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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  • even buildrrs agree rate wont increase much from here so they are utilzing till dwali as good period to sell as much as possible.

    but again price wont fall as sharp as the market and may again get stable at the rate prevalent around june time.

    Also want to know points to look in agreement to ensure buyers interests are protected and builder doesnt take the undue advantage
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  • what points to check in agreement for the buyers who had booked the flat
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  • points to look in agreement to ensure buyers interests are protected
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  • No news

    Not a news, something we already know. But affirms the view that RE has only one way to go. DOWN.

    http://www.indianrealtynews.com/real-estate-trends/housing-sector-may-witness-fall-in-prices-knight-frank-india.html

    "Global property consultancy firm, Knight Frank India, on Thursday said prices in the ="http://www.indianrealtynews.com/category/real-estate-trends/"]residential property segment are likely to decline in a short time. “We feel prices of residential segment may go down over a period of time,” Knight Frank India Chairman Pranay Vakil told reporters here today. The residential segment may see a robust demand in certain markets, he said, adding that it was also a good time for property developers to invest in land. "are likely to decline in a short time. “We feel prices of residential segment may go down over a period of time,” Knight Frank India Chairman Pranay Vakil told reporters here today. The residential segment may see a robust demand in certain markets, he said, adding that it was also a good time for property developers to invest in land. "
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  • Real has time and again told on this forum.. "Buy only ready possession flats".

    Here is an example of why you should not go for under construction flats

    ]http://www.indianexpress.com/news/irked-flat-owners-join-hands-to-get-promised-deal/522360/1

    I believe builders might be the chosen son of God!!!!

    We take Loans on our risk to give to the builder so that the builder can live a lavish life style.. 3-4 Mercs/BMWs/Audies, 10 ROOM Duplexes.. 2-3 in number.. Foreign vacations to elite locations... All this is return of a promise to give flats at a later date.

    Cant believe that people even now go for under construction apartments.. in hope of getting something cheap. pls consider the risk involved as well.

    VK

    I believe builders might be the chosen son of God!!!!

    We take Loans on our risk to give to the builder so that the builder can live a lavish life style.. 3-4 Mercs/BMWs/Audies, 10 ROOM Duplexes.. 2-3 in number.. Foreign vacations to elite locations... All this is return of a promise to give flats at a later date.

    Cant believe that people even now go for under construction apartments.. in hope of getting something cheap. pls consider the risk involved as well.

    VK
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  • VK,
    :D Thanks for the link.
    Man, I too don't understand how people can put their one of the biggest investment blindly. They take hours to finalize clothes, cell fones etc. & trust the builders blindly. It is like asking thief to guard you valuables:D.

    While dealing with builders, verify & cross-verify. If you are not sure, drop the project. I reiterate, while buying an apartment/rowhouse; buy what you see now & not what you will see tomorrow.
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  • Hi Pune friends,

    Have been reading all your posts regularly.

    I should say we really have many knowledgeable and smart people on board.Continue sharing such insightful thoughts and engaging in healthy debate.

    Its been interesting to note many similarities in Pune RE and chennai RE.Both being Tier II cities saw the boom only during the later stages when RE markets in Mumbai, NCR, Bangalore started to saturate.

    Even during the Global financial crisis onset period, markets like Chennai and Pune have done remarkably well holding up while the Tier I cities were feeling the heat.

    We still have divided opinion and articles such as the following talking of another boom.

    Pune realty to witness 51% CAGR?!



    People have always attributed the word "bubble" to such rise in price due to speculation.So one would expect a bubble burst to be quick and correction sharp.Looking back at other countries where such a RE bubble was formed due to Excess liquidity and increasing salary and later burst.It has been slow and correction happens in phases interluded by stagnation period.

    India has many local advantages, micro markets dynamics and demographics that makes it inherently different to be directly compared to countries like US and Japan.The trend would be more or less similar but the extent of impact may not be identical.

    Its very important that we apply such macro principles correctly in the context of local market conditions to arrive at an informed decision and not be misled.

    Most of us seem to agree that what we have witnessed in India in the last few years is a boom and potential RE bubble.Most of the conditions that fuelled it are non-existant today.

    The builders/banks/political cartel are doing very well to keep the correction in abeyance and creating false demand-supply gap to maintain and justify the price.They are keeping their hope afloat with huge profit margins that covers their cost when 30% of their project is sold and by targetting different buyer segments and luring them with low interest loan, affordable price on smaller ticket size etc.Seeing all this, The question still remains for how long all this will extend?

    I would like to question members here

    What do you feel will be the definite factor or event that will instigate the fall in Tier II cities and the reason why?

    Can a quantum be attributed when the correction is expected and by how much?

    Thanks all of you in advance.
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  • 10-15 times earnings

    Say, the piece of real estate in question currently fetches you 15000 per month in rent. That works out to 180000 per annum, which represents the earnings from your investment. Going by the upper bound of 15 times earning, you should buy this piece of real estate for 2700000. If you have a bullish outlook on the economy and the appreciation of your property, you can consider 20 times earnings, which works out to 3600000.

    Currently, an apartment that fetches you 15k in rent is going for 60 lakhs (conservatively), which is roughly 34 times earnings!

    To put this in perspective, in the current bull run of the stock market (Sen at 17k, Nifty at 5k), Infosys is quoting at 22 times earnings, and SBI is quoting at 15 times earnings. This is the bullish evaluation for blue chip companies that are consistently doing well for a long long time.
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  • Originally Posted by asliarun


    Currently, an apartment that fetches you 15k in rent is going for 60 lakhs (conservatively), which is roughly 34 times earnings!

    To put this in perspective, in the current bull run of the stock market (Sen at 17k, Nifty at 5k), Infosys is quoting at 22 times earnings, and SBI is quoting at 15 times earnings. This is the bullish evaluation for blue chip companies that are consistently doing well for a long long time.


    Analysis is interesting but if you really want to compare on that basis then you need to comapre increased valuation of Infy or SBI against increased valudation of apartment & Rent should be compared with divident received from Infy or SBI.
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  • Originally Posted by mahesh pune
    Analysis is interesting but if you really want to compare on that basis then you need to comapre increased valuation of Infy or SBI against increased valudation of apartment & Rent should be compared with divident received from Infy or SBI.


    Rent cannot be strictly compared to dividend alone, it should also be compared with the revenues/profits generated by the company whose stock you're holding. This is because as a stock holder, you are part owner of the company, and the profit made by the company is thus your profit. Even if you don't directly get a share of the profit the company makes (as part of dividends), the company is hopefully making use of the money in a better way by say pumping it back in to help the company grow, and thus increasing the value of your holding. Think of it instead as the company investing the dividend (from the profit) on your behalf back into the company itself, which you would have done anyway as owner of the company.

    The only reason why we've blindly invested in real estate without looking at returns (compared to say, an FD) is because of greed that prices will always go up. This is no different from the irrational bull run that happened in the stock market a year ago, where people were investing in companies not for their fundamentals but because of the FDI flowing in. This is still the case in the stock market, by the way.

    When we say that for a good investment like stock or real estate, 12-15 times earnings is a good number, it is considering returns either in the form of dividends or rents, or in the form of stock appreciating because the returns were used in a better way for the betterment of the investment. So, it already takes into account the normal appreciation of the real estate due to the betterment of the neighborhood, economy, and salaries.

    Yet another way to put it is this way: If all I say is untrue, and I am no expert by the way, and if real estate prices did indeed increase 4 times in the last 6 years because our lives, our economy, and our salaries became better 4 times as well, why haven't rents increased 4 times in the last 7 years? People should certainly be able to afford the proportionally increased rents, right?
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  • Originally Posted by asliarun

    If all I say is untrue, and I am no expert by the way, and if real estate prices did indeed increase 4 times in the last 6 years because our lives, our economy, and our salaries became better 4 times as well, why haven't rents increased 4 times in the last 7 years? People should certainly be able to afford the proportionally increased rents, right?


    Excellent point. Your question itself has the answer.
    Rent has NOT gone up 4 times coz NO scarcity of flat due to continuous supply of new flats.
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  • Interesting. But there are other points to note!

    Originally Posted by asliarun
    Rent cannot be strictly compared to dividend alone, it should also be compared with the revenues/profits generated by the company whose stock you're holding. This is because as a stock holder, you are part owner of the company, and the profit made by the company is thus your profit. Even if you don't directly get a share of the profit the company makes (as part of dividends), the company is hopefully making use of the money in a better way by say pumping it back in to help the company grow, and thus increasing the value of your holding. Think of it instead as the company investing the dividend (from the profit) on your behalf back into the company itself, which you would have done anyway as owner of the company.

    The only reason why we've blindly invested in real estate without looking at returns (compared to say, an FD) is because of greed that prices will always go up. This is no different from the irrational bull run that happened in the stock market a year ago, where people were investing in companies not for their fundamentals but because of the FDI flowing in. This is still the case in the stock market, by the way.

    When we say that for a good investment like stock or real estate, 12-15 times earnings is a good number, it is considering returns either in the form of dividends or rents, or in the form of stock appreciating because the returns were used in a better way for the betterment of the investment. So, it already takes into account the normal appreciation of the real estate due to the betterment of the neighborhood, economy, and salaries.

    Yet another way to put it is this way: If all I say is untrue, and I am no expert by the way, and if real estate prices did indeed increase 4 times in the last 6 years because our lives, our economy, and our salaries became better 4 times as well, why haven't rents increased 4 times in the last 7 years? People should certainly be able to afford the proportionally increased rents, right?



    Asliarun,

    No offense. But this is comparing appls to oranges.

    If you go way back, I had a detailed derivation as to why a 1C house at the peak should decline to 24 lakhs for its valuation to be "correct". At that time, declines were around 10-15% and most people could not digest what I said! :D

    Anyways, coming back. Stocks are significantly different from RE. Lets start with regulation, price transparency and liquidity. You know that these 2 are poles apart in all these areas (recently, Deepak Parekh was rooting for a RE regulator ust like for Insurance, etc!!!).

    Then again, you cannot apply stock P/Es to RE simply because of the very high leverage that is available in RE. Tell me of one bank that will give you 90% of stock value as loan? This means that, even at low yields (or apparently high P/Es) property is attractive simply because when RE grows at above RE loan rates (11%?), each 1 percentage gain on total property value is 10% gain on the money you put down on the property!!!

    But that is only during boom times when credit was cheap and gains were high. So, when loans were available at 8% and growth was 20% your investment boomed unconrollably and everyone was a speculator.

    But today, when loans are at 11% (and that too only for sound buyers) and growth is at best ZERO and generally -10% pa, each 1 percentage decline is a 10% decline in presumed wealth!!!:(

    Most young buyers hae not made this calculation and have not experienced it (negative leverage) in their lives. This is why they are still locked into this boom-time gung-ho, risky, speculative mindset. This will take some time and a sound beating in the market to reset to more conservative mindset. Most of us oldies have had this beating and so we can see the reality of longer term price stagnation or very slow growth!

    cheers
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  • Thanks for the insights, wiseman!
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  • those who want to come out of this riddle should read Rich Dad Poor Dad by Robert Kiyosaki
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