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 imtpass

    Mumbai Based realty major Lodha Group had been charging customers for car parking space, a practice now declared illegal by courts, sources in the incometax department said.

    According to a Supreme Court verdict in 2010, a developer of a housing complex cannot charge members for parking space. The ruling said the developers cannot sell open spaces and stilt areas in their buildings as these are meant for common use and form part of the flats. I-T officials are examining how many of the car parking spaces were sold before the Supreme Court verdict.


    Sunil Mantri, President of the Maharashtra Chamber of Housing Industry, in an interview stated that Maha Govt plans to setup real-estate regulator before March 2011.

    So no charges for parking and 100% terrace?
    I hope, like SEBI it is independent body and takes up cases of fraud/cheating by builders.
    CommentQuote
  • Originally Posted by hitmady
    Sunil Mantri, President of the Maharashtra Chamber of Housing Industry, in an interview stated that Maha Govt plans to setup real-estate regulator before March 2011.

    So no charges for parking and 100% terrace?
    I hope, like SEBI it is independent body and takes up cases of fraud/cheating by builders.


    Builders wont charge you for parking, but levy an infrastructure or development charge to cover for that. What can you do against that? For every law, there are 2 loopholes
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  • The RE may see upward trend in 2011 compared to 2010 Global property investments to hit $380 bn in 2011 - The Economic Times
    CommentQuote
  • NBFCs raise rates for realtors...

    With liquidity from traditional channels like banks and equity markets drying up for property developers, non-banking finance companies (NBFCs) have raised rates for loans to real estate companies by two-three percentage points (200-300 basis points).

    The rates have gone up from 15-19 per cent to 17-22 per cent. The rates vary according to the developer, the project and the requirement of the company, say NBFCs and consultants. Normally, NBFCs charge three-five percentage points more than commercial banks.
    “Our own cost of borrowing has risen to 14 per cent,” said an executive with an NBFC.

    A senior analyst with a public-sector bond house said the cost of funds for companies, including NBFCs, had gone up, reflecting the severe strain on resources. The three-month commercial paper was priced at 7.5 per cent in October. Fresh issuances would now be done at 9.5 per cent and above. As of now, the rates look stable. But, they may rise in line with the heightened demand in the last quarter. The Reserve Bank of India’s (RBI’s) policy would also have a bearing on rates.

    A senior executive with Edelweiss Capital said the rates had hardened due to the severe liquidity crunch and the risks associated with the sector. “The sector is seen as a high-risk one. As a prudent step, NBFCs are seeking additional collaterals. For instance, for a loan of Rs 150 crore, the collateral sought is at least 2.5 times the loan’s value,” he said.

    “It all depends on the project and the developer who is borrowing,’’ said Harshad Apte, vice president, IIFL, a financial services firm.

    Indiabulls, Religare, Edelweiss, IIFL, Reliance Capital, IL&FS and IDFC are active in providing finance to construction and real estate companies.

    Public sector banks, a major source of funds for developers, have been tightening funding to developers after RBI increased the risk weight on loans extended to commercial real estate. RBI also asked banks to be more vigilant in lending to the sector.

    “PSU banks are becoming indecisive and taking time to clear loans, this is more due to the tightening in liquidity and general perception surrounding real estate as an asset class,’’ N Shridhar, director, strategy and finance, DB Group, a Mumbai-based developer, told this newspaper last month.

    The recent ‘bribe-for-loan’ scam in which senior officials of LIC Housing Finance and some banks were arrested had made matters worse, said developers.

    “The borrowings from NBFCs have gone up sharply in the last few months as banks have tightened lending,” says Ramashraya Yadav, head of finance at Orbit Corporation, a Mumbai-based property developer. However, Orbit had not taken any loan from NBFCs recently, he added.

    “Developers do not have an option as home sales are declining and the equity route is becoming difficult to tap,’’ says Amit Goenka, national director, capital transactions, Knight Frank, an international property consultant.

    Home sales in Mumbai have dropped to half compared to the beginning of 2010 as property prices in key areas have risen 40-45 per cent. Developers’ initial public issue (IPO) plans have also been hit by poor investor sentiment.

    According to Prime Database, which tracks primary capital markets, eight real estate companies have got the final approval to launch IPOs. These include Raheja Universal, Lodha Developers, Lavasa Corporation and Kumar Urban Development. Together, they want to raise Rs 9,500 crore.

    However, developers need cash to complete their projects and repay debt. According to an earlier RBI estimate, property developers have piled up a debt of Rs 75,000 crore and have to repay Rs 25,000 crore before March 31.

    Realtors are also borrowing from portfolio management services (PMS) companies such as ICICI Prudential PMS and HDFC PMS at 25-27 per cent on a pre-tax basis, which includes a fixed coupon rate, a premium and a fee.

    “Today, we are certainly charging higher than earlier,’’ said a senior fund manager with a PMS firm.

    NBFCs raise rates for realtors...
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  • How much speculators are going to pump?

    The circle head of Indian Bank, Ashok Vishwakarma, said that the banks’ exposure fund to real estate is almost exhausted. “It is not that banks are not funding the sector but a certain dedicated fund for real estate is over. The case is not only with one bank, but with the whole banking industry. Many banks have already funded realty sector in Ahmedabad and the fund is now over. This might have brought developers into liquidity crunch,” he said.
    :bab (35):
    Cash crunch will force realtors to reduce property prices in Ahmedabad: Bankers - Money - DNA
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  • RBI raises rates to fight inflation; EMIs to go up

    The Reserve Bank of India (RBI) today raised key policy rates by 0.25 percentage point in its quarterly review. As a result, the repo rate (at which the RBI lends money to banks) has gone up from 6.25 per cent to 6.50 per cent. Since the RBI has increased the repo rate, the cost of funds for banks will go up. The banks are likely to pass on the increased rates to borrowers.

    Today's move is a positive for fixed deposit customers who will now earn more interest on their savings. But, the rate hike will add more burden to customers who have car or home loans as their EMIs will rise, once the banks decide to pass on the rate hike to their retail customers. New loans are also likely to be costlier.

    Read complete story here:-

    RBI raises rates to fight inflation; EMIs to go up - NDTV Profit
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  • Are we going back to 2006 Cycle ?

    - No relief to Real Estate Market/home prices... first VAT , second Sales Tax and now interest rate hike.....Except SBI all banks have closed the Teasing rate schemes.... good slow down is expected ?

    - even after good monsoon food inflation is not under control.....if this year Monsoon fail to expectations then condition would be worst....

    - During last year budget deficit was covered because of 2G and 3G license fees. This time there would be struggle to reduce deficit gap. can not expect much from the government....

    - Coporate is not excited as there is raw material price hikes/interest hikes/ Disel and Cooking Gas....hike is due

    - Expect hikes in all segments.....Maruti / Mehindra has already increased the car prices...

    - Good thing is U.S. economy is showing recovery signs...that will do good for Indian IT world....

    - Conducting Budget session without timeloss is challange looking winter session experience....

    - Stock market is clueless ...even after most of corporate results are inline with expectations... FII inflow is dried out... after all kinds of scams and goverment looks helpless.

    - 3rd Q, IIP went down to 2.7 % ; which was 11 % during last year...
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  • Realty bites: Sale of flats at all-time low

    Posted: Tue Jan 25 2011, 02:10 hrs

    The sale of residential property in Mumbai has hit rock bottom with stamp duty registration figures in December 2010 being almost 40 per cent lower than those in the corresponding month last year.

    While 9,276 flats were registered in December 2009, only 5,927 flats were registered in December 2010. Revenue department officials said usually property registrations are the highest in December since it reflects the increased residential sales around the festive period of October-November........

    Sales are only expected to dive further with cash flows to developers slowly drying up. “Property prices in Mumbai are expected to fall by 10 per cent to 20 per cent by March as pressure on developers for loans repayment starts to build up,” said Vakil.....

    “The sales have now gone down but since developers have borrowed heavily from banks and non-banking financial companies, they have to meet their financial obligations. Instead of borrowing from high net-worth individuals at huge interest rates of 20 per cent and above, they might soon start selling their stock at 20-25 per cent discounted rates,” said Dutt.

    The research agency points out that Indiabulls Sky Suites and Sky Forest have reduced their per sq ft (PSF) rates to Rs 16,500 from Rs 25,000 and Rs 23,000 respectively three months ago. Similarly, DB Turf View in Mahalaxmi has reduced their rates from 52,000 PSF to Rs 42,000 PSF.

    Read complete story in IE here:-

    Realty bites: Sale of flats at all-time low
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  • "Home registrations in Mumbai, India’s most expensive real estate market, fell to their lowest in 20 months in November, according to brokerage Prabhudas Lilladher Pvt. Property prices have climbed between 30 percent and 70 percent across India last year, with some markets having surpassed their 2007 peaks, Mahesh Nandurkar, a real-estate analyst at CLSA Asia-Pacific Markets in Mumbai, said in November."


    Mumbai Home Prices May Drop 15% by October as Record Prices Deter Buyers - Bloomberg
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  • Realty sector may see price correction

    Realtors’ cash flow that is getting affected by this fall in sales volume, the credit supply crunch and the recent bribery-for-loan scam, all these factors are now expected to force some builders to offload their inventory in the market at a negotiated price, industry experts said.

    Apart from the repayment of debt rescheduled two years ago, which is due around March, redemption of structured quasi-equity instruments totalling 3,000 crore held by foreign investors is also expected in the next couple of months and all this is expected to stress already cash-strapped developers.

    Read complete story here:-

    Realty sector may see price correction - The Economic Times
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  • Realacres, I would differ in opinion.

    Price may at the most soften, say by 10% from current level but it will not crash by 30%. But, if that softening happens that will happen with limited supply in the market.

    I believe you very well aware of that there are different kinds of builders

    1. Large builders with too many projects in hand and pipe line and too much leverage ... these are the builders who will be affected the most. Now look at actual buyers... how many are buying from the big builders? Not really a fractions of the total transactions. Please discounts members here, they are just a little fraction of the buyers.

    2. Medium size builders, who are just present in nearby cities/towns : There are two categories here, one group want to join the big brothers too early and hence too much leveraged ... these are the most vulnerable group

    3. Medium builders with controlled number of project : Nothing will happen to these group of builders

    4. The small builders with less than 5 smaller projects in hand : This is a mix bag.... the veteran in this group will not be affected in any way. The new entrant in this group will be affected.... but since their exposure is very limited, they will find other financial option to fund their project. Very likely this new funding will be costlier and the cost will be passed to the buyers.

    If you look at transaction volume, most number of transactions happens in group 3 and 4. These are the group who builds NO FRILL basic houses for mass.

    Source of funding for group 3 and 4 builders are their own accruals, borrowing from close circle and black money investment.... it does not get affected by anything!!
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  • I kind of agree to this post by gharondabhai. However there is another side to it as well. Large project (township types) will definitely face pressures and the same may happen to premium projects as well (though not a whole lot). But there are many small time builders in the market who are not leveraged extensively. Though they do not have the pricing power and are generally sold at a discount to what larger builders charge. The key thing here is the change in sentiment. The investors will be out of market, the second/third/fourth home buyers too may defer their purchase plans and the first home buyers will try and negotiate hard. The general rates will come down and the time to close sales will increase further.

    One silver lining among this doom is the fact that IT sector may be stable to positive (which is considered largely responsible for this absurd increase in prices). And if that happens, then the prices may not come down to the extent they should. One thing is for sure... India consumption story (domestic growth) will weaken for sometime. Lets see how it pans out... Certainly concerning times ahead...

    Just a random side thought - Too much to chew in a very little time often leads to upset stomach and it then often needs measures like fasting and self-control/discipline to get things back on track. And we all know how difficult it is to lead a disciplined life.
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  • But man, the hike in interest rates is going to affect all the BUYERS, irrespective of the builder. As far as Pune builders is concerned, I will be making a list of projects & the builder & inform how bad the projects have been hit irrespective of the builder.

    If all builders are not over-leveraged or think they can sell at any price, why did prices dip in 2009 then or crashed in 1998 in Pune?
    CommentQuote
  • We never really got OUT of the crash in the first place!!!

    Originally Posted by Satved
    - No relief to Real Estate Market/home prices... first VAT , second Sales Tax and now interest rate hike.....Except SBI all banks have closed the Teasing rate schemes.... good slow down is expected ?

    - even after good monsoon food inflation is not under control.....if this year Monsoon fail to expectations then condition would be worst....

    - During last year budget deficit was covered because of 2G and 3G license fees. This time there would be struggle to reduce deficit gap. can not expect much from the government....

    - Coporate is not excited as there is raw material price hikes/interest hikes/ Disel and Cooking Gas....hike is due

    - Expect hikes in all segments.....Maruti / Mehindra has already increased the car prices...

    - Good thing is U.S. economy is showing recovery signs...that will do good for Indian IT world....

    - Conducting Budget session without timeloss is challange looking winter session experience....

    - Stock market is clueless ...even after most of corporate results are inline with expectations... FII inflow is dried out... after all kinds of scams and goverment looks helpless.

    - 3rd Q, IIP went down to 2.7 % ; which was 11 % during last year...



    Satved,

    Through most of 2009 and all of 2010, I had to take brickbats from everyone when I continued to say that we have not really gotten out of the crash but only appear to do so because suddenly the Govt has stuffed new, worthless cash into our pockets (as debt) and made the gamblers in us all feel richer so that we went back to our old (pre-2008), unsustainable spending binges.

    Now, we are re-entering the bear phase again (sometime the debt stuffing has to end, no :)) when the liquidity injection ends. This time around we will be entering a more dangerous phase (with most people having a weaker personal balance sheet), with much higher inflation eating away what little cash is there in our pockets and EMIs of homes, cars, durables, while at work we get hit harder because companies will suddenly feel the need to tighten belts much harder as margins are falling all round.

    The 2009-2010 phase was all maya induced by the injection of a happiness drug called debt money! :) We will now see the reality hangover slowly overtaking us.

    cheers
    CommentQuote
  • Originally Posted by realacres
    But man, the hike in interest rates is going to affect all the BUYERS, irrespective of the builder. As far as Pune builders is concerned, I will be making a list of projects & the builder & inform how bad the projects have been hit irrespective of the builder.

    If all builders are not over-leveraged or think they can sell at any price, why did prices dip in 2009 then or crashed in 1998 in Pune?


    I have a simple question to ask, do you personally know an end user purchased during the so called CRASH in 30% discount?

    You know the answer and I know the answer. If there is a real crash, only the investors with deep pocket and a much deeper risk appetite get the benefit... normal end user are then to scared to buy a house.
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