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....
Read more
Reply
12597 Replies
Sort by :Filter by :
  • Everybody kindly read this post..even if a little long one--part2

    Yearly rate of rise for property
    10%


    Loan interest rate
    9%





    First investment

    Year

    Property Cost
    30,00,000
    2005

    Down payment
    6,00,000
    2005

    Loan amount
    24,00,000

    Possession year

    2007

    Sold
    45,00,000
    2010

    Less loan amount
    24,00,000

    Less interest (approx)
    10,80,000

    Amount in hand
    10,20,000

    % returns
    70%


    For tax purposes


    CIF in 2007
    480

    CIF in 2010
    632

    Indexed purchase cost
    39,50,000

    Total profit / loss
    5,50,000




    Second investment

    Year

    Property Cost
    51,00,000
    2010

    Down payment
    10,20,000
    2010

    Loan amount
    40,80,000

    Possession year

    2012

    Sold
    76,50,000
    2015

    Less loan amount
    40,80,000

    Less interest (approx)
    18,36,000

    Amount in hand
    17,34,000

    % returns
    70%


    For tax purposes


    CIF in 2012
    730

    CIF in 2015
    895

    Indexed purchase cost
    62,52,740

    Total profit / loss
    13,97,260




    Third investment

    Year

    Property Cost
    86,70,000
    2015

    Down payment
    17,34,000
    2015

    Loan amount
    69,36,000

    Possession year

    2017

    Sold
    1,30,05,000
    2020

    Less loan amount
    69,36,000

    Less interest (approx)
    31,21,200

    Amount in hand
    29,47,800

    % returns
    70%


    For tax purposes


    CIF in 2017
    730

    CIF in 2020
    895

    Indexed purchase cost
    1,06,29,658

    Total profit / loss
    23,75,342




    Fourth investment

    Year

    Property Cost
    1,47,39,000
    2015

    Down payment
    29,47,800
    2015

    Loan amount
    1,17,91,200

    Possession year

    2017

    Sold
    2,21,08,500
    2020

    Less loan amount
    1,17,91,200

    Less interest (approx)
    53,06,040

    Amount in hand
    50,11,260

    % returns
    70%


    For tax purposes


    CIF in 2017
    1,010

    CIF in 2020
    1,175

    Indexed purchase cost
    1,71,46,856

    Total profit / loss
    49,61,644


    As one can see from the above, a Rs.6,00,000 investment in 2005 would be converted into 50,11,260 by the year 2025, an annualized return of slightly more than 11.5% per year compounded – there is no tax paid at all.
    Now, why I think this investment plan is really good:


      Wealth is built up consistently over a long term.
      It is a bit different than investing in Mutual Funds or Shares because real estate investments are not very liquid. If one has an investment in MFs or Equity, every time money is needed to say, buy a new car or something like that, the first reaction is to sell part of the portfolio. Whereas, nobody thinks of selling a house to buy a car!
      THIS POINT IS MOST IMPORTANT. Say, in the ‘Fourth Investment’ above, if the sale price was say, 1,60,00,000 instead of 2,21,08,500. Then the actual profit would be 1,60,00,000-1,47,39,000 = 12,61,000. However, taking into account the Cost Inflation Factor, the Indexed Purchase Cost is 1,71,46,856, so for tax purposes, there is a LOSS of Rs.11,46,856. This loss can be set off against any other Capital Gains and in fact can be carried forward for the next 8 years! This in short means that the government GUARANTEES inflation related returns for real estate investments.

      Happy Investing!!


      *******************************************************


      will be waiting for esteemed borders reply on this mail.

      regards

      vatsal
      Happy Investing!!


      *******************************************************


      will be waiting for esteemed borders reply on this mail.

      regards

      vatsal
      Happy Investing!!


      *******************************************************


      will be waiting for esteemed borders reply on this mail.

      regards

      vatsal
      Happy Investing!!


      *******************************************************


      will be waiting for esteemed borders reply on this mail.

      regards

      vatsal
      Happy Investing!!


      *******************************************************


      will be waiting for esteemed borders reply on this mail.

      regards

      vatsal
      Happy Investing!!


      *******************************************************


      will be waiting for esteemed borders reply on this mail.

      regards

      vatsal
    CommentQuote
  • What happens if we add rental income to this calculation?
    CommentQuote
  • Resell property in 3 years and lose half of your gains

    Originally Posted by joshiga
    What happens if we add rental income to this calculation?


    The profit made from the sale of a house is never a simple calculation involving the subtraction of purchase price from sale price. A number of income-tax caveats kick in. If you buy an apartment for 50 lakh and sell it two years later for 1 crore, your profit from the sale will not be 50 lakh. It will be much lesser. Here is how the maths works:

    If you sell within three years of buying:

    The first thing to take into account is tax liability. If you sell a flat within 36 months of buying it, the profit is added to your income for that year, and taxed accordingly. If you fall in the highest income tax bracket

    Resell property in 3 years and lose half of your gains - ET Slide Shows - Features - The Economic Times
    CommentQuote
  • We assume the property prices go up by 10% a year on an average.

    I am sure this is one of the assumptions that was used by a smart banker to come up with a model that never lost money. Other smart bankers derived other outcomes from this basic assumption and some 5-6 years later we had what we know as 2008-2009 financial debacle. BTW the effects of which are felt even today and will be felt for more years to come.

    Beware of statements like average 10% appreciation till 20 years and fixed 9% loan till 20 years. That is a trap. Just change one of the parameters in the calculation and you will see how a little difference from the assumption can affect the final outcome. Also known commonly as sensitivity analysis (just thought of throwing in some jargon). :-P

    VK
    CommentQuote
  • Originally Posted by vatsalbajpai
    Yearly rate of rise for property
    10%


    Loan interest rate
    9%





    As one can see from the above, a Rs.6,00,000 investment in 2005 would be converted into 50,11,260 by the year 2025, an annualized return of slightly more than 11.5% per year compounded – there is no tax paid at all.
    Now, why I think this investment plan is really good:


      Wealth is built up consistently over a long term.
      It is a bit different than investing in Mutual Funds or Shares because real estate investments are not very liquid. If one has an investment in MFs or Equity, every time money is needed to say, buy a new car or something like that, the first reaction is to sell part of the portfolio. Whereas, nobody thinks of selling a house to buy a car!
      THIS POINT IS MOST IMPORTANT. Say, in the ‘Fourth Investment’ above, if the sale price was say, 1,60,00,000 instead of 2,21,08,500. Then the actual profit would be 1,60,00,000-1,47,39,000 = 12,61,000. However, taking into account the Cost Inflation Factor, the Indexed Purchase Cost is 1,71,46,856, so for tax purposes, there is a LOSS of Rs.11,46,856. This loss can be set off against any other Capital Gains and in fact can be carried forward for the next 8 years! This in short means that the government GUARANTEES inflation related returns for real estate investments.

      Happy Investing!!


      *******************************************************


      will be waiting for esteemed borders reply on this mail.

      regards

      vatsal


      There goes your 10% rise

      So Mumbai will be the most costly city .... most unmanagable city .... most slow city in terms of getting from point A to B

      This on top of US and Europe in Deflation if not recession.

      Now your calculation says what property in Mumbai was costing 100 is costing 500 - 700 i.e. 5 to 7 times ...
      If if corrects for some reason (law of averages for RE worldwide has price rise at less then 5 %)
      a 20% correction which is moderate ... can you show in your calculations ? (In case Cong losses power that will be correction.)

      a 40% correction which is severe ... In case US goes bankrupt ?




      This info is coming out in open ....... whats going behind the scene would be far worse.


      As politicians, executives and financiers networked at parties and panels last week in Davos, Switzerland , Barrie Wilkinson was in a nearby hotel, warning that a 2015 financial catastrophe may be looming.



      At Davos, analyst sees a bank crisis in 2015 - The Economic Times
    CommentQuote
  • Originally Posted by heretic
    Pls check out my latest posts about the deteriorating global macro conditions on the 'stock advice' thread on this forum. Very important info.


    In fact, heretic, your macroeconomic discussions in stock advice thread are actually better off here - most macroeconomic discussion in the entire IREF takes place here.

    Re: Vatsal Bajpai,

    Buying property on loan is a bad investment.

    Any investment based on loan is usually a bad investment for salaried people - OK for a business man only.

    You have assumed 10% yearly return. Long term property return on capital value is around 8-9% depending on which year you start calculating. Rental return of 2-3% can be added to that to get 12% long term return.

    You also have stamp duty, income tax, maintenance, and deterioration of building value. Add to that poor quality of property market in India and Stocks are a much better investment.

    Buying a flat on loan for self use is a good idea - regardless of timing and keeping your affordability in mind. But then a home for yourself is not an investment but an expenditure. It is just a better expenditure than cars (Real, please disist from talking cars :)), clothes, watches, cell s and other such things. Only jewelery comes close to being an expenditure which has potential to appreciate rather than depreciate.

    Home loan also assures discipline - although SIP also ensures discipline.

    Between stock and flat, I would prefer stocks any day - for investment that is (investment means not flat for self use - but flat for renting out or resale)

    Assuming 12% long term return, why go for a flat when FD will soon give you similar pre-tax returns? YOu get none of the hassles.

    An investment flat becomes meaningful when your corpus grows too big and you want to diversify to hedge against risk (inflation risk being top of the mind at the current juncture)
    CommentQuote
  • watch out today Tuesday CNBC AWAAZ at 6/6.30 and 9/9.30

    Reality Khatare main

    Real Estate in Danger
    CommentQuote
  • Originally Posted by frugality
    watch out today Tuesday CNBC AWAAZ at 6/6.30 and 9/9.30

    Reality Khatare main

    Real Estate in Danger


    will watch it :)
    CommentQuote
  • Originally Posted by puser
    will watch it :)

    I missed it:(. Was on a site. What did they show man?
    CommentQuote
  • Home loan interest rates in double digits

    Banks have hiked the home loan rates yesterday which includes several PSU banks as well. The HDFC rates are as follows:-

    Upto 30L = 9.75%/annum;
    30-75L = 10%/annum &
    >75L = 10.25%/annum.

    As said before, this Egypt crisis will worsen oil scenario & rightly then crude oil prices have hit $ 100/b rates. After Egypt, the King of Jordan has kicked his Govt & it is expected that rebellion will take place here as well.

    Just hope that petrol doesn't hit 70/l now.
    Btw, the economic advisory council says that inflation will continue to remain high, more-so the food inflation :(. Expect another hike in interest rates by RBI by Mar 11.
    CommentQuote
  • Originally Posted by vatsalbajpai
    will be waiting for esteemed borders reply on this mail.

    regards

    vatsal

    You haven't considered:-

    the hike in interest rates;

    delays by the builder in completing project & giving possession. Man, even if project gets delayed by an year, the calculations go for a toss;

    buyers at your expected price point;

    you don't get buyers for 1 year & price doesn't go up respectively, so, you loose 1 yr holding cost.

    Currently, I would place my bet on bank FD, now that they have hiked interest rates yesterday even more :).
    CommentQuote
  • Originally Posted by frugality
    watch out today Tuesday CNBC AWAAZ at 6/6.30 and 9/9.30

    Reality Khatare main

    Real Estate in Danger


    Was this show really telecast ? Didnt find it y'day .
    CommentQuote
  • Originally Posted by suryawork
    Was this show really telecast ? Didnt find it y'day .

    Ya, It was telecast. I seen it and they showed all the big player are have lots of debt.
    CommentQuote
  • Originally Posted by Saurabh01
    Ya, It was telecast. I seen it and they showed all the big player are have lots of debt.



    May be after few days, they will have one more show, where they say, population is more and supply is not keeping with demand. LOL:D

    I do not like any of these shows. For entertainment ok.
    CommentQuote
  • The Other Side of Chinese Growth - Ghost Cities

    Just check out how over-building leads to such places. Some nice satellite & aerial images too are shown here:-

    The Other Side of Chinese Growth - Ghost Cities - FunOnTheNet
    CommentQuote