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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  • Just came across this article http://www.moneycontrol.com/news/cnbc-tv18-comments/its-time-to-buyhome_481495.html. It does not mention Pune but guess the same scenario (or even worse) might exist.
    With negative or flat appreciation for next 12 months, RE investment as compared to other options really sucks.
    CommentQuote
  • Cement Prices went down by 100Rs per 50 kg bag

    It seems like Cement prices have been reduced from Rs 300+ to 200+ in just four months .This is the clear evidence of how RE market is doing .
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  • You are right!

    Originally Posted by Venkytalks
    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?



    Venky,

    Spot on. Back to doing some "real" work finishing the product for Energy Management. Not surprisingly, given the long-term crisis coming up in Energy companies are moving aggressively into installing these systems which give them lots of insight and control into their Electrical Energy usage. We are only scratching the surface of what can be done so its an exciting area for Operational and Strategic BI and Analytics in the area of Electrical Energy.

    Gol.d has stealthily come back into the limelight once it became widely known that the "recovery" was just Govt throwing good money after bad to keep their power nd people in a Drug-induced stupor (liquidity beng the drug). Its nearing its previous highs and remains safely in a strong bull market. But the dark horse is Silver. Lagging behind Gol.d for a long time, silver has started galloping. So, it might be actually better to stock up on silver to bring it on par with Gol.d in your portfolio. In all cases, buy only solid, investment-grade metal. In a few years, eonomies going the way they are, it might be hard to actually find bullion in the market!!!

    Notwithstanding all the noise about India being an economicall strong country, please note that just a few years back we used to think we were a basket-case. Much of all this strength is pumped up and propped up by insane amounts of foreign "investments" via FIIs. These can and will go away in a jiffy in the coming crash which will have a larger on us in the real world due to job-losses and an already weak financial position. Therefore, the Markets as well as the Rupee will take greater hits when the $$$ takes its hit. As usual, and silver will be the winners by taking off.

    An interesting news about China's RE bubble. I read separate reports ...

    1. The Electricity Authority reported that around 64.5 million meters in urban areas were showing zero readings. Indicative of empty homes (or defective meters! :)

    2. A recent large survey by Sina.com across 100 cities showed 51% house vacancies in Beijing, 65% in Shanghai and 70% vacancies in Hunan.

    These are indicative of the kind of massive bubble in RE in China which is even bigger than the bubble in US. By my calculation the vacant homes in China can accomodate as much as 20% of the entire population!!!!

    Another interesting fact. In the last month, China reduced their US Treasury holdings by 11% to around $ 750 Billion. They should, at this rate be completely free of US Treasuries within the next one year. So much for China being affected by the upcoming Treasuries crash :).

    Just a few data points...

    cheers
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  • Hypocrite Society

    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.

    Originally Posted by aaj123
    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.

    You need to adjust the taxes, maintenance & importantly the capital gains tax which ranges between 20-30% based on the period of holding of the property. Man, if 14% would have been the appreciation, why do we see such a huge empty glut of housing across the city??? Why have the registrations in Pune dipped by 50% this quarter??

    As far as the so called prestige issue is concerned, tell me whether you live for what the society says or you do something which makes you happy?? See the world from your own eyes man & not from the society's. Society is the epitome of hypocrisy, has multiple standards for different people & I can give 100 examples for the same. Man, one of my friend stays on rent in a 3BR, owns a Skoda Laura, goes with his family on long vacation once a year & has atleast 18-20L in savings besides go_ld....& there is his neighbor, who has PURCHASED a 2BR, drives a alto & his holidays are never outside Maharashtra, let alone India & this is for the simple reason that most of his income goes in paying for the EMIs of his 50-52L flat. Now this fellow is successful according to society standards, but who is living a quality life?? I agree with fellow member who gave an eg. of 4 people riding on a scooter & owning a flat of 25L:o.

    Man, society gaayi bhaad main, I keep breaking the rules made by the hypocrites who consider themselves to be MORAL in the society. Make the most of life now.....remember it's your life & not the society's . If you go bankrupt tomorrow, the same society will laugh at you...infact it the only thing which society likes to do:- Laugh at other's failure :bab (35):.

    * If VK comments here, it would be like this:-

    Kuch to log kahenge, logon ka kaam hai kehna.......:D
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  • Where do you source your coin ? Very few options in market, 5-10%% charge from bank for coins.

    More later (I am also doing some real work).

    Any thoughts on shale gas energy in indo gangetic plains?



    Originally Posted by wiseman
    Venky,

    Spot on. Back to doing some "real" work finishing the product for Energy Management. Not surprisingly, given the long-term crisis coming up in Energy companies are moving aggressively into installing these systems which give them lots of insight and control into their Electrical Energy usage. We are only scratching the surface of what can be done so its an exciting area for Operational and Strategic BI and Analytics in the area of Electrical Energy.

    Gol.d has stealthily come back into the limelight once it became widely known that the "recovery" was just Govt throwing good money after bad to keep their power nd people in a Drug-induced stupor (liquidity beng the drug). Its nearing its previous highs and remains safely in a strong bull market. But the dark horse is Silver. Lagging behind Gol.d for a long time, silver has started galloping. So, it might be actually better to stock up on silver to bring it on par with Gol.d in your portfolio. In all cases, buy only solid, investment-grade metal. In a few years, eonomies going the way they are, it might be hard to actually find bullion in the market!!!

    Notwithstanding all the noise about India being an economicall strong country, please note that just a few years back we used to think we were a basket-case. Much of all this strength is pumped up and propped up by insane amounts of foreign "investments" via FIIs. These can and will go away in a jiffy in the coming crash which will have a larger on us in the real world due to job-losses and an already weak financial position. Therefore, the Markets as well as the Rupee will take greater hits when the $$$ takes its hit. As usual, and silver will be the winners by taking off.

    An interesting news about China's RE bubble. I read separate reports ...

    1. The Electricity Authority reported that around 64.5 million meters in urban areas were showing zero readings. Indicative of empty homes (or defective meters! :)

    2. A recent large survey by Sina.com across 100 cities showed 51% house vacancies in Beijing, 65% in Shanghai and 70% vacancies in Hunan.

    These are indicative of the kind of massive bubble in RE in China which is even bigger than the bubble in US. By my calculation the vacant homes in China can accomodate as much as 20% of the entire population!!!!

    Another interesting fact. In the last month, China reduced their US Treasury holdings by 11% to around $ 750 Billion. They should, at this rate be completely free of US Treasuries within the next one year. So much for China being affected by the upcoming Treasuries crash :).

    Just a few data points...

    cheers
    CommentQuote
  • Originally Posted by realacres
    Man, one of my friend stays on rent in a 3BR, owns a Skoda Laura, goes with his family on long vacation once a year & has atleast 18-20L in savings besides go_ld....& there is his neighbor, who has PURCHASED a 2BR, drives a alto & his holidays are never outside Maharashtra, let alone India


    And those who over stretch and buy out of fear, might spend vacations on the Ambegaon lake:D:D:D
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  • I am sure, friend of yours already own property either plot / shop / bunglow somewhere :)
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  • For a change this time I would like to agree with ‘wiseman’ seems this time around we are going to see real revolution(change) in energy sector. I think shell gas will be big thing

    Watch out if US opens up excess inventory of NG. Its surprising to see consistent price pressure on NG even after so called recovery from 2008 slump. Landscape of IPP(Independent power producer) in Us business have been rewritten because of constant price pressure on NG (electricity price is directly proportional to NG). Just compare oil and Henry hub NG graph for last 3 years in dollar terms.

    Substantial amount of bail out money was not invested until now as there were no project plans. But looking at the plans detailed on paper now, it looks like focus area will be solar and energy related inventions, one of them making electric car cost same as fossil fuel car by 2015 by investing on battery research and manufacturing superior batteries.

    I don’t how much all these new efforts will yield but definitely money is going into these things. I just dream that if we get alternative energy in India itself, we will get rid of all those huge import bills. We will have so much of money available for politicians for corruption that even they will keep counting for rest of life(provided all tax heaven countries go bankrupt).

    All wishful thinking but I guess its right time for energy sector there is so much lull for last 2 decade even though so much of effort have been made to find alternative.
    :bab (35):
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  • Originally Posted by realacres
    * If VK comments here, it would be like this:-

    Kuch to log kahenge, logon ka kaam hai kehna.......:D


    Real you put it excellently and concluded with a great song.
    I salute your attitude.

    Most of Indian society is driven by FEAR and GREED.
    CommentQuote
  • Originally Posted by realacres


    * If VK comments here, it would be like this:-

    Kuch to log kahenge, logon ka kaam hai kehna.......:D


    Thanks for remembering me dude. :bab (59):

    VK

    PS: And yaa i agree with you about society.. although i so far have not found the courage to do what i feel.. but slowly i think i am moving in that direction.
    CommentQuote
  • Double Dip

    Originally Posted by puser
    I am sure, friend of yours already own property either plot / shop / bunglow somewhere :)

    Well he has no property anywhere & he simply doesn't buy for the simple reason that he thinks that it makes no sense to put money in Pune at these prices. Being elder than me, he has wife + kid, but nowhere does his wife complaint of he not buying a home for the simple reason that she knows that they can buy one on any day as they have made sufficient savings. He has simple logic which I completely agree:- Buy if prices correct &/or some property is VFM. Till then keep saving & buy only with 30% loan max for not more than 5-10 years.
    Man, if house is the only thing which is your biggest investment, then you are wrong somewhere in finances coz the home loan EMI should always be less than your savings.

    Btw, the US growth has dipped & companies are not willing to hire more people now. The Fed chairman Bernanke has said that they will do whatever they can to fuel some growth. This just means printing more $$:bab (22):. Again, China too is stuck with US treasury bonds coz if the Chinese sell more than 10% of their holding, this will lead to devaluation of US $ & due to drop in $ valuation, their entire 90% bond value will be affected:bab (35):. Even India is wary of this & hence is focusing more on buying metals than keeping the Forex reserves in $ denomination.

    Here is a good link which throws more light on this:-

    http://www.bloomberg.com/news/2010-08-28/bernanke-says-fed-has-tools-to-prevent-a-recession-avoids-stimulus-pledge.html
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  • Is Hperinflation coming to the US?

    Originally Posted by realacres
    Well he has no property anywhere & he simply doesn't buy for the simple reason that he thinks that it makes no sense to put money in Pune at these prices. Being elder than me, he has wife + kid, but nowhere does his wife complaint of he not buying a home for the simple reason that she knows that they can buy one on any day as they have made sufficient savings. He has simple logic which I completely agree:- Buy if prices correct &/or some property is VFM. Till then keep saving & buy only with 30% loan max for not more than 5-10 years.
    Man, if house is the only thing which is your biggest investment, then you are wrong somewhere in finances coz the home loan EMI should always be less than your savings.

    Btw, the US growth has dipped & companies are not willing to hire more people now. The Fed chairman Bernanke has said that they will do whatever they can to fuel some growth. This just means printing more $$:bab (22):. Again, China too is stuck with US treasury bonds coz if the Chinese sell more than 10% of their holding, this will lead to devaluation of US $ & due to drop in $ valuation, their entire 90% bond value will be affected:bab (35):. Even India is wary of this & hence is focusing more on buying metals than keeping the Forex reserves in $ denomination.

    Here is a good link which throws more light on this:-

    http://www.bloomberg.com/news/2010-08-28/bernanke-says-fed-has-tools-to-prevent-a-recession-avoids-stimulus-pledge.html



    Hyperinflation is NOT Inflation in Steroids!

    This is the first wrong impression that most people have about it. Now let us see how Hyperinflation will come to America and soon too.

    First what is hyperinflation? It is the major loss of value in the currency of a country primarily due to the loss if confidence by its population and the world in general made worse by its monetary authority taking emergency (and wrong) measures to maintain confidence in it.

    And, not surprisingly, this happens only to currencies that have no backing of real assets (gol.d?) and are called fiat currencies.

    This is why, in a seemingly very quick span of time the currency seems to completely collapse. How will it start ...

    Everyone thinks China is in a bind since almost a trillion $$$ in US Treasuries (otherwise debt owed by the US to others) were held by China a while ago and they (and other countries who hold them) cannot afford to sell them as this will set the US into a hyperinflationary decline.

    Did anyone notice that just last month, China sold treasuries to effect a NET 11% decline in their holding to around $750 Billion (had mentioned this in another post a couple of days ago). At this rate, within the next 1-2 years they will be almost free of US debt. And then they can take steps that they would not now ... like decoupling from the US in trade and therefore lending them money ...

    Soon, as you notice, because the US is getting to be a very dangerous place to put their money in, more and more countries and institutions will start reducing their treasury holdings.

    Now the problem is this. To keep the economy afloat, the US will have to borrow more and more and more (they say debt will increase from current 12 Trillion to minimum 20 Trillion by 2020. And all this while others will be trying to reduce their exposure to US debt.

    So, how does the US continue to issue this debt? Here comes the FED to buy up all the treasuries issued by the treasury. One hand of the Govt issues and the other buys. Very soon this will ensure that $$$ printing will go to insane levels and this puts the $$$ in a potential loss-of-confidence situation. With the FED holding large part of the treasuries.

    The actual uncontrollable slide in value will start with a small fall in treasury yield and one of the too-big-to-fail banks deciding to sell treasuries to balance their books. The FED would naturally step in to buy. The computer program that sees this will then decide to throw a little more into the sale and others banks will catch on. Soon, like the Flash Crash that you saw some time ago, there will be an avalanche of treasuries coming up for sale at ever declining prices and no one else to take it up but the FED. This wiould be the beginning of the end for the $$$ and the start of massive loss of confidence and the calling of the bluff of the FED for the last 97 years ...

    When can this happen? Maybe 2011? wh knows?

    cheers
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  • Wiseman, if this happens, Rupee g_old will collapse, because of Rupee appreciation against dollar.

    The whole rationale of buying gol_d etf on BSE is Rupee depreciating against dollar.

    The reverse scenario you propose will wipe out g0ld investors in India.

    Contrarian view - dollar weakness and inflation will push up US rates (it cannot fall, already 0) - dollar will rise - dollar carry trade will fall - Indian equity will crash, Rupee will depreciate, g0ld etf on BSE will appreciate like crazy.

    Tough call
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  • Updates about Direct Tax Code

    The tax slabs are much, much lower than expected :(. Nothing new to be frank, went through serious discussion about this yesterday. Man, they are putting something our of your pocket & giving it back. What's the use?

    Here are some updates:-

    http://sify.com/finance/dtc-bill-tabled-in-ls-proposes-exemption-limit-of-rs-2-lakh-news-tax-ki4pEgcdigf.html

    http://www.moneycontrol.com/news/economy/fm-introduces-direct-tax-code-billparliament_481711.html
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