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 wiseman
    Real and other folks,

    The term senior does not have anything to do with age or wisdom! :) Its to do with longevity of membership measured in terms of posts (I think).
    ...
    cheers


    Indeed, very well said (and insightful)!
    CommentQuote
  • Originally Posted by wiseman
    Real and other folks,

    The term senior does not have anything to do with age or wisdom! :) Its to do with longevity of membership measured in terms of posts (I think).

    Anyways, coming back to topic, the actual misunderstanding between older (and presumably more experienced) members and younger members is this.....

    Thanks a lot for this wonderful post. You put off some strain from my fingers :). I have learnt a lot from my previous generations & much senior people in life (people like you wiseman) & frankly, most of my friends are atleast 8-10 yrs elder than me. Friends of my age only think about splurging, & *----* you know! These elders really give me loads of ready made experience, so I have learnt one thing:- Be what you are, don't imitate what society wants you to be.

    RE to large extent is mainly driven by societal pressures & it is this pressure which makes you get into debt trap. Decide. Cheers to life :).

    Btw, no wonder then that builders like Sobha (as mentioned earlier) state that 40%+ of their buyers are ITGs.

    Hey, anyone planning to visit yet another PBAP/Credai Pune exhibi at Hotel Pride Executive, Ganeshkhind road?
    CommentQuote
  • Thanks folks!

    Sometimes God writes with the help of my fingers ...

    Rest of the time I blunder around :D

    cheers

    PS - Btw Real, I'm just 48 (not that old :D). Still got the ability to outplay, outtrek and outcode a lot of youngsters (don't drink, smoke and am Vegetarian (by choice)!). Still got quite a few years under my belt to do better than I am :) - I hope
    CommentQuote
  • Builders are now showing their frustration, check the latest news inSakal paper -

    http://www.esakal.com/esakal/20101027/4855178911441944178.htm

    For non-marathi readers - the title reads like this "The present prices of apartments are UNREAL", said DS Kulkarni, the owner of DSK.
    CommentQuote
  • Originally Posted by wiseman


    The magic mantra is ...
    1. As early as possible save as much as possible
    2. Put these savings as much as possible in longer-term high-growth investments on CASH BASIS only (not borrowing to buy asset)
    3. Be FRUGAL in the early years
    4. Buy only substantially in cash and only what you need and can afford

    Then, if all else works out, you will be fairly well off even in your middle age and pretty rich in your latter years.

    But since the current generation Y Z ... is programmed by TV, Internet and other media to be susceptible to buy the latest, greatest gadget (whether it makes sense or not), they will generally behave like robots and buy, buy, buy. Time will do the rest.

    This is what the basic difference between Real's philosophy and the "junior"'s thought process.

    This is human nature. Nothing can be done about it.

    cheers


    Really nice one .. and one from wiseman which I understood :)
    CommentQuote
  • Originally Posted by monds
    Builders are now showing their frustration, check the latest news inSakal paper -

    http://www.esakal.com/esakal/20101027/4855178911441944178.htm

    For non-marathi readers - the title reads like this "The present prices of apartments are UNREAL", said DS Kulkarni, the owner of DSK.


    I didn't get what exactly he want to say...I feel he is saying as prices r Hyped?
    Is that the correct interpretation?
    CommentQuote
  • I think we are WAY away from the topic. Instead of fighting with each other, let us air our views.Each individual has his own views.

    Its the readers or the members to take whats good and whats bad of them...maybe all of us should include the "disclaimer" tag.
    CommentQuote
  • Wiseman, thanks for your seasoned posts, learning lot from it.
    Recently, read about Maddison's magic number (per capita of 7000$ on PPP), used in G20 discussions. Most of poor Asian countries reached this number and then growth slowed and failed to be developed countries. Japan and South-Korea are exceptions where innovation & efficiency has driven them to be developed.

    India can either be developed or be developing with inefficient infra/people.
    What is your prognosis on India's future growth rates?
    CommentQuote
  • Originally Posted by wiseman
    Real and other folks,

    The term senior does not have anything to do with age or wisdom! :) Its to do with longevity of membership measured in terms of posts (I think).

    Anyways, coming back to topic, the actual misunderstanding between older (and presumably more experienced) members and younger members is this.

    DEBT does NOT add wealth. This, the older members understand very well through experience.

    Today, DEBT provides younger people jump the gun, fall prey to their impatience (goes with age) and desire to get every high-depreciating asset TODAY (example expensive cars, l.aptops, cell p.hones, club memberships etc, etc). - damn filter eats up even l.aptop and p.hone!

    Living beyond your income = spending your future income => less income in future to take care of much higher expenses => much lower level of living in future!!!

    Got it?

    If you do not believe me, simply look up the budget gap between what the Govt has promised PF depositors (or Pensioners in US) and what they have in hand and project into the future. Clearly, this HUGE shortfall means even more Govt borrowing to fund the deficit OR go back on the promise of PF/Pension payment. Govts of the world are showing youngsters (and all others) what happens to your latter years (when you have least future earning capacity) if you binge in the younger years on high levels of DEBT. Humans never learn from other's mistake ....

    The magic mantra is ...
    1. As early as possible save as much as possible
    2. Put these savings as much as possible in longer-term high-growth investments on CASH BASIS only (not borrowing to buy asset)
    3. Be FRUGAL in the early years
    4. Buy only substantially in cash and only what you need and can afford

    Then, if all else works out, you will be fairly well off even in your middle age and pretty rich in your latter years.

    But since the current generation Y Z ... is programmed by TV, Internet and other media to be susceptible to buy the latest, greatest gadget (whether it makes sense or not), they will generally behave like robots and buy, buy, buy. Time will do the rest.

    This is what the basic difference between Real's philosophy and the "junior"'s thought process.

    This is human nature. Nothing can be done about it.

    cheers



    Wisey, this is by far your wisest post!!!!

    Fantabulous:)
    CommentQuote
  • Originally Posted by wiseman
    Real and other folks,

    The term senior does not have anything to do with age or wisdom! :) Its to do with longevity of membership measured in terms of posts (I think).


    Today, DEBT provides younger people jump the gun, fall prey to their impatience (goes with age) and desire to get every high-depreciating asset TODAY (example expensive cars, l.aptops, cell p.hones, club memberships etc, etc). - damn filter eats up even l.aptop and p.hone!

    Living beyond your income = spending your future income => less income in future to take care of much higher expenses => much lower level of living in future!!!
    ......
    cheers


    touche!!!!!! Great Post!
    CommentQuote
  • No Clue ...

    Originally Posted by hitmady
    Wiseman, thanks for your seasoned posts, learning lot from it.
    Recently, read about Maddison's magic number (per capita of 7000$ on PPP), used in G20 discussions. Most of poor Asian countries reached this number and then growth slowed and failed to be developed countries. Japan and South-Korea are exceptions where innovation & efficiency has driven them to be developed.

    India can either be developed or be developing with inefficient infra/people.
    What is your prognosis on India's future growth rates?



    I have no clue about India's future growth rates. Except ...

    - Somewhere I read a report that this MAD Western avarice for higher and higher growth rates is unsustainable and stupid. As per this report (from some very respected Dons) over the long term, most corporates have stabilised at around 15% growth long term compounded.

    - I personally like the old Indian or "Hindu" rate of growth. MAybe a little higher. This is far more sustainable and results in (probably) greater balance in wealth distribution, may avoid the Billionaire lust of the modern Indian which is a purely American phenomenon of unsustainable and inhuman greed

    - The growth rate India should be most worried about is our Population Growth Rate! :D

    I also believe that the following characteristics will help India be among the leaders in the world in the coming years ...

    - Indians are individually very intelligent and smart (as a mob they are chaotic :)

    - Indians have a sense of balance in most things - especially money

    - Having lived for millenia in doubt and fear, whenever common Indian sees some money, he immediately stashes it away in some solid form of wealth - land, , etc. VERY THRIFTY (if you see KBC running now, most participants take a call and simply quit when they see difficult odds - rather lock-in profits than be risky)

    - Beyond a point, Indians do not tolerate excess. So when a political party goes beyond limit, they get dumped soonest

    - India is the most religiously tolerant country (even if we have our prejudices)

    Irrespective of growth rate, it is these deep-rooted characteristics of most Indians that will save this country, so I don't much worry about out growth rate (another way of saying I don't know! :)

    cheers
    CommentQuote
  • Originally Posted by wiseman
    I have no clue about India's future growth rates. Except ...

    - Somewhere I read a report that this MAD Western avarice for higher and higher growth rates is unsustainable and stupid. As per this report (from some very respected Dons) over the long term, most corporates have stabilised at around 15% growth long term compounded.

    - I personally like the old Indian or "Hindu" rate of growth. MAybe a little higher. This is far more sustainable and results in (probably) greater balance in wealth distribution, may avoid the Billionaire lust of the modern Indian which is a purely American phenomenon of unsustainable and inhuman greed

    - The growth rate India should be most worried about is our Population Growth Rate! :D

    I also believe that the following characteristics will help India be among the leaders in the world in the coming years ...

    - Indians are individually very intelligent and smart (as a mob they are chaotic :)

    - Indians have a sense of balance in most things - especially money

    - Having lived for millenia in doubt and fear, whenever common Indian sees some money, he immediately stashes it away in some solid form of wealth - land, , etc. VERY THRIFTY (if you see KBC running now, most participants take a call and simply quit when they see difficult odds - rather lock-in profits than be risky)

    - Beyond a point, Indians do not tolerate excess. So when a political party goes beyond limit, they get dumped soonest

    - India is the most religiously tolerant country (even if we have our prejudices)

    Irrespective of growth rate, it is these deep-rooted characteristics of most Indians that will save this country, so I don't much worry about out growth rate (another way of saying I don't know! :)

    cheers

    Nice post. What I feel is this:-

    >> Infra needs to be boosted on war footing. Simply look at Mumbai airport, one needs to hover in air for 32-40 mins:o & Delhi has over-taken Mumbai in terms of passengers;

    >> Incentive to industries especially those which exports but are not in SEZ or EOU. Here, the cos need to pay VAT on input material but can't pass it to end user (foreign firm). So, need to wait for refund of VAT. These glitches need to be taken care of for the benefit of exporters,

    >> Voting rights of people having more than 2 kids should be canceled (This means several MLAs & MPs won't be able to vote:D).

    >> Emphasis should be more on creating employment opportunities for semi & unskilled labor rather than depend on service sector alone,

    >> Creation of satellite cities should be given priority. This would mean mass housing possible + reduction on infra strain in city limits. This would also help to cool RE prices,

    >> Loan should be made tougher. More strict policies should be adapted by banks so as to avoid any sort of bubble formed out of this 'RENTED MONEY',

    >> Priority should be avoiding price hikes than focusing on growth. If inflation is more than real GDP, the growth is negative in real terms. Better have 6% growth with 4% inflation.
    CommentQuote
  • Originally Posted by monds
    Builders are now showing their frustration, check the latest news inSakal paper -

    http://www.esakal.com/esakal/20101027/4855178911441944178.htm

    For non-marathi readers - the title reads like this "The present prices of apartments are UNREAL", said DS Kulkarni, the owner of DSK.

    The good part of this is that even builders now know that buyers know what real RE picture is.
    CommentQuote
  • Realty cos in Maharashtra will now be charged for extra FSI

    The local bodies can now charge a fee for granting additional floor space index (FSI), as Maharashtra government has amended the State Regional Town Planning Act (MRTP).

    The amendment will be implemented with retrospective effect from January 11, 1966, the day MRTP Act came into being, to validate all levies collected in the past four decades, an official from Urban Development Department said. The FSI is the ratio of the total permissible built-up area to the size of the plot it is constructed on.

    The amendment came after the Bombay High Court quashed the notification granting extra FSI in Mumbai suburbs. Some builders had moved the high court, challenging the allocation of FSI against a premium. Many projects were stalled due to the technical hitch after the HC ruling in June.

    The state cabinet then decided to amend Section 22(d) of the Act with retrospective effect, which will help the government regularise decisions taken since the provision came into effect.
    The premium charged against extra FSI is expected to be used for infrastructural projects and effective implementation of the development plan, he said:).

    http://www.realtyplusmag.com/rpnewsletter/fullstory.asp?news_id=10849&cat_id=3

    In short it means that builders profits will now be shared by Govt as well:).
    CommentQuote
  • Originally Posted by realacres


    >> Voting rights of people having more than 2 kids should be canceled (This means several MLAs & MPs won't be able to vote:D).



    We can't do this and shouldn't. This is communism and against human rights. We unconsciously got into the population mess over the years. By 2050 our rates will reach a stage from where they cannot rise further and can only fall. We will pan this population problem naturally. We should only encourage people in rural and semi-urban areas to have 2 kids for their betterment, not as laws. In urban areas, having more kids than 2 is unaffordable, so people automatically will follow it. Its a natural cycle.

    Originally Posted by realacres

    >> Emphasis should be more on creating employment opportunities for semi & unskilled labor rather than depend on service sector alone


    For this we need to foster entrepreneurship. outsourcing will help us for only next 20 years before inflation completely eats up this business as there will be other places which will be cheaper. We need Microsofts and Googles to sustain businesses. I talked about IT, but we need this kind of business acumen in all fields.

    Originally Posted by realacres

    >> Creation of satellite cities should be given priority. This would mean mass housing possible + reduction on infra strain in city limits. This would also help to cool RE prices

    +100 to this.

    Originally Posted by realacres

    >> Loan should be made tougher. More strict policies should be adapted by banks so as to avoid any sort of bubble formed out of this 'RENTED MONEY',

    I think the interest rates and loan market is ok. This is the best we can get. There is a thin line for the banks to earn more and lend. We are exactly at that trade off.

    Originally Posted by realacres

    >> Priority should be avoiding price hikes than focusing on growth. If inflation is more than real GDP, the growth is negative in real terms. Better have 6% growth with 4% inflation.


    +1
    CommentQuote