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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  • A good article on debt

    http://www.economist.com/node/16397110?story_id=16397110

    "MAN is born free but is everywhere in debt. In the rich world, getting hold of your first credit card is a rite of passage far more important for your daily life than casting your first vote. Buying your first home normally requires taking on a debt several times the size of your annual income. And even if you shun the temptation of borrowing to indulge yourself, you are still saddled with your portion of the national debt. "
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  • Some global updates on RE

    Property prices in Singapore set to fall as transaction volumes dip by up to 88% in some districts:-

    http://www.propertywire.com/news/asia/singapore-property-price-falls-201006174228.html

    Developers in Singapore holding off launching new property projects, according to analysts:-

    http://www.propertywire.com/news/asia/singapore-real-estate-launches-201006214240.html

    Real estate prices flat or falling in Northern Emirates, new property report indicates:-

    http://www.propertywire.com/news/middle-east/-northern-emirates-real-estate-201007224337.html

    And now the US as usual;

    Number of properties being put up for sale in US rises, two separate reports show:-

    http://www.propertywire.com/news/north-america/us-real-estate-inventory-201007234340.html

    So, RE is correcting in far east, middle east/west asia & the west. Man, where does India lie & especially Pune?? Jupiter?:D

    Btw, the Mumbai RE sales have fallen by 26% month-on-month.
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  • We might fall less, but if everywhere there is downward trend , we will also follow suit.
    Iam talking about Delhi NCR region.

    Pune guys are more optimist, and may be for some closely held secrets. So Iam not sure of Pune.
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  • Just forgot to mention in prevoius post:-

    Digvijay, I like your posts though on some points we tend to differ. However, it is good as it opens up other avenues of thinking:).

    Btw, you are close to 250 posts, where were you for so many days then?? Delhi thread?:bab (35): You should have been here before coz various aspects of RE in general is discussed here other than mere projects + the forum has some of the most though provoking active members as well :).
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  • Originally Posted by aditi sharma
    http://www.economist.com/node/16397110?story_id=16397110

    "MAN is born free but is everywhere in debt. In the rich world, getting hold of your first credit card is a rite of passage far more important for your daily life than casting your first vote. Buying your first home normally requires taking on a debt several times the size of your annual income. And even if you shun the temptation of borrowing to indulge yourself, you are still saddled with your portion of the national debt. "



    Brilliant article I must say. Thanks for posting
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  • Thanks Aditi Sharma, a very nice and thought provoking article from Economist.

    Credit is bad because it is viewed as someone else's money and gets mis-epent/misallocated/wasted in capital destructive ways

    Indian RE is a good example - IT guys (or does G stand for geniuses?) bought flats they did not need, just because they got easy credit. Why should a programmer have 4 flats and give out 3 on rent - is that any kind of sensible choice? Why would someone pay crores to invite misery on himself?

    Easy credit clouds one's judgement and makes one waste money.
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  • RBI rate hikes

    Nice link aditi. And as said before, the RBI will be doing it today, yet again :- Hike the lending rates!! This would put more pressure on banks to hike auto, home loans & the consumers will get hit. Everything will be clear by today afternoon. Let's see what happens.
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  • Update

    Hey, just got the update:-

    RBI hikes repo rate by 25 bps (at 5.75%) and reverse repo rate by 50 bps (at 4.50%).:bab (6):
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  • Hotel Leela scraped

    http://www.realtyplusmag.com/rpnewsletter/fullstory.asp?news_id=9499&cat_id=1

    "Hotel Leela had earlier planned to build a hotel on the land parcel along with service apartments but, company source says “the plan has been changed as the Pune market looks saturated.” "
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  • Originally Posted by aditi sharma
    http://www.realtyplusmag.com/rpnewsletter/fullstory.asp?news_id=9499&cat_id=1

    "Hotel Leela had earlier planned to build a hotel on the land parcel along with service apartments but, company source says “the plan has been changed as the Pune market looks saturated.” "


    Hotel leela has sold land bought for 80 Crore for 280 Crore.

    Why go to the trouble of building and operating hotels when you can just sell empty land and make 250% profit in a few years?
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  • Venky,
    Land deals have always a black component. What will be published in press is what there is 'on paper'. We dont know inside details so I wont speculate.
    But consider this, If they want to expand in pune in future, they wont get land in 280cr either. The land pricing shows, builder are able to rip more profit from residential projects rather than commercial as Lunkad is planning a residential project on this land.

    Originally Posted by Venkytalks
    Hotel leela has sold land bought for 80 Crore for 280 Crore.

    Why go to the trouble of building and operating hotels when you can just sell empty land and make 250% profit in a few years?
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  • Originally Posted by aditi sharma
    Venky,
    Land deals have always a black component. What will be published in press is what there is 'on paper'. We dont know inside details so I wont speculate.
    But consider this, If they want to expand in pune in future, they wont get land in 280cr either.


    Agreed, Aditi.

    Leela must have fallen out with politicians. Maybe they were forced to sell the land against their will!!!

    Also, another possibility is that this land must have been sold by a politician long ago by giving hotel land use, because at that time only that was possible. But the intention all along might have been to park the land with the hotel to get immediate money and later convert the usage to reap illegitimate rewards all over again - double rewards scheme. All the politician has to do is strike a deal with the hotel owner, who has the capital. Everyone makes money - politician, leela, and the new builder.
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  • It is a good deal for Leela.. I don't think they are doing so great and operating in Pune would maybe have resulted in losses.. Having a hotel in the city for office community would be better for Gateway kind of hotels and I am not sure if Leela has a brand on that range..

    Politicians take their cut being the silent partner in such ventures.. as high as 50% just for easing out the deal and getting necessary approvals

    Originally Posted by Venkytalks
    Agreed, Aditi.

    Leela must have fallen out with politicians. Maybe they were forced to sell the land against their will!!!

    Also, another possibility is that this land must have been sold by a politician long ago by giving hotel land use, because at that time only that was possible. But the intention all along might have been to park the land with the hotel to get immediate money and later convert the usage to reap illegitimate rewards all over again - double rewards scheme. All the politician has to do is strike a deal with the hotel owner, who has the capital. Everyone makes money - politician, leela, and the new builder.
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  • Hello real, people tend to differ and thts abosolutely normal. Infact this causes healty discussions and gives us more perceptions.

    But I really liked your initial analysis regarding present situations of Pune( infact most of India) real estate. All most all points are valid and true.

    Yes I found the Pune forum the most active and insightful.



    Originally Posted by realacres
    Just forgot to mention in prevoius post:-

    Digvijay, I like your posts though on some points we tend to differ. However, it is good as it opens up other avenues of thinking:).

    Btw, you are close to 250 posts, where were you for so many days then?? Delhi thread?:bab (35): You should have been here before coz various aspects of RE in general is discussed here other than mere projects + the forum has some of the most though provoking active members as well :).
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  • Originally Posted by aditi sharma
    http://www.realtyplusmag.com/rpnewsletter/fullstory.asp?news_id=9499&cat_id=1

    "Hotel Leela had earlier planned to build a hotel on the land parcel along with service apartments but, company source says “the plan has been changed as the Pune market looks saturated.” "

    Oh, it means Leela Kempinski (proposed name:D) is gone man!! I don't know where it was going to come up, but it was in east Pune (they used to mention about 4 km from KP ;), man why the hotel too states this, why not directly say Kharadi, Yerwada etc? ) on 4 acres of land.

    Btw, does anyone knows when Hyatt, Vimannagar is going to open?? It is located adjoining to Hotel Ibis. Man, this is one thing which I like about east Pune:- really good hotels:).
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