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?

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  • The argument continues!

    Originally Posted by rocknrolls
    I think this renting argument goes overboard many times. Its advised to rent as if renting/stock investment is the best medicine for every house buyer's woes. I beg to differ here though.

    1. If I rent a house (a big plush house in posh area for peanuts), I can still be kicked out by my landlord on a month's notice. I don't want to see myself running around for a new house to be rented in the same locality.

    2. I have school going kids. Although renting gives me the flexibility to rent anywhere in the city, it does not guarantee admission to a good school in the new area......

    The argument continues. The bottom line is:

    1) All those who believe, house prices is NOT going to fall tomorrow and if at all, will be 10-20% and will again recover in 1 yrs time, they will buy. And to justify their buying, they start cursing renting, even if most of them(Can I say 90%, I guess yes) have good experience renting and is never kicked out of the house on short notice.

    2) All Others who believe prices are going to fall in future, they are in all praise of renting, how its cheap and all.

    Point I want to make is, real reason why one buys house is NOT because of problems with renting, but because he/she believes that prices are not going to fall tomorrow. Anyone disagree?

    Did not meet any one who buys(for self use) when he believes prices are going to fall tomorrow, but is tired of renting, so buys.
  • Originally Posted by Munish Malhautra
    I have a B-School graduate(topper in economics) cousin of mine working as a merchant banker with a Japanese company in Mumbai literally lived like a hermit/brahmchari/miser for about 30 yrs. I never saw him spend money on anything more than reasonable, forget about luxury. Now he got married his life suddenly transformed, he has been earning a decent salary which he always use to earn due to his qualifications and past academics. After this transformation in his life(dont know how), he has bought a 2-bhk house in Mumbai's hiranadani for 1.5cr, taking a loan of 1.1cr, an EMI of 1 Lac pm. Imagine a guy sound in economics leveraging over-aggressively. Mind you, rental in same society for 2 bhk is 35K

    I guess there were multiple top B-school graduates running Lehman brothers.

    Point is top B-school graduate is NO guarantee of "Always right" They can also go wrong.

    In this case time will tell, no one knows today.
    We all can only wish good luck to him.
  • I think the point is being missed ENTIRELY!

    Originally Posted by pcpune
    :), So when did the senior member suggest - "Never Buy" ? Infact, all of us are on this forum bcos we want a property in Pune.

    The question is -- WHEN to BUY and at WHAT VALUE ?

    Senior members have only suggested time and again - rent for 2-3 years, get good enough cash under your belt and then take the plunge in 2013-2015.

    Todays hype,builder cheatings,rent:sale ratios, interest rates,infra in Pune,etc are all stacked up against a property purchase of Pune.

    Well, but for some, " own house" sickness or happiness is more important than financial stability or future risks - So Be IT.

    We are advising all to think PRACTICALLY not EMOTIONALLY.


    pcpune has hit the nail on its head in terms of what exactly the "seniors" are reccommending.

    Its descended into a "buy" Vs "Rent" argument (and that lead us nowhere). This is what we are saying ...

    Until you get everything right (including the price) rent. Once you have everything right (including spare savings even after putting down a good chunk of your home as well as have an income that will comfortably cover the EMI under any circumstances), then buy your home.

    This way, if people are picky and choosy, builders will not be acting as though buyers need them. They will behave as though they need buyers!!!:bab (45):

    Have you seen any other industry (other than the Anti-virus industry) where the seller lords over the buyer?!

    In life, taking rigid positions like "NEVER" do this or "ALWAYS" do that is not necessarily beneficial to oneself! Everything changes in life. Can you afford to NOT change (IF SITUATION DEMANDS)?

  • Originally Posted by RAJESHP
    Agree with you except for 30% of total price, I would follow 50% of the house price. Did not understand point 2 though! we are talking self use right?

    Basically both points depend on age factor as to how many more years left for earning.
    30% is acceptable for people under 40, 50% or above is good for people over 40.
  • Originally Posted by Munish Malhautra
    Basically both points depend on age factor as to how many more years left for earning.
    30% is acceptable for people under 40, 50% or above is good for people over 40.

    I tend to disagree coz irrespective of age, down-payment has to be the same. So, a young fellow should buy who has more savings & better incomes, rest should buy late, else, one buys early, with more loan %age & then wastes his gol_den years of life serving the builder & bank.

    Man, buying house is similar to getting should be fixed on the target, & be settled to take care of family...if not stay single like rent in case of RE!! ;)
  • Originally Posted by RAJESHP
    I guess there were multiple top B-school graduates running Lehman brothers.

    Point is top B-school graduate is NO guarantee of "Always right" They can also go wrong.

    In this case time will tell, no one knows today.
    We all can only wish good luck to him.

    U are absolutely right. I had a lot of mixed feelings when i heard this from the guy.
    See even though a property in Mumbai will always be VFM, but buying is re-sale and that too in a locality which is luxury, is a bit over aggressive specially with the tough times expected.
    Looks like the next 5-6 years are going to be tough for everyone.
  • my comments in bold
    Originally Posted by realacres
    I tend to disagree coz irrespective of age, down-payment has to be the same. So, a young fellow should buy who has more savings & better incomes, rest should buy late, else, one buys early, with more loan %age & then wastes his gol_den years of life serving the builder & bank.

    Agreed but partially. There is a big factor called Fear Factor and psychology which is more obvious for a person over 40. A person over 40 is basically from the previous generation and hence his risk taking ability is limited.
    There are many conditions which directly effect(family, job, business situation, spending habits etc) though but lets take an eg A person at 45 years with saving capacity of 10 lacs per annum has 10 more years left in him, his total saving potential is 100 lacs. And a person of 30 years with saving potential of 5 lacs pa has total earning potential of 125 lacs.(assuming 55 as retirement for both)

    Man, buying house is similar to getting should be fixed on the target, & be settled to take care of family...if not stay single like rent in case of RE!! ;)

    Hahaha-I got married at 25 so did i over-leverage?
  • Well, I disagree that previous generation didn't have risk taking abilities. Most of the companies where current generations work are built by previous generations. Imagine Infy without Murthy or Reliance without Dhirubhai. Man, our generation feels great (though under false pretext) that we are more successful. It is mere availability of loans which made this happen.....put downpayment at 60% & have interest rate of 15%, even 35 yr old will not dare to buy!!

    Our generation is jumping around because of RENTED MONEY, get the difference man:bab (35):.
    Originally Posted by Munish Malhautra
    Hahaha-I got married at 25 so did i over-leverage?

    It depends man, I can't say.....if one gets good deal & is capable of handling the fire, go ahead.;) I can't say of leveraging, but man, you lost freedom toooo early!!:D However, 25 is under-age marriage in case of boys. This is bal-vivah of 21st century:D.
  • What i said and meant was an older person nearing retirement will prefer to give a higher DP than a younger person due to his limited capacity. just for eg-I can take a risk of lesser DP(30%) and higher rate of interest(12%) but my father will prefer higher DP(50%+) and lower interest(7%).

    Lets focus on AAM Admi and not AMBANI else the discussion will go somewhere else:)
  • Btw at 25 i got a good deal:):)
  • Bad news for realtors, hope for buyers in Mumbai

    Real estate experts say sky-high property prices in the city cannot be sustained. Meanwhile, 250 million square feet of residential property lies unsold.

    Here’s good news for would-be home owners. Astronomical prices, the norm in the city now, can’t be sustained for long. International property consultants have predicted this going by falling buy-sell transactions.

    “We estimate the current unsold inventory of residential property in five major cities at 250 million square feet. The absorption of residential space in key cities has dropped in the last couple of quarters,” Llyod Cardoza, analyst with HDFC Securities, wrote in a note to clients last week. “According to our analysis, this is due to seasonal effect and possibly the run-up in residential rates.”

    Sanjay Dutt, CEO and business head, Jones Lang LaSalle Meghraj, wrote in a note: “There is yet another reason for the concern over a bubble building. All developers who had ventured to buy land overseas or across India are now buying only in their primary cities. Mumbai developers are concentrating on acquiring land solely in Mumbai, and the same is happening in Gurgaon.

    “Investments are now chasing these tier one markets — and if this continues, there is certainly the probability of a bubble in residential property by the end of the year.

    Ambar Maheshwari, head, investment advisory, DTZ International Property Advisers, said residential prices have gone to levels that are unsustainable. “Bulk level housing and commercial projects that were launched in the higher range are not getting enough clients at that pricing.

    There is a lot of euphoria at this point with the markets doing well, but there has been a huge increase in prices and there will be a correction pretty soon; the driver could be anything from a double dip in the US or a European economy not faring well. Even registration numbers at present are less than what they were at the beginning of the year.”

    But there are others who say a fall in prices is unlikely now for both structural and investor-demand reasons. A consultant said prices may not fall easily because there are only two or three land bank aggregators in Mumbai.

    “Once they have the major chunk of land parcel, they can release and dominate prices as they want. So it is not necessary that we would see a correction, and these developers are quite aggressive,” he added.

    Abhishek Lodha, managing director, Lodha Developers, said: “I think in the next three-six months, prices would remain fairly stable and reasonable. I don’t see any immediate decline.”

    Akshay Kulkarni, executive director of Cushman and Wakefield, concurred. “We do not expect a drop in prices. Even if we believe that sales are investor-led, they are coming in because they see value here.”Some developers say land prices are to blame for the predicament.

    “If I don’t get land cheap, how can I sell cheap? I do want to sell cheap, but look at the land auctions — prices are just going up,” said Vikas Oberoi of Oberoi Constructions.

    Realty prices in the city have risen more than 50% over the last year. Some residential developments in central Mumbai, which had seen a peak price of Rs30,000 per sq ft during the late-2007 boom, is currently quoting Rs38,000 per sq ft.

    “The kind of volumes we witnessed in the first half of 2010 has come down dramatically. However, liquidity in the market has not dropped. Neither has the appetite for investment,” Dutt wrote.

    Still, private equity firms are sceptical about investing in central Mumbai, where oversupply is set to pull prices southwards.

    Dutt said banks and financial institutions are eager to exit non-performing assets for cash. A lot of money has been lent to realtors who have an unrelenting focus on high-end projects. “If this continues, we may see a number of high-value bad loans in the market in a couple of years,” Dutt wrote. “Some of the larger high-value residential projects in Mumbai will undergo at least two property cycles before completion.
  • Originally Posted by realacres
    It depends man, I can't say.....if one gets good deal & is capable of handling the fire, go ahead.;) I can't say of leveraging, but man, you lost freedom toooo early!!:D However, 25 is under-age marriage in case of boys. This is bal-vivah of 21st century:D.

    then u expect one to marry? at 35?
  • Correct in general ...

    Originally Posted by Munish Malhautra
    my comments in bold

    Hahaha-I got married at 25 so did i over-leverage?


    Overall you are correct that people over 40 (or let me say, older people) are less risky (assuming that their earning years are decreasing) and therefore they would like to be safe about it.

    But this is a theory which is based on salaried people. If you look at business people (especially successful business people, like Real is pointing to like NRN, etc), they are not only moneyed but also have a balanced approach to risk, calculating it and entering only when the calculations are in their favor (while it looks risky to us, they do their calculations).

    For example, when I was salaried I took less risks and invested almost all my money into companies that had large amounts of cash (earned through business over long periods of time) and were leaders in their business continuing to throw out large amounts of cash. This has paid off very handsomely as pcpune has been stating.

    Today (well over 40) I take tremendous risks with 5% of my portfolio (while stashing the remaining in stocks bought long ago, RE bought long ago and gol.d (bought some time ago).

    Throughout life risks must be taken but with calculation as to what are the potential loss Vs gain (risk-return ratio). If your calculations are correct, you will do very well. If not, you lose 5% of your wealth (and can still live with it). In either case you learn some valuable lessons which could stand you in good stead when you get into the next risky venture!!! :D

  • Originally Posted by dhinchek
    nice info... thanks -

    :) Your aritical was really intresting & it shows your depth of knowledge.
    But my question is that how economy will run if you do not spend the money on infrastructure.WHo will get the job n if job is not there how you will pay your rent of think about buying a home.Yes it is true many people are buying now as a investment purpose.But it also a safe bet in three way 1 you will save the money by not paying the rent 2. you will get the tax dedution on interest 3.there will be price appriciation every year.
    For me its a win-2 situation.I will agree with you but I am not finding anything in your support.

    Trust the same is ok.
  • Mkts are fine but real estate is in trouble: Deepak Parekh

    Deepak Parekh, chairman, HDFC is not among the worried men who are circumspect of the rising markets. Not just yet. Speaking to CNBC-TV18, the country's most famous banker said the market is not sitting on a bubble, nor will the flood of initial public offerings (IPOs) take away liquidity from the system.
    He is however, very concerned about the commercial real estate space on account of over-supply. "There is a huge glut in commercial real estate sector and prices will come down soon as there are no takers," he said adding developers will have to reduce commercial real-estate prices atleast by 10% to get rid of their stock.

    Read full story here...