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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  • isnt that negative, when you have to pay up 10% interest to bank ?
    People who considers house for rental income have pathetic financial sense. One of my relative got 25L from ancestor property and bought an industrial plot, rented out that plot at 20K per month to someone for industrial use.


    Originally Posted by hitmady
    The place where I'm renting capitalization rate is 4%. Here price shud fall from 20L to 12L for me to buy this property :D
    Capitalization limit: USA = 7% (5% mortgage-rate + maintenance charges). India = 11% (10% interest + maintenance).
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  • Originally Posted by aditi sharma
    isnt that negative, when you have to pay up 10% interest to bank ?


    That's why required capitalization-rate for India is 11%.
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  • Originally Posted by aditi sharma
    isnt that negative, when you have to pay up 10% interest to bank ?
    People who considers house for rental income have pathetic financial sense. One of my relative got 25L from ancestor property and bought an industrial plot, rented out that plot at 20K per month to someone for industrial use.

    At current times, the return on commercial spaces is better, be it office space or industrial one. Don't know why investors don't look outside residential spaces. Even abeerbagul had given similar eg. of Bhosari industrial area.
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  • Hi Wiseman,

    Good to see you around here once again. You seem to have reduced your prolific output - doing some real work for a change?

    Let us see some more of your insights.

    So what is your take on

    1. Gol_D in dollars and in Rupees?
    2. Gol_D coins vs. Sense_x Gol_D etf?
    3. Private investment trust for commercial property (see todays ET on HNI investments)
    4. Chinese RE - crash to come or already crashed sufficiently in 2007-9?
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  • Originally Posted by aditi sharma
    isnt that negative, when you have to pay up 10% interest to bank ?
    People who considers house for rental income have pathetic financial sense. One of my relative got 25L from ancestor property and bought an industrial plot, rented out that plot at 20K per month to someone for industrial use.


    Your argument is only partially right. But then consider, for example, the fact that many people consider as a good investment. Now if you buy , does it pay you an annual rent? No. It has certain storage cost associated with it too. yet it is considered a good investment because of the perception that it retains value over a period of time adjusted for inflation. I think this is the logic people apply when investing in residential property rather than considerations of annual rental yield.
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  • Originally Posted by aaj123
    Your argument is only partially right. But then consider, for example, the fact that many people consider as a good investment. Now if you buy , does it pay you an annual rent? No. It has certain storage cost associated with it too. yet it is considered a good investment because of the perception that it retains value over a period of time adjusted for inflation. I think this is the logic people apply when investing in residential property rather than considerations of annual rental yield.


    There is a problem in this website. It is not allowing me to edit a mistake in my post. Even if I make changes and save, the post did not get edited. Here is what I wanted to say:


    Your argument is only partially right. But then consider, for example, the fact that many people consider as a good investment. Now if you buy , does it pay you an annual rent? No. It has certain storage cost associated with it too. yet it is considered a good investment because of the perception that retains value over a period of time adjusted for inflation. I think this is the logic people apply when investing in residential property rather than considerations of annual rental yield.
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  • Originally Posted by aaj123
    Your argument is only partially right. But then consider, for example, the fact that many people consider as a good investment. Now if you buy , does it pay you an annual rent? No. It has certain storage cost associated with it too. yet it is considered a good investment because of the perception that it retains value over a period of time adjusted for inflation. I think this is the logic people apply when investing in residential property rather than considerations of annual rental yield.


    Very strange... I have no idea why this forum is removing the word ' G O L D' from any post that I make. Hence my posts above sound strange. :)
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  • Originally Posted by aaj123
    There is a problem in this website. It is not allowing me to edit a mistake in my post. Even if I make changes and save, the post did not get edited.

    Log out & log in again.

    Here is what I wanted to say:

    Your argument is only partially right. But then consider, for example, the fact that many people consider as a good investment. Now if you buy , does it pay you an annual rent? No. It has certain storage cost associated with it too. yet it is considered a good investment because of the perception that retains value over a period of time adjusted for inflation. I think this is the logic people apply when investing in residential property rather than considerations of annual rental yield.

    Agreed that there is storage or stocking cost associated with it & this can be solely recovered by adding this amount at the time of sale in considered price. However, at the current prices of RE, what appreciation do you expect in next 2-3 yrs?? Hardly anything when compared to the invested amount + other miscellaneous costs. What you said holds true if this had been 2005.
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  • Originally Posted by realacres
    Log out & log in again.


    Agreed that there is storage or stocking cost associated with it & this can be solely recovered by adding this amount at the time of sale in considered price. However, at the current prices of RE, what appreciation do you expect in next 2-3 yrs?? Hardly anything when compared to the invested amount + other miscellaneous costs. What you said holds true if this had been 2005.


    Ok so now you accept the idea that simply a low rental yield figure does not by itself mean that an investment is bad. This being the case, I ask you by what criteria you say that in 2005, residential prices were reasonable and that now they are not? Remember, you musn't use the rent to price argument in your justification.
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  • Originally Posted by aaj123
    Ok so now you accept the idea that simply a low rental yield figure does not by itself mean that an investment is bad. This being the case, I ask you by what criteria you say that in 2005, residential prices were reasonable and that now they are not? Remember, you musn't use the rent to price argument in your justification.

    Eg. Flats costing about 9.5-11L at Sinhagad rd. were getting rental of 5.5k/month. Now the price of 2BR in similar locality is atleast 40-45L while the rental is 10-11k. So, in early days, it made sense to buy than to rent while now it is better to be on rent that to buy. Now do you expect 45L flat to be worth 90L-1.2Cr in next 3-4 yrs???? If yes, go ahead & buy.
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  • Originally Posted by realacres
    Eg. Flats costing about 9.5-11L at Sinhagad rd. were getting rental of 5.5k/month. Now the price of 2BR in similar locality is atleast 40-45L while the rental is 10-11k. So, in early days, it made sense to buy than to rent while now it is better to be on rent that to buy. Now do you expect 45L flat to be worth 90L-1.2Cr in next 3-4 yrs???? If yes, go ahead & buy.


    In India, owning a house comes with its own prestige and societal expectations on which it is difficult to put a price. hence the whole idea that people will make these precise breakeven calculations to decide whether to buy or rent is not applicable to India IMO. The fact that its much cheaper to rent than to buy in India is because you pay a price for the prestige and societal approval that comes with buying a house. For example, if it were really the same cost per month to buy or rent, you would see everyone plunge into buying rather than renting in India whereas this is not that obvious in a different country like US where more strict financial criteria may be applied in the decision making. hence its foolish to expect a rental return greater than bank interest rate on Indian residential property.
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  • Originally Posted by aaj123
    hence its foolish to expect a rental return greater than bank interest rate on Indian residential property.


    Buddy.. why it is foolish to expect rental return to be greater than bank interest?
    If you don't know economics says the last place to put your money is bank. Because that's the place where you get least ROI but more safety. If your house is giving lesser return than Bank then your investment sucks.. and sucks big time....
    Btw, why r u forgetting conveniently that the ROI on house was great till 2005 even in India?

    I would say.. the people who are buying currently for renting...... was I searching some group to name as "foolish"??
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  • Originally Posted by maheshk2k
    Buddy.. why it is foolish to expect rental return to be greater than bank interest?
    If you don't know economics says the last place to put your money is bank. Because that's the place where you get least ROI but more safety. If your house is giving lesser return than Bank then your investment sucks.. and sucks big time....
    Btw, why r u forgetting conveniently that the ROI on house was great till 2005 even in India?

    I would say.. the people who are buying currently for renting...... was I searching some group to name as "foolish"??


    Ofcourse return on your property should be greater than bank interest rate. What I meant was that the rental yield alone need not be greater than bank interest rate. For instance, rental yield may be 4% (as is typical in India) and house price appreciation may be 10%. So my total return is 14%. If this is greater than my bank interest rate of 9%, the investment is fine. Ofcourse this doesn't even count the prestige factor of owning a house which for many people goes beyond pure financial reasoning.
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  • Originally Posted by aaj123
    Ok so now you accept the idea that simply a low rental yield figure does not by itself mean that an investment is bad. This being the case, I ask you by what criteria you say that in 2005, residential prices were reasonable and that now they are not? Remember, you musn't use the rent to price argument in your justification.


    Why not, because the numbers don't add up? That is not a good reason.
    Tell me some good reason!
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  • Originally Posted by aaj123
    In India, owning a house comes with its own prestige and societal expectations on which it is difficult to put a price. hence the whole idea that people will make these precise breakeven calculations to decide whether to buy or rent is not applicable to India IMO.



    Smart people use these dialogs to justify their irrational buying, because their numbers dont add up.

    No one buys if he thinks that prices are going to fall tomorrow. If you are saying that you are buying for above reasons when you know that prices are going to fall tomorrow, you are lying.

    When the question is 1/2 Cr, there are not emotional strings attached to it, unless you have 10Cr in your savings account.
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