interest rates and risky loans & good returns for investors in initial phases of boom in 2004-05.
Prices went up, interest rates went up & buyers savings went down. So prices are violating the most basic assumptions about supply and demand.

13.) There is lack of land.
WRONG. Ample of land is available & continue to be even in future in Pune. Sales volume are down. Even in Japan (small country with less land), prices went down. Current prices here are the same as that of 23 years ago. If we really had a housing shortage, there would not be so many vacant rentals.

14.) If you don't own, you'll live in a cheap neighborhood later.
WRONG. For the any given monthly payment, you can rent a much better house than you can buy. Renters live better, not worse. There are downsides to renting, such as being told to move at the end of your lease, or having your rent raised, but since there are thousands of vacant rentals, you can take your pick and be quite happy renting during the crash. There are similar but worse problems for owners anyway, such as being fired and losing your house, or having your interest rate and property taxes adjust upward. Remember, property taxes are forever.

15.) There's always someone predicting a real estate crash.
TRUE, yet irrelevant. There are very real crashes every decade or so. Even a broken clock is right twice a day.

16.) Local incomes justify the high prices.
WRONG. The mortgage should be more than your 3 years earning. It is much higher today. Most are already in danger/red zone.

17.) You have to live somewhere.
CORRECT. But that doesn't mean you should waste your life savings on a bad investment. You can live in a better house for much less money by renting during the down slide in RE.

18.) It's not a house, it's a home.
WRONG. Wherever one lives in it is home, be it apartment, condo, bungalow , mansion or house. Calling a house a "home" is a manipulation of your emotions for profit.

19.) If you don't buy now, you'll never get another chance.
WRONG. History proves otherwise.
Here's a beautiful quote from a analyst:-
"The real issue isn't whether you will be stuck being a renter all your life, she says. Its whether you'll get so scared about being shut out that you'll buy at the market's peak and be stuck in a property you can't afford or sell."

20.) It would take major economic recession or a major earthquake that wipes out this area in order for the price to fall by over 50%.
WRONG. Even today, if the prices fall by 50%, there will still be very few people who can buy at this levels due to uncertainty in jobs & most importantly high EMIs. Also, look at the rental rates for equivalent houses. Which loss per month is larger? EMI or rent?

contd....
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  • Part2:- Builders & RE Bulls Theory Proved Wrong.

    contd....

    21.) My wife will divorce me if I don't buy a house or shall I show her the savings by not buying the house.
    WRONG. She will divorce you if you do buy a house and go bankrupt trying to pay the mortgage. She won't divorce you if you rent a much nicer place than you can buy, and then take her to Paris for a month in an year, which you can do just by avoiding that suicidal mortgage.

    22.) Drop in interest rates would make people jump into market again which will increase the prices or atleast won't let RE prices crash.
    WRONG. The RE prices reflect the median income of the area. RE market in Pune was largely driven by IT, NRIs & investors. IT industry is slashing jobs or cutting the pays & perks. Due to global economic crunch, NRIs lack funds today. Several investors have burnt their fingers in stock market & they see no appreciation but a RE correction today (some may call it as rates are ‘Softening’). Hence, all these elements that were the main drivers for RE boom are absent today. At the end of the day what matters is whether one can afford EMIs or not. To what extent is priciple amount & interest component is altogether diferent issue. Try to see to it that what is fixed (RE rates) are low so that interest rates fluctuation won't bother you much. The RBI figs. posted by fellow blogger clearly shows how loan dibersement has decrerased despite hike in RE prices. This only means that people aren't simply taking loans. Home loan NPAs are increasing every day passing by. Hence, banks are in no mood to lend further for a highly depreciating asset.

    23.) Demand is there hence, drop won't take place.
    WRONG. Demand is there but definately not at current levels. Current market is dictated by end users & end users alone. Hence, builders can't today enjoy on investors money & neglect the end users.

    24.) No new projects are being announced. This will lead to low supply hence pushing up the rates.
    WRONG. Even if 58% of the projects are abandoned, there simply aren't any buyers for the rest 42%. Add to it the investors 40% additional supply which will flood the market this year.

    25.) Small correction here & there doesn't amount to crash.
    WRONG. The correction of 20% & more, if is small, then another 'Small correction' is sufficient for crash. Consider this as a 'Whirlpool'. Once you are in, you are not out unless you sink to the bottom.

    26.) I just want to own my own house.
    CORRECT. Most people do and that's fine. Buyers will get their chance when housing costs half as much and they have saved a fortune by renting. House ownership is great - unless you ruin your life paying for it. If you can save even just 10% on the price of a house, you can retire several years earlier than you would otherwise. If you can save 50%, then you can easily take a ten year vacation and still come out ahead.

    Conclusion:-

    1.) People are simply not spending due to current RE & economic scenario.

    2.) Investors aren't there, ending the speculation.

    3.) Current market is end user dictated. End user doesn't find rates affordable/logical.

    4.) Builder>> End User or
    Builder>> Investor/speculator>> End user.
    The chain ends with end user. End user is the king. Hence, expect distress sales from investors too.

    5.) Result is visible on ground. Builders slashing prices, thus defying PBAP diktat. One builder reduces rates & now it is catching steam that will set off chain reaction for RE crash.

    6.) Most importantly, the buyers are not homeless. They have a house even if it means rented one. Those who want to upgrade from 2BHK to 3/4BHK have put their plans on hold, as they too are not desperate. Due to several layoffs, people are going back to their native place, thus increasing the number of flats on rent.

    7.) Several news posted earlier, clearly indicate that bankers, economic analysts as well as realty observers state that the RE prices will come down by 50-60% from their peak value, irrespective of place, location. These people are neither bears nor bulls, but analysts with neutral perspective.

    8.) Most importantly, the holding capacity of buyers is greater than builders. Builders have taken loans from various finance sources with interest rates as high as 20-35%. These are turning defaulters & if they want the finance institutions not to put an attachment to their properties, they will have no other option but to sell off current inventory a very low rates.

    Who blinks first was the question late last year. Today we have the answer:- Builders.

    Like it or not, the current Pune RE scenario is similar to that of a ship heading inside the ‘Bermuda triangle’. What is visible today is just a deflection of ‘Compass’. Once it reaches the epicenter of the ‘Bermuda Triangle’, no one can help it from sinking.

    To conclude, the builders require your money. So, whom should you believe? Facts or theories put forth by boomers? Think for yourself.

    I would be very glad if you can share your thoughts on my article.
    Comments most welcome & I would be happy to hear from you.

    Regards,
    Realacres

    --concluded--
    CommentQuote
  • Hi realacres
    It seems we think alike on Rent vs Emi analysis. It is quiet true and practical. Had decent savings living in rented apmt.

    After booking a house, I almost felt poorer thinking of future EMI payments for 15 years.
    Ultimately. cancelled home-loan and booking becoz of low-value in return and job-insecurity.

    May take risk and buy one if price falls 20% from current-level.
    For me price at 2006 level would be affordable.

    I think there is a similarity between buying a house at inflated price and buying a luxury car.(I can survive on hired vehicle).
    Its more of ego-statement. But how many of middle/upper-middle-class people can go on such ego-trip?
    CommentQuote
  • I have this funny feeling I read this on an American Post!

    Originally Posted by realacres
    contd....

    21.) My wife will divorce me if I don't buy a house or shall I show her the savings by not buying the house.
    WRONG. She will divorce you if you do buy a house and go bankrupt trying to pay the mortgage. She won't divorce you if you rent a much nicer place than you can buy, and then take her to Paris for a month in an year, which you can do just by avoiding that suicidal mortgage.

    Regards,
    Realacres

    --concluded--


    Realacres,

    You have taken this post from an article about American housing and done some cut-n-paste, no? :D Okay, don't take that seriously ;)

    That said, most points here are valid for India too. But some are not.

    1. RE in the US has risen by an inflation-adjusted 1% only over the last 100 years. Which is why Warren Buffet said what he did. Indian RE has a slightly higher inflation-adjusted number. Btw, this is not too high, because, you will note that, in the 70s and 80s (when you got it real cheap) inflation rates were well in the double-digits and would have had a big damping effect on the inflation-adjusted rate of increase.

    2. About the savings part as well as about the wife!

    Unfortunately, most Indians (like most Americans) do not save in any other way than via RE, which is a forced saving. Unfortunately, this is the truth.

    And yes, most wives will seriously contemplate a divorce if the husband has not bought a home by the time he is 40 AND he does not have much in savings. Unfortunately, this is also true in today's India!!! :D

    But most of the rest of the post is equally applicable to India. And I commend you to have taken the time to put in this exhaustive list. Very informative and instructional!!!

    cheers
    CommentQuote
  • Going by the post. it only make sense to rent and not own. if that is the case the whole world should simply rent.. now body should own .. and if no body owns then there is no owner .. then from whom should we take the house on rent...

    ... dude like there should be balance between debt and equity the same is true for your house.. you need not buy a house for the max loan a financial institute is ready to loan but a house that u need and you can afford.

    why to buy a maruti 800 when u want a ferrari and why to buy a ferrari when ur need of the hour is maruti 800 ...
    CommentQuote
  • excellent post

    Originally Posted by realacres
    contd....

    21.) My wife will divorce me if I don't buy a house or shall I show her the savings by not buying the house.
    WRONG. She will divorce you if you do buy a house and go bankrupt trying to pay the mortgage. She won't divorce you if you rent a much nicer place than you can buy, and then take her to Paris for a month in an year, which you can do just by avoiding that suicidal mortgage.

    22.) Drop in interest rates would make people jump into market again which will increase the prices or atleast won't let RE prices crash.
    WRONG. The RE prices reflect the median income of the area. RE market in Pune was largely driven by IT, NRIs & investors. IT industry is slashing jobs or cutting the pays & perks. Due to global economic crunch, NRIs lack funds today. Several investors have burnt their fingers in stock market & they see no appreciation but a RE correction today (some may call it as rates are ‘Softening’). Hence, all these elements that were the main drivers for RE boom are absent today. At the end of the day what matters is whether one can afford EMIs or not. To what extent is priciple amount & interest component is altogether diferent issue. Try to see to it that what is fixed (RE rates) are low so that interest rates fluctuation won't bother you much. The RBI figs. posted by fellow blogger clearly shows how loan dibersement has decrerased despite hike in RE prices. This only means that people aren't simply taking loans. Home loan NPAs are increasing every day passing by. Hence, banks are in no mood to lend further for a highly depreciating asset.

    23.) Demand is there hence, drop won't take place.
    WRONG. Demand is there but definately not at current levels. Current market is dictated by end users & end users alone. Hence, builders can't today enjoy on investors money & neglect the end users.

    24.) No new projects are being announced. This will lead to low supply hence pushing up the rates.
    WRONG. Even if 58% of the projects are abandoned, there simply aren't any buyers for the rest 42%. Add to it the investors 40% additional supply which will flood the market this year.

    25.) Small correction here & there doesn't amount to crash.
    WRONG. The correction of 20% & more, if is small, then another 'Small correction' is sufficient for crash. Consider this as a 'Whirlpool'. Once you are in, you are not out unless you sink to the bottom.

    26.) I just want to own my own house.
    CORRECT. Most people do and that's fine. Buyers will get their chance when housing costs half as much and they have saved a fortune by renting. House ownership is great - unless you ruin your life paying for it. If you can save even just 10% on the price of a house, you can retire several years earlier than you would otherwise. If you can save 50%, then you can easily take a ten year vacation and still come out ahead.

    Conclusion:-

    1.) People are simply not spending due to current RE & economic scenario.

    2.) Investors aren't there, ending the speculation.

    3.) Current market is end user dictated. End user doesn't find rates affordable/logical.

    4.) Builder>> End User or
    Builder>> Investor/speculator>> End user.
    The chain ends with end user. End user is the king. Hence, expect distress sales from investors too.

    5.) Result is visible on ground. Builders slashing prices, thus defying PBAP diktat. One builder reduces rates & now it is catching steam that will set off chain reaction for RE crash.

    6.) Most importantly, the buyers are not homeless. They have a house even if it means rented one. Those who want to upgrade from 2BHK to 3/4BHK have put their plans on hold, as they too are not desperate. Due to several layoffs, people are going back to their native place, thus increasing the number of flats on rent.

    7.) Several news posted earlier, clearly indicate that bankers, economic analysts as well as realty observers state that the RE prices will come down by 50-60% from their peak value, irrespective of place, location. These people are neither bears nor bulls, but analysts with neutral perspective.

    8.) Most importantly, the holding capacity of buyers is greater than builders. Builders have taken loans from various finance sources with interest rates as high as 20-35%. These are turning defaulters & if they want the finance institutions not to put an attachment to their properties, they will have no other option but to sell off current inventory a very low rates.

    Who blinks first was the question late last year. Today we have the answer:- Builders.

    Like it or not, the current Pune RE scenario is similar to that of a ship heading inside the ‘Bermuda triangle’. What is visible today is just a deflection of ‘Compass’. Once it reaches the epicenter of the ‘Bermuda Triangle’, no one can help it from sinking.

    To conclude, the builders require your money. So, whom should you believe? Facts or theories put forth by boomers? Think for yourself.

    I would be very glad if you can share your thoughts on my article.
    Comments most welcome & I would be happy to hear from you.

    Regards,
    Realacres

    --concluded--


    nice info... thanks -
    CommentQuote
  • great info

    thanks realacres and wiseman
    kudos to your thought provoking and knowlegeable writing
    CommentQuote
  • Prices in Pune RE have fallen 20%, but the Rupee has also fallen 25% against the US dollar, making it favourable for NRI investors (Total 45% off from Peak). They also fear that in the long run dollar will fall, so they will keep investing in India. Just a thought...btw...its a very informative post.
    CommentQuote
  • great read for buyers who are taking a risk in uncertain climates.

    just adding one more bullet here especially for that dashing young guy who booked a 2BHK in PS area within no time after his second visit and is not able to come out from the trap now - house registration is complete and the bank has disbursed funds to the builder.

    27) I am a IT guy and my gross salary is 12L. I am the best performer in my team. I expect salary raises starting latter half of this year. I can defenitely afford a 40L home in Pune.
    NOT TRUE!! You should continue to do your job well and perform well. But there is no gurantee that IT jobs will continue to surge in India, or your job will not be taken to China. There is also no guarantee that $ vs Rs will sit pretty always. It might take many years for US and UK to get back on feet and many IT jobs depends on these economies. Do not expect salary raises for sometime.
    CommentQuote
  • Flat 50% Discount.

    Originally Posted by amit_arya
    Going by the post. it only make sense to rent and not own. if that is the case the whole world should simply rent.. now body should own .. and if no body owns then there is no owner .. then from whom should we take the house on rent...

    ... dude like there should be balance between debt and equity the same is true for your house.. you need not buy a house for the max loan a financial institute is ready to loan but a house that u need and you can afford.

    why to buy a maruti 800 when u want a ferrari and why to buy a ferrari when ur need of the hour is maruti 800 ...


    Just see the facts:-

    1.) Most of the Investors purchased just before RE boom. It was only due to investor/speculators & IT which fueled RE to current levels at first place.

    2.) I don't think any investor must have purchased RE in 2008. Had that been the case, avg prices would have been atleast INR 4000-4500/sq ft in Pune. Correction in RE prices wouldn't have taken place at first place.

    3.) At current levels, the returns on rental/lease are just about 3.6%/annum. This is far lower than simple bank FD of atleast 8%. With proper investments, you can without any risk still earn 12-14%/annum even today.

    4.) The simple calculation for calculating economically viable property price is:-

    Total Price of Property = 200 (max) * x; where x = monthly rent.
    Hence, if you are paying INR 10,000/month as rent, the max. value of that property should not be more than INR 20L. Hence, the statement that you can rent larger & better location flat for less than the EMIs.

    5.) At current prices, what would you have after end of your home loan tenure? Just a flat ? I would prefer to stay on rent & stay free of unnecessary financial liabilities at current RE & economic scenario.

    6.) I would like to conclude by saying that I am not asking anyone to stay on rent for life. I just want to say that Rent Today & Purchase Tomorrow at affordable/logical price.

    Happy house hunting!:)

    Btw, have a look at the following news:-

    Unbelievable, but true. A Pune-based builder offers apartments at half the existing rate;.....

    ]http://www.mid-day.com/news/2009/jun/240609-Krome-builders-Mumbai-builders-Vishrantwadi-Koregaon-Park.htm
    CommentQuote
  • this all sounds good what I would say it is theroy.

    becuase I will take one case, where my good friend was paying 5K rent in 2004 for 2BHK and then bought a house for 10L for 9K EMI.

    Now his house is worth of 30L even after RE crash and paying 10K EMI...in this case, buying a house decision is wiser than pay the rent.

    Today it all depends on where you invest due to globalisation, development is happening at most of the location, you donot find place as same as it was looking 10 years back. but it was the case 20 years back, So it cannot be generalised. one of my friend bought a house in Dec-2007 in 25L and sold in 35L after a year before shifting to Pune. he didnot pay the rent for year and also gained 10L on top of it. What will you call this case ?
    CommentQuote
  • very well said realacres.

    People should not get carried away by emotions where their hard-earned money (present as well as future money is concerned). Let the trends and the market forces play out over the next 5-7 years to get to the real fair value of real estate!
    CommentQuote
  • calculator buy vs rent.

    hi all,

    just to make things simpler for you, i am attaching an excel calculator ( i was in the same dilemma , and found useful stuff on the net , god bless the person who has made it) which will let you know whether buying or renting is a better option. :)

    as you might see this depends based on various parameters which you have to key in, & based on your inputs calculator lets you know which is the best option.


    disclaimer: cannot claim on the authenticity or accuracy of this calculator hence pls use at your own will. I will not be liable in anyway for any inaccurate result.
    CommentQuote
  • manna143,
    About your friend, where is he living now? Did he buy a new house? If not, then he has understood the futility of ownership. If he has, then he obviously paid for his new house at peak rates of 2008. I.e. net loss, even in your supposedly good case scenario.
    The thing is, it takes a loooong time to recover from RE slumps. As a medium term investor, I would steer clear even at rock-bottom prices, because I wouldn't be able to recover my capital + interest for as much as upto a decade.
    CommentQuote
  • Originally Posted by manna143
    this all sounds good what I would say it is theroy.

    becuase I will take one case, where my good friend was paying 5K rent in 2004 for 2BHK and then bought a house for 10L for 9K EMI.

    Now his house is worth of 30L even after RE crash and paying 10K EMI...in this case, buying a house decision is wiser than pay the rent.

    Get us some figs.

    1.) What is the rent which your house will fetch right now? It makes sense to buy a 10L house than to pay INR 5000/month as rent even today, right now.
    Formula is above:- Value of house max.= 200x; x=rent/month.

    2.) What you did was in 2004. This made sense as it is accommodated in the above formula nor there existed any RE bubble at that time.

    3.) If you want to purchase your own house again, will you buy it at INR 30L or pay rent?

    Please don't get confused between PURCHASE IN 2004 Vs RENT IN 2009.

    Today it all depends on where you invest due to globalisation, development is happening at most of the location, you donot find place as same as it was looking 10 years back. but it was the case 20 years back, So it cannot be generalised. one of my friend bought a house in Dec-2007 in 25L and sold in 35L after a year before shifting to Pune. he didnot pay the rent for year and also gained 10L on top of it. What will you call this case ?
    Fact remains that this happened before RE bubble burst in the country & economy showed signs of illness. Would he have been able to sell it today at INR 35L is the question?
    CommentQuote
  • Originally Posted by realacres
    I am not asking anyone to stay on rent for life. I just want to say that Rent Today & Purchase Tomorrow at affordable/logical price.




    I agree to you fully with that but i would like to add

    " dont try to time the market"

    e.g. 20 years down the line properties in NCR were available at a price of 10-20L are currently at 2-3Crs. so if you are looking for a home for self or for long term perspective a home bought today at 3K or 3.5K per sq ft will not matter 20years down the line when it would be probably 40K 45K per sq ft. ... well this will hold true for every big city in india atleast for next 30-40years
    CommentQuote