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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  • HOW about watching.. "NO DAD" i.e. LAWARIS from Amitabh bachchan.!!

    VK

    PS: Sorry could not hold myself back from cracking this PJ.!!
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  • Originally Posted by asliarun

    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?


    Your question is very valid. I amnot economist to answer in terms of figures. As per my understanding real estate prices are going high because perople are buying it as they can afford it. It is not purely based on requirement. Rent is low because pure requirement drived rent market. Again when rates will go beyond buying capacity people will prefer Renting it and Rent may go high.
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  • Originally Posted by asliarun

    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?


    The reason for rent not keeping up with property appreciation is simple.its "Leverage".People borrow to buy property but house for personal use is always rented within means.

    In India rental yield has always been low.Personally I feel 15 times earning is a very conservative number.20-25 times earning or 4-5% rental yield would be a more realistic expectation.

    The rent vs buy decision based on rental yield would have been correct if people think to divert only the current rent outgoing towards EMI.i.e. borrow such that only between 30-40% of take home goes towards EMI.But in greed and hope of future increase in salary,better returns from investment, attractive loan scheme from banks and flowery words from builders encourages borrowers to overstretch their limits.

    The capability to borrow has empowered people to afford 4 times more than what they could have normally able to afford with their salary.
    Rental appreciation has not happened that much as its directly paid from their salary, not borrowed money.

    To clearly understand, if a person earns 5 lakh p.a with a take home of 35K.

    Rental affordability(generally 1/3 rd of take home) = 12,000

    Loan eligiblity(Generally 3-4 times annual salary for 20 years tenure at floating interest rate) = 20 Lakhs

    Property affordable = 20 Lakhs(80% principal) + 5 Lakhs(20% downpayment) = 25 Lakhs

    If the person gets a raise of say 20%.i.e. 6 lakhs p.a with 40K take home.

    Rental affordability = 13,500

    Loan eligiblity = 24 Lakhs

    Property affordable = 24 Lakhs(80% principal) + 6 Lakhs(20% downpayment) = 30 Lakhs

    So the same person, with the salary increase of 20% can afford a property 20% more than earlier but can rent only 12.5% more.

    Add other factors like joint loan, more downpayment, less/more interest the equations all get more skewed.

    Generally property price is expected and believed to appreciate in proportion to increase in salary adjusted to inflation(per-capita income).

    more comments are welcome.
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  • Interesting analysis....

    Add one more angle...

    A person can buy more than 1 properties and sell them at later time for profits... this increases demand as people are willing to own more than 1 apartment

    While Rental a person will only rent 1 house at a time (unless has a huge family).. I dont think anyone would rent 5 apartments and try and sub-rent it out more expensive to someone else... This keeps rental demand more in check with actual ground reality.

    Just my 2 PAISE.!! :D

    VK
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  • Thanks, Nabhishek! That is very insightful as well.

    On a total aside, why are prices in Pune so high when the municipality is so weak? I came here from Bangalore and was appalled at the lack of infrastructure. After giving this some thought, I have come to the conclusion that the difference is the fact that Pune is not a state capital. The reality is that Pune will never ever have a competent municipality that will turn the city around. The city does have a lot of good things going for it, like being 300mts above sea level, greenery at least in some areas, nice pleasant people with an especially good work ethic, modern facilities, etc. However, the infrastructure is from the 1930s! This is okay, if the real estate prices are discounted for this negative factor. However, that is not the case, and in fact, Pune prices are more than Bangalore prices! Thane can claim to proximity to Bombay, not Pune!

    I'm not trying to antagonize anybody with my statement, and this has probably been asked and answered before. However, I still remain genuinely puzzled. For example, what explains the sky high prices in Sopan Baug, or any other locality that is called Baug?
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  • Originally Posted by Winner
    those who want to come out of this riddle should read Rich Dad Poor Dad by Robert Kiyosaki


    Surely you are trying to lure prospective buyers :D ain't you... but nothing wrong, it's a business these days and buyers know about it...
    By the way, I red that book but I am still in...do you want to suggest any other book???
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  • Sorry to sound like a know-all, but I'd done this one too!

    Originally Posted by nabishek
    The reason for rent not keeping up with property appreciation is simple.its "Leverage".People borrow to buy property but house for personal use is always rented within means.

    In India rental yield has always been low.Personally I feel 15 times earning is a very conservative number.20-25 times earning or 4-5% rental yield would be a more realistic expectation.

    The rent vs buy decision based on rental yield would have been correct if people think to divert only the current rent outgoing towards EMI.i.e. borrow such that only between 30-40% of take home goes towards EMI.But in greed and hope of future increase in salary,better returns from investment, attractive loan scheme from banks and flowery words from builders encourages borrowers to overstretch their limits.

    The capability to borrow has empowered people to afford 4 times more than what they could have normally able to afford with their salary.
    Rental appreciation has not happened that much as its directly paid from their salary, not borrowed money.

    To clearly understand, if a person earns 5 lakh p.a with a take home of 35K.

    Rental affordability(generally 1/3 rd of take home) = 12,000

    Loan eligiblity(Generally 3-4 times annual salary for 20 years tenure at floating interest rate) = 20 Lakhs

    Property affordable = 20 Lakhs(80% principal) + 5 Lakhs(20% downpayment) = 25 Lakhs

    If the person gets a raise of say 20%.i.e. 6 lakhs p.a with 40K take home.

    Rental affordability = 13,500

    Loan eligiblity = 24 Lakhs

    Property affordable = 24 Lakhs(80% principal) + 6 Lakhs(20% downpayment) = 30 Lakhs

    So the same person, with the salary increase of 20% can afford a property 20% more than earlier but can rent only 12.5% more.

    Add other factors like joint loan, more downpayment, less/more interest the equations all get more skewed.

    Generally property price is expected and believed to appreciate in proportion to increase in salary adjusted to inflation(per-capita income).

    more comments are welcome.


    Abishek,

    Still too lazy to dig out another one where I had done something like this ...

    In that, the story in short was,

    2000 - IT Salary of 6-8 yrs experienced person, around 3.00 lakhs, Loan availability around 6 times gross annual salary - 18 lakhs, down payment 15%, therefore price of property saleable - 21.5 lakhs approx.

    2007 - IT salary of same level of person around 6-8 lakhs, loan availability around 10-12 times gross annual salary - 60-95 lakhs, down payment 10%, therefore price of property saleable - anywhere from 65 to 105 lakhs approx.

    Clear to see why property prices went from 25 lakhs to 105 lakhs with a few frills thrown in (which is very hillariously well documented in another thread by various people on this forum)!

    The main culprit was the Govt that created scope for such loose lending standards. The banks come next for simply throwing money at any and every one who came with a salary slip showing new-found wealth. The builders simply increased their margins to suit the new-found wealth of the newly (seemingly) rich. Landowners seeing all this took it as a once-in-a-lifetime opportunity and sold their earlier-cheap land for a fortune.

    The poor flat-owner is now saddled with a 1C flat and a humongous EMI hanging like a giant millstone around his/her neck!!!

    My sympathies.

    cheers
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  • We may have seen the end of the bear market rally from March!

    Folks,

    Just yesterday, I sent a circular to all my Stock Advisory friends that we may have seen the end of the bear market rally from 8000 in early March to around 17200 now. More importantly, the Chinese markets are already back to being in Bear territory since August and the US markets may have finally turned.

    The DOW, S&P have both given an early warning by breaking short-term indicators. The Dow is within 100 points and S&P within 12 points of breaking intermediate term indicators. Since the Dow fell 203 points and S&P 27 points in one day, these levels breakdown are only a bad day's move away.

    The final support is Dow 9050 and S&P 975 which are the 200 day Moving Averages, commonly seen as the dividing line between bull and bear phases. These levels are only a couple of bad day's moves away, though they may take time to be reached.

    Please note that our own markets have had a nearly 70% rally from bottoms (better than the Dow's 45% rally) simply because of a high level of FII inflows following better economic performance of Indian economy over US economy.

    Therefore, while i only expect our market to fall to around 9800-10500 levels IF the US market gets into the next leg down (which I expect because of the terrible situation in the US), any drastic pullout of money by FIIs may see a steeper fall.

    The extreme bullishness among all is also an indication that the markets have run well away from reality.

    In any case, the next leg down in the US is expected to take the DOW down to 4000-5000 levels and S&P to 350-400 levels. Looks extreme from this levels, but it has happened before!

    The next few days will show whether markets bounce back up or simply slide away. Let us see.

    cheers
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  • Originally Posted by wiseman
    Folks,

    Just yesterday, I sent a circular to all my Stock Advisory friends that we may have seen the end of the bear market rally from 8000 in early March to around 17200 now. More importantly, the Chinese markets are already back to being in Bear territory since August and the US markets may have finally turned.

    The DOW, S&P have both given an early warning by breaking short-term indicators. The Dow is within 100 points and S&P within 12 points of breaking intermediate term indicators. Since the Dow fell 203 points and S&P 27 points in one day, these levels breakdown are only a bad day's move away.

    The final support is Dow 9050 and S&P 975 which are the 200 day Moving Averages, commonly seen as the dividing line between bull and bear phases. These levels are only a couple of bad day's moves away, though they may take time to be reached.

    Please note that our own markets have had a nearly 70% rally from bottoms (better than the Dow's 45% rally) simply because of a high level of FII inflows following better economic performance of Indian economy over US economy.

    Therefore, while i only expect our market to fall to around 9800-10500 levels IF the US market gets into the next leg down (which I expect because of the terrible situation in the US), any drastic pullout of money by FIIs may see a steeper fall.

    The extreme bullishness among all is also an indication that the markets have run well away from reality.

    In any case, the next leg down in the US is expected to take the DOW down to 4000-5000 levels and S&P to 350-400 levels. Looks extreme from this levels, but it has happened before!

    The next few days will show whether markets bounce back up or simply slide away. Let us see.

    cheers

    i also agree
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  • Investment Vs Speculation

    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.

    In stocks, you have an option of averaging out or diversifying your portfolio. Do you have that option in RE?

    Putting money in NSE (not BSE) listed companies is investment,
    Putting money in RE (especially residential) is speculation; especially in last 3-4 years.
    That's the difference.

    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?

    I strongly differ on this. It seems that you are talking about IT. Ask any person in manufacturing or simply non-IT person & you will get the answer. Add to it the low interest rates & high lending %age by the banks which made even tom,dick & harry with 3 years of work buy a flat. These all belonged to IT & lower age meant more loan tenure, meaning high amount of loans. Simply put, person earning 12L/annum, aged 25 years will be eligible for more loan than that of 35 years old.

    Other important factor here:-

    Buying high on the basis of income hike in future. Thiswas another factor which fueled the RE bubble>> Speculation, not investment.

    Rentals haven't increased in that proportion? Right. Reasons mainly 2:-

    1.) Large scale of speculators in the market, which meant higher vacancy leading to downward pressure on rentals;

    2.) If rentals go very high, people will rather buy than rent.
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  • The extreme bullishness among all is also an indication that the markets have run well away from reality.

    That's what many people fail to understand. The rally in stock markets is mainly due to FIIs. They put in INR 57,537 Cr in last 4 months which is way higher than domestic retail investors combined together. This money came in from China as FIIs pulled out of China, & the US$ valuations looked good against INR. Hence, it meant buying on Indian stock markets even cheaper. The moment FIIs change their mood, see the fun. Personally, I have pulled out my entire stock market investments which included some loss in a scrip too (It was Reliance ADAG btw:p).

    Originally Posted by nabishek
    Generally property price is expected and believed to appreciate in proportion to increase in salary adjusted to inflation(per-capita income).

    more comments are welcome.

    That's so true. As the property prices increased more than avg. incomes, bubble got build up. Add to it the global recession, which gave salary, incentive cuts & in worse case, the pink slips (why pink? It is such a beautiful color. Why not green/red? Kodhwa green & slant eyed red:p).

    I have seen people who over-leveraged themselves, bought a property, car, personal & credit card loans.... & today after pay cuts, they are saving INR 4.5k/month. They think about EMIs 24*7. No holidays, breaks, adventure etc. Ask:- Is buying RE really worth at this cost?

    Other factor in your calculations which got missed:-

    You rightly pointed about high purchase power, but it was based solely on RE. When incomes go up, does one spend that rise in salary only in RE?
    People buy better cell fones, better vehicles, upgrade from CRT to LCD/Plasma/LED TV, go abroad on holidays than local ones, buy better things including s h o e s ;) & importantly the investments, savings too rise proportionately.

    Personally, I calculate everything in terms of %age rather than it's paper value. Hence, at the end of the day 10% hike in your income doesn't mean that 10% more affordabilty in actual terms.

    Btw, if one is married, 10% hike in incomes means 20% hike in jewelry spendings leading to less on paper savings:D.
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  • Realacres, I agree with what you're saying, and in fact, was trying to say the same thing in a different way. In my opinion, real estates prices are artificially inflated, which I tried to prove by saying that rents have not increased proportionally. Most people are still fooled only because the up and down cycles are much longer in RE (~10 years, correct me if I'm wrong)
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  • Originally Posted by wiseman
    Folks,
    2007 - IT salary of same level of person around 6-8 lakhs, loan availability around 10-12 times gross annual salary - 60-95 lakhs, down payment 10%, therefore price of property saleable - anywhere from 65 to 105 lakhs approx.

    Which bank is/was lending 60-95 lacks for 6-8 lack salary?
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  • Originally Posted by wiseman

    2007 - IT salary of same level of person around 6-8 lakhs, loan availability around 10-12 times gross annual salary - 60-95 lakhs, down payment 10%, therefore price of property saleable - anywhere from 65 to 105 lakhs approx.

    which bank is/was lending 60-95lacks for 6-8 lacks gross?
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  • Wrong Gross!

    Originally Posted by tpshere
    which bank is/was lending 60-95lacks for 6-8 lacks gross?


    The 6-8 lakh gross was a mistake. In 2007 the norm being bandied about was at least 1 lakh for every year's experience and for good guys as high as 1.5 to 2 lakhs per year of experience or more - I know; I used to argue that it was one more ridiculous ratio, but thats what happens when you put cattle in charge.

    At a higher salary than that, I sure was being offered such loans and even bigger loans than that.

    cheers
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