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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  • Originally Posted by realacres

    The current economic indicators are not good if you are overleveraging for making RE purchase.


    Some good points by Muneesh on real life experience - more valuable in RE than abstract analysis

    Realacres, Overleveraging is bad "regardless" of the economy.

    Leverage for RE investment is indicated in very few instances

    1. If you are in a steady job in a steady location, currently renting, and buying a ready built flat for own stay, saving rent. Then definitely.

    2. In booking under construction, if you want to avail a 12% or more downpayment discount and will be staying in it after it is built, if the builder is reputed, and you have only 50% of the cash. Then take a 100% loan for downpayment, your 50% cash will cushion the EMI payments

    3. If you have 100% of cash required but want to keep it intact for emergency, in which you pay just 1.25-1.5% for the loan differential (since your cash earns 7.5% in the FD).

    Any loan servicing costing more than 20-30% of salary in EMI is dangerous. Better to save for a downpayment of 50% at least.

    In current economic scenario, there should be no urgency to buy. Prices are likely to stay static. One can postpone the buy decision without sufffering any consequence.

    NOIDA saw a 30% price correction after huge number of affordable range flats were launched in the last 6 months.
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  • RealAres-Ofcourse, comparing cash with RE is of no use coz you just wanted to put that cash somewhere, that's it. I bet, if he had loads of white money, he would have invested elsewhere. But as said before, the investor makes money only after selling to end users & not investor.

    *************************

    RE is one good investment where u can trade for cash and it will give u returns, cash kept somewhere normally is a burden. will not.
    U can convert B into W money and keep buying it.
    Agreed that investor makes money after selling to user but how can we forget investors having 5 properties and still making money without selling to end user.
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  • RE is a good place to park white money also.

    After a point, keeping track of a large stock. mutual fund portfolio becomes difficult. Because of tardiness, returns in stock start falling below FD returns even - especially in difficult times when much money is parked in liquid funds.

    RE being big ticket and very long term, is easier to manage
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  • Why

    Originally Posted by Venkytalks
    Realacres, Overleveraging is bad "regardless" of the economy.

    +1. Agree 100%.

    Any loan servicing costing more than 20-30% of salary in EMI is dangerous. Better to save for a downpayment of 50% at least.

    Met couple of bankers this week (PSU banks) & guess what? They said that over 90% of home loan buyers have EMIs of 60-65% of take home salary. In case of private banks, it is even more . The bad part:-

    They said that banks are even lending to bachelors based on 'to be wife's earning' :o & note that this is when the boy doesn't even know who his wife would be. Later, when the boy sees himself in trouble, the most important aspect for marriage then becomes the earning of wife rather than wife(. Don't know why people buy based on future incomes that too of their wife .

    NOIDA saw a 30% price correction after huge number of affordable range flats were launched in the last 6 months.

    Unfortunately, most of Pune buyers are unaware what is happening outside PMC & feel that prices will appreciate 10l/annum:D.
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  • If one can take loan based on future wife's supposed income, can one take loan of 500 years hoping his great great great grandson or somewhere in the chain will be like Bill Gates?

    Gotta talk to banker of such bank
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  • Originally Posted by puser
    If one can take loan based on future wife's supposed income, can one take loan of 500 years hoping his great great great grandson or somewhere in the chain will be like Bill Gates?

    Gotta talk to banker of such bank

    Speak with LIC-HF & SBI. These LIC-HF have come up with different teaser rates for 5 yrs, however, they come with T & C!!
    Btw, this LIC fellow told me that if someone is earning 50k/month in techmahindra/infy etc. & other person is earning in 50k/month in not so big co., the loan sanctioned is reduced for later :(. Why man, can't techmahindra guys be fired or take salary cut?? Alongwith builders, even the banks are pushing buyers to the brink & later these will be same banks who will refuse you car loan, personal loan etc. coz they say already the income:EMI ratio is bad:bab (61):.

    Man, why do people over-leverage?? :bab (39):
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  • Originally Posted by puser
    If one can take loan based on future wife's supposed income, can one take loan of 500 years hoping his great great great grandson or somewhere in the chain will be like Bill Gates?

    Gotta talk to banker of such bank


    This is amazing. i wonder we have started following what US banks have been doing since ages and got themselves into deep-shit.
    just anyone could enter into a bank in US and get a loan/credit


    (QUOTE=real acres)Btw, this LIC fellow told me that if someone is earning 50k/month in techmahindra/infy etc. & other person is earning in 50k/month in not so big co., the loan sanctioned is reduced for later . Why man, can't techmahindra guys be fired or take salary cut??

    This is totally contradictory to above. 1st banks say welcome all and then they say ##$%&^ . what kind of rules are these.
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  • Originally Posted by realacres
    Speak with LIC-HF & SBI. These LIC-HF have come up with different teaser rates for 5 yrs, however, they come with T & C!!
    Btw, this LIC fellow told me that if someone is earning 50k/month in techmahindra/infy etc. & other person is earning in 50k/month in not so big co., the loan sanctioned is reduced for later :(. Why man, can't techmahindra guys be fired or take salary cut?? Alongwith builders, even the banks are pushing buyers to the brink & later these will be same banks who will refuse you car loan, personal loan etc. coz they say already the income:EMI ratio is bad:bab (61):.

    Man, why do people over-leverage?? :bab (39):


    Techmahindra is known for lay offs :D
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  • Originally Posted by realacres


    They said that banks are even lending to bachelors based on 'to be wife's earning' :o & note that this is when the boy doesn't even know who his wife would be. Later, when the boy sees himself in trouble, the most important aspect for marriage then becomes the earning of wife rather than wife(. Don't know why people buy based on future incomes that too of their wife


    An interesting Question on the above comments, how banks is calculating/speculation "to be wife's" income:bab (34):

    I don't know which bank is doing this, but I feel possibility of above to be true is 0.0001%, as you have to give proof of your income while getting home loan & I don't know how the guy & bank will take proof in this situation:D:D
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  • Originally Posted by realacres
    +1. Agree 100%.


    Met couple of bankers this week (PSU banks) & guess what? They said that over 90% of home loan buyers have EMIs of 60-65% of take home salary. In case of private banks, it is even more . The bad part:-

    They said that banks are even lending to bachelors based on 'to be wife's earning' :o & note that this is when the boy doesn't even know who his wife would be. Later, when the boy sees himself in trouble, the most important aspect for marriage then becomes the earning of wife rather than wife(. Don't know why people buy based on future incomes that too of their wife .


    Unfortunately, most of Pune buyers are unaware what is happening outside PMC & feel that prices will appreciate 10l/annum:D.


    Actually banks outsource their selling to hungry young men who are ready to say anything to make a loan. These fellows sit in the builder's office and say "loan no problem"

    They presanction based on your slary but make all sorts of enticing verbal commitments. They get kickbacks from the builder and the actual sanction of loan is immaterial.

    Once a person books, many times the loan is not even actually sanctioned. Booker is left in the lurch and has to distress sell his booking at a loss (or make a killing as the case may be - because many make a couple of lakhs in the process, people dont mind all the misleading and mis-selling involved.

    One should never believe anything told by "bank representative" sitting in builder's office
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  • Originally Posted by ash7979
    An interesting Question on the above comments, how banks is calculating/speculation "to be wife's" income

    I don't know which bank is doing this, but I feel possibility of above to be true is 0.0001%, as you have to give proof of your income while getting home loan & I don't know how the guy & bank will take proof in this situation

    Hey nice to see you back after a long time.
    Coming to this, the banks basically see the following:-

    Nature of work,
    The company,
    Savings,
    Age,
    Future Prospects. It is here where the speculation starts. First the banks offers the loan for 20 yrs & later say that 25 can also be done. Hence, at 20 yrs rate, they give more loan than that can be given, main reason being that post marriage the income will increase. This I have personally seen especially in case of ITGs as many ITGs marry ITGs (hey gals here:D). This is a step taken by the bank based on FUTURE INCOME, if fails, increase the loan duration.

    Man, do you know the way how banks were busy sanctioning loans before sub-prime crisis in US??? This is the sole reason of rising NPAs. You can also confirm the EMI:Income ratio as well if you have some known senior people in home loan section.

    Btw, I have personally seen a person's credit card limit being halved in less than 6 months after he took the home loan.

    What matters is not just the servicing of home loan EMIs but also making sure that your current lifestyle is not hampered after taking a home loan, that's all.
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  • China's growth has dipped according to the figs released today. This will impact not only Chinese exporters but cos. who used to supply to China as well. Today, on Bloomberg-UTV, I also saw news which was describing how we are heading towards a dip, the bailout money has been exhausted & no funds with the US & EU Govts. It has been cleared that US will take much more time than predicted to come out of economic mess it is in right now.

    For India, the inflation nos. are out. Food inflation has gone up & expect the RBI to hike interest rates by about 50 bps in a month or so.
    Personally, I have decided to wait & watch.
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  • China replaces India as preferred outsourcing destination

    Originally Posted by realacres
    China's growth has dipped according to the figs released today. This will impact not only Chinese exporters but cos. who used to supply to China as well. Today, on Bloomberg-UTV, I also saw news which was describing how we are heading towards a dip, the bailout money has been exhausted & no funds with the US & EU Govts. It has been cleared that US will take much more time than predicted to come out of economic mess it is in right now.

    For India, the inflation nos. are out. Food inflation has gone up & expect the RBI to hike interest rates by about 50 bps in a month or so.
    Personally, I have decided to wait & watch.


    In Some previous threads we discussed how China will eat indian ITES Market ...

    Now it has started happening ...


    China has replaced India as the primary destination of outsourcing and shared services for Asia-Pacific companies, according to the accounting firm KPMG.


    The survey also revealed low labor costs as one of the reasons for contracting outsourcing providers.

    Time to wakeup ...... :bab (35):
    when flats will cost so much ... in turn ....employee need higher salary ....
    so the shifting will happen to China....



    http://economictimes.indiatimes.com/infotech/ites/China-replaces-India-as-preferred-outsourcing-destination/articleshow/6171831.cms

    Greed wins :bab (59):
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  • Originally Posted by realacres
    Hey nice to see you back after a long time.
    Coming to this, the banks basically see the following:-

    Nature of work,
    The company,
    Savings,
    Age,
    Future Prospects. It is here where the speculation starts. First the banks offers the loan for 20 yrs & later say that 25 can also be done. Hence, at 20 yrs rate, they give more loan than that can be given, main reason being that post marriage the income will increase. This I have personally seen especially in case of ITGs as many ITGs marry ITGs (hey gals here:D). This is a step taken by the bank based on FUTURE INCOME, if fails, increase the loan duration.

    Man, do you know the way how banks were busy sanctioning loans before sub-prime crisis in US??? This is the sole reason of rising NPAs. You can also confirm the EMI:Income ratio as well if you have some known senior people in home loan section.

    Btw, I have personally seen a person's credit card limit being halved in less than 6 months after he took the home loan.

    What matters is not just the servicing of home loan EMIs but also making sure that your current lifestyle is not hampered after taking a home loan, that's all.

    i wish these "future earnings potential" were true!! even iw as under the impression that these builder sponsored Loan Agents are hungry after the numbers!! but its not as rosy as it appears to be!!

    One of my contacts, who got a decent deal recently needed to complete his loan formalities quickly since he was leaving the country for long term...of course, his first destination was SBI/LICHF stc, who flatly refused his eligibility since VPI component in the salary was almost 30% and no payout was done in the last 3 months, since it is paid half yearly (as per total CTC he was eligible for the loan amount he was looking for!!) with no where to go, he ultimately banked on so called Builder sponsored Agents, thinking there might be some relaxation... but it wasn't supposed to be and ultimately he had to cancel the booking :(

    I wish his application also was considered for "Future Earning Potential"....
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  • Unaffordable real-estate prices force retailers to shelve expansion plans

    Commercial sector performs with brains rather than heart. See the way the commercial sector is dealing in terms of RE:-

    High rental rates and scarcity of retail space in good locations are discouraging retailers from going ahead with their expansion plans. Existing unaffordable prices and sheer misbehaviour of real-estate developers are forming a roadblock to the growth of the organised retail industry in India.

    http://www.moneylife.in/article/8/7123.html
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