Hereby I will prove how the realty boomers arguments are false.

What are the boomers arguments?

1.) Buy today, houses always increase in value in the long run.
WRONG. House prices cannot increase more than incomes in the long run. This is obvious if you think about it. If house prices go up more than people can afford to pay, buying stops, like it has stopped now.
Even Warren Buffett have pointed out that houses don't increase in intrinsic value. Unless there's a bubble or a crash, house prices simply reflect current salaries and interest rates. If a house is 100 years old, it's value in sheltering you is exactly the same as it was 100 years ago. Then came the maintenance as the house didn't renovate itself. It also has taxes, and insurance - costs that always increase and never go away. The price of the house went up about as much as salaries went up.
To put this is simple perspective, vegetable were costing Rs.5-6/kg when 5 digit salary was a rarity.
Today, the prices have gone up by about 4 times but so have the salaries. So, sounds very much like the reasoning people use now when they talk about how much their father's house appreciated "in the long run" without considering that salaries rose a proportional amount.

2.) Renting is just wastage of money.
WRONG. As said before renting is now much cheaper per month than owning. If you don't rent, you either:

* Have a mortgage, in which case you are throwing away money on interest, tax, insurance, maintenance, costs that increase forever.
* Own outright, in which case you are throwing away the extra income you could get by converting your house to cash, investing in bonds, and renting a similar place to live for much less money. This extra income is sufficient for emergency expenses,retirement etc.

Either way, owners lose much more money every month than renters and that's assuming prices don't correct to very high level & everything is smooth in the economy.

3.) As a renter, you won't have any money left as you will spend them on vacations,cars & hence won't have equity/savings etc.
WRONG. Equity is just money. Renters are actually in a better position to build equity/savings through investing in anything but housing. Renters can get rich much faster than owners, just by investing in conservative stocks & bonds.

* Owners are losing every month by paying much more for interest than they would pay for rent. The tax deduction does not come close to making owing competitive with renting.
* Owners must pay taxes simply to own a house. That is not true of stocks, bonds, or any other asset that can build equity/savings. Only houses are such a guaranteed drain on cash.
* Owners must insure a house, but not most other investments.
* Owners must pay to repair a house, but not a stock or a bond.
* Owners lose their money as house prices reduce. The EMI's remain constant in spite of reduction in rates. At the end of loan tenure, they would have paid almost twice than that of current renters who will buy at logical rates. Keep interest rates in mind. Most of the EMI is not principal amount but interest.

4.) There are great tax advantages to owning a house.
WRONG. Many people believe you can just reduce your income tax by the amount you pay in interest, but they are wrong. Buyers may not deduct interest from income tax; they deduct interest from taxable income. And even then, the tax advantage is not significant compared to the large monthly loss from owning.

If you don't own a house but want to live in one, your choice is to rent a house or rent money to buy a house. To rent money is to take out a loan. A mortgage is a money-rental agreement. House renters take no risk at all, but money-renting owners take on the huge risk of falling house prices, as well as all the costs of repairs, insurance, property taxes, etc.

5.) RE is based on local factors, it's not a national phenomenon. RE of Delhi-NCR,Bangalore & rest of the cities has nothing to do with Pune RE.
WRONG. Lending rates remain the same throughout the country. ALL loans are harder to get. This will drive prices down everywhere.

6.) A rental house provides good income. So, you can rent if you have purchased as investment.
WRONG. Rental houses provide very poor income in hyped areas and certainly cannot cover mortgage payments. Remember there is almost 300% difference between EMIs & rent for the same house.

It's pointless to do the work of being a landlord if you can make more money with no risk, no work, and no state income tax by investing in assured good returns bond.

7.) If owning is a loss in monthly cash flow, but appreciation will make up for it.
WRONG. Appreciation is negative. Prices are going down. It only adds to the injury of already high EMI's.

8.) As soon as prices drop a little, the number of buyers on the sidelines willing to jump back in increases.
WRONG. There are very few buyers left, and those who do want to buy will be limited by increasing difficulty of borrowing now that many house owners are near bankrupt as they don't save anything at the end of the month due to high EMI's.
No one has to buy, but there will be more and more people who have no choice but to sell as their payments rise. That will keep driving prices downward for a long time.

9.) House prices never fall atleast in Pune.
WRONG. If you see the RE scenario of 1996, prices crashed by 50% & took a whole 7+ years to recover.
Exact 1996 scenario may not be there today but strong correction is inevitable across the city.

10.) House prices don't fall to zero like stock prices, so it's safer to invest in real estate.
WRONG. House prices won't be zero, but the equity or the principal amount you paid can be zero or even negative. What you will pay as EMIs later in actual terms is not for the principal amount but only the interest as house prices dip. So, you will be only serving the bank.

11.) Prices will soften gradually, won't crash immediately.
WRONG. Prices are falling off a cliff. No one knows exactly what will happen, but it looks like prices will continue to fall for long time. These are just more manipulation of buyer emotions, to get them to buy even while prices are falling.

12.) The bubble prices were driven by supply and demand alone.
WRONG. Prices were driven by low interest rates and risky loans & good returns for investors in initial phases of boom in 2004-05.
Prices went up, interest rates went up & buyers savings went down. So prices are violating the most basic assumptions about supply and demand.

13.) There is lack of land.
WRONG. Ample of land is available & continue to be even in future in Pune. Sales volume are down. Even in Japan (small country with less land), prices went down. Current prices here are the same as that of 23 years ago. If we really had a housing shortage, there would not be so many vacant rentals.

14.) If you don't own, you'll live in a cheap neighborhood later.
WRONG. For the any given monthly payment, you can rent a much better house than you can buy. Renters live better, not worse. There are downsides to renting, such as being told to move at the end of your lease, or having your rent raised, but since there are thousands of vacant rentals, you can take your pick and be quite happy renting during the crash. There are similar but worse problems for owners anyway, such as being fired and losing your house, or having your interest rate and property taxes adjust upward. Remember, property taxes are forever.

15.) There's always someone predicting a real estate crash.
TRUE, yet irrelevant. There are very real crashes every decade or so. Even a broken clock is right twice a day.

16.) Local incomes justify the high prices.
WRONG. The mortgage should be more than your 3 years earning. It is much higher today. Most are already in danger/red zone.

17.) You have to live somewhere.
CORRECT. But that doesn't mean you should waste your life savings on a bad investment. You can live in a better house for much less money by renting during the down slide in RE.

18.) It's not a house, it's a home.
WRONG. Wherever one lives in it is home, be it apartment, condo, bungalow , mansion or house. Calling a house a "home" is a manipulation of your emotions for profit.

19.) If you don't buy now, you'll never get another chance.
WRONG. History proves otherwise.
Here's a beautiful quote from a analyst:-
"The real issue isn't whether you will be stuck being a renter all your life, she says. Its whether you'll get so scared about being shut out that you'll buy at the market's peak and be stuck in a property you can't afford or sell."

20.) It would take major economic recession or a major earthquake that wipes out this area in order for the price to fall by over 50%.
WRONG. Even today, if the prices fall by 50%, there will still be very few people who can buy at this levels due to uncertainty in jobs & most importantly high EMIs. Also, look at the rental rates for equivalent houses. Which loss per month is larger? EMI or rent?

contd....
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  • Originally Posted by realacres
    These are following conclusions w.r.t. current scenario:-


    Though compared to now, the deal becomes more VFM for BUY, but on ground nothing changes as this 15% will be wiped out due to inflation + higher interest rates.

    Conclusion:- No change.

    The EMIs are almost 3-4 times the rent in normal conditions, so 15% hike in rents is peanuts. So, renting will still make more sense. Add to it interest rates going up, renting becomes even more lucrative.

    Conclusion:- No change.


    Man-u have hit the nail on its head. This is exactly where i was coming from. :D
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  • May be you missed my previous posts where I had written this.
    These are all 'soft-layoffs'. No-one received hike after April 2007. (In April 2008 situation had worsen) And there were no jobs in market until 6 months back. They waited a cool 2.5-3 years period. Meanwhile noone received Variable pay too. Now there is no 30-40% hike for even a 5-6 yr guy. It looks all rosy when you say... it isn't.

    Originally Posted by m_square
    some 7 mid and senior (5-10 years) people have left: They left, not laid off. They must be getting a good 30-40% hike in some other company. So they moved. Simple :)
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  • Originally Posted by RAJESHP
    In either cases I would buy if price of the flat equals rent * 200, otherwise not.

    Simple answer isn't it?


    So basically u want prices of flats to come down generally by 50%.
    Aisa nahi hoga bhai. What will our politicians/builders eat if that happens, they will die of mal-nourishment. :bab (43):
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  • Well, practically the rentals have gone down -- indicating an OVER-SUPPLY in the market since last 3 years.

    Also, there has been a flurry of new schemes launched since last 2 months which will really make rentals go down even further. Of course, in high demand areas, the rentals will be steady , but my question to you is simple --

    HAVE THE RENTALS IN LAST 7 YEARS MOVED ALONG WITH THE REAL ESTATE PRICES ?

    If the answer is NO, we know it is just a HYPE/BUBBLE building up...

    Another indication, is the number of "Ready Possession" apartments in the market -- if the market was so hot that even 10-15% was absorbed, they would have been history...

    The truth is builders/developers and the investors are holding onto the prices, they only want to SELL at higher prices - not bothering to clear inventory...

    But, when the "total inventory" becomes more than 50% of the demand, you will see a definate correction. The point is PATIENCE.
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  • Originally Posted by pcpune
    The point is PATIENCE.


    Totally agree with you.

    The only issue is THEY have been playing (and winning) with our patience from last 10 years and now have more(10x) patience than us:)
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  • Well, PATIENCE is the virtue of some of the "SMART" and "WISE" home buyers and investors.

    I mean there are people who bought E71 at 23000 and now its available at 12,000. The LCDs have gone down by half.

    People who dont have patience -- either are ultra rich - they dont care whether its 40 lacs or 80 lacs or 2 crores.

    But, most of them today, think that since the prices have been ONLY moving north -- generally -- they would continue to do so.

    But then some people are so much burdened by "emotional satisfaction", "peer pressure", "family pressures", that they forget the most important rules in ECONOMICS.

    1. Dont lose money.
    2. Dont EVER forget Rule No.1

    What they are doing is - living in "debt" for most of their lives counting pennies....

    Smart investors or people who know the value of money -- are not investing or buying anymore in Pune.

    Its the GULLIBLE ITG or one of the cases above.But, everybody wants to do to business. IF there are 100 builders who want to sell 100 flats each, its 10000 flats, so finding those 10000 is a problem today.

    I have been trying to find out the "number of property registrations" in Pune, it has gone down from like 5000 a month in 2007, to like 500-800 a month in last 3-6 months, indicating that the volumes have really dried.

    Ofcourse - the numbers are just word of mouth from a PMC guy, but I do certainly believe him.
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  • pcpune

    can we use RTI to obtain these numbers?
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  • Originally Posted by wiseman
    What you guys are saying is strange!

    Govt is saying IT sector is going to boom like anything and reach countless billions in next 5 years.

    Stock market is saying, notwithstanding the single-digit growth figures and low-double-digit margin figures, IT sector is underpriced at 20-40 times trailing P/E and jacking prices up, up and away.

    IT sector CEOs are saying they are launching for the moon shortly (first halt will be the "cloud"s) and there is no stopping them.

    Can they all be wrong? :D:D

    cheers


    I think you were being sarcastic here, though your title suggested otherwise.

    But in my opinion, IT is now a mature business and should command no more than PE of 15-20. Currently stock prices are too high.

    The only reason to invest in IT stock is in anticipation of Rupee devaluation, which is currently appreciating like crazy, as discussed elsewhere.

    IT will be a good sector to invest after it falls (after equivocal results this quarter, end of QE2, global stock weakness, and Rupee finishes appreciating). They are on my watch list right now, too pricey to invest.

    I doubt if the IT growth of last decade will ever again be repeated.

    PCP, while what you are saying about RE is true, it is never wise to be totally out of an asset class in uncertain times. So some allocation to RE (and g-old) is not wrong - but overallocation or leverage (unless it is primary residence) in RE is definitely dangerous.
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  • Originally Posted by puser
    pcpune

    can we use RTI to obtain these numbers?


    I think we can, however, we would need the PRO of the office who collects this data.Cant figure out which one from the PMC or PCMC website.
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  • Originally Posted by pcpune
    Well, PATIENCE is the virtue of some of the "SMART" and "WISE" home buyers and investors.

    I mean there are people who bought E71 at 23000 and now its available at 12,000. The LCDs have gone down by half.

    People who dont have patience -- either are ultra rich - they dont care whether its 40 lacs or 80 lacs or 2 crores.

    What they are doing is - living in "debt" for most of their lives counting pennies....

    Smart investors or people who know the value of money -- are not investing or buying anymore in Pune.

    I wouldnt want to compare RE with Electronics anyday and patience has nothing to do with that:)

    I do not see Living in debt as an issue(i have 0 debt btw:)). Most successful business having crazy share price started with high debt and still are.

    Secondly my point is related to general RE market not necessarily to Pune, i agree that Pune is overheated now but it still remains a very strong option for Mumbai's commercial market.
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  • Complete Picture

    Originally Posted by Munish Malhautra
    Totally agree with you.

    The only issue is THEY have been playing (and winning) with our patience from last 10 years and now have more(10x) patience than us:)

    First of all it is not 10 yrs but just 5 yrs while we are the ones who want to book in a month (some have target of even 1 week:D).

    As far as patience is concerned, simply ask the banks who have lent money to builders & are now stuck. As they don't want to loose thousand of crores, they were busy restructuring the loans:bab (45):. If you see nowadays, there are several flats in a building which are taken up by the bank (builder says blocked by investors/land owners, in reality it is banks):bab (34):. This clearly shows the falling confidence of the banks in most of the builder community.

    Man, the builders themselves launching FD schemes, even major ones in Pune like Paranjape, DSK, Kumar etc. clearly shows that they are finding it tough to raise money from the market. Btw, Mumbai builders are even more in a jinx, Wadhwa has started FD at 16% (same as that of Kumar), over 30 projects of Lodha builders are running behind schedule atleast by 1.5 yrs & the cash flows are negative.

    Problem is that buyers don't look at such figs. & think everything is against them:o. Man, look at the total picture & then you will find how not buying at current rates makes sense.

    Btw, there is going to be another interest rate hike in Nov 10.
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  • Originally Posted by realacres
    First of all it is not 10 yrs but just 5 yrs while we are the ones who want to book in a month (some have target of even 1 week:D).

    As far as patience is concerned, simply ask the banks who have lent money to builders & are now stuck. As they don't want to loose thousand of crores, they were busy restructuring the loans:bab (45):. If you see nowadays, there are several flats in a building which are taken up by the bank (builder says blocked by investors/land owners, in reality it is banks):bab (34):. This clearly shows the falling confidence of the banks in most of the builder community.

    Man, the builders themselves launching FD schemes, even major ones in Pune like Paranjape, DSK, Kumar etc. clearly shows that they are finding it tough to raise money from the market. Btw, Mumbai builders are even more in a jinx, Wadhwa has started FD at 16% (same as that of Kumar), over 30 projects of Lodha builders are running behind schedule atleast by 1.5 yrs & the cash flows are negative.

    Problem is that buyers don't look at such figs. & think everything is against them:o. Man, look at the total picture & then you will find how not buying at current rates makes sense.

    Btw, there is going to be another interest rate hike in Nov 10.


    many buyers don't have this information; those who have do not have skill to interpret it correctly and some buyers have money&urgency to spend so they buy it anyway
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  • Originally Posted by realacres

    Man, the builders themselves launching FD schemes, even major ones in Pune like Paranjape, DSK, Kumar etc. clearly shows that they are finding it tough to raise money from the market. Btw, Mumbai builders are even more in a jinx, Wadhwa has started FD at 16% (same as that of Kumar), over 30 projects of Lodha builders are running behind schedule atleast by 1.5 yrs & the cash flows are negative.

    Btw, there is going to be another interest rate hike in Nov 10.


    When were Builders ever into good books of banks:D They have always been getting bailed out by politicians and cash rich individuals.
    Most of new formed builders have to launch their projects without any bank loan. Their cartel is so big we cant even imagine.
    A newly formed builder in Delhi who was into car dealership for last 30 years with a customer base of 2000 till date entered into RE in 2007. He himself used to fund RE projects(upto 50 crores) at the time of his car dealership. Now atleast 25% those customers have bought space in his new project and he has received adequate finance from those people, plus he has also got finance from nationalized banks as well.

    The new rate hike in interest will hit the buyer as well.
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  • Originally Posted by Munish Malhautra
    When were Builders ever into good books of banks:D They have always been getting bailed out by politicians and cash rich individuals.
    Most of new formed builders have to launch their projects without any bank loan. Their cartel is so big we cant even imagine.
    A newly formed builder in Delhi who was into car dealership for last 30 years with a customer base of 2000 till date entered into RE in 2007. He himself used to fund RE projects(upto 50 crores) at the time of his car dealership. Now atleast 25% those customers have bought space in his new project and he has received adequate finance from those people, plus he has also got finance from nationalized banks as well.

    The new rate hike in interest will hit the buyer as well.

    Man, even Lavasa having backing of Pawar & Co. has excess of INR 1,000 Cr as loans from multiple banks. One can't put in 100% B-money in a project man:D. Also, what you said must be true for small scale builder, else INR 50Cr is peanuts in RE if talking of bigger scale!!

    Btw, I personally know some financiers who have pulled out money nor are putting it in RE. Man, be it banks or investors, at the end of the day, they want to earn money. If the builder can't do that for them, they will pull out

    It will be naive to say that investors stay invested even if they can't see good returns .
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  • Originally Posted by realacres
    Man, even Lavasa having backing of Pawar & Co. has excess of INR 1,000 Cr as loans from multiple banks. One can't put in 100% B-money in a project man:D. Also, what you said must be true for small scale builder, else INR 50Cr is peanuts in RE if talking of bigger scale!!

    Btw, I personally know some financiers who have pulled out money nor are putting it in RE. Man, be it banks or investors, at the end of the day, they want to earn money. If the builder can't do that for them, they will pull out

    It will be naive to say that investors stay invested even if they can't see good returns .

    They will pay the 1000 Cr by cash :)
    Anyway, some PM are bouncing. People must have some space in the message box.
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