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 :
  • Black Money and RE bulls theory

    There is probably one thing that we are missing while discussion the Real Estate melt down. I agree all the economics suggests that RE is at peak and will definitely correct. But what about the Black Money. Most of the high end RE are purchased by people with lots of black money. Very few of the salaried people afford premium RE. And the people with black money have the potential to keep the RE invested for probably their entire life time. This results in eroding of common resources of the country and ever increasing price of RE. And people like us can definitely not compete with these people/investors.
    CommentQuote
  • Prices to fall by 30% in Mumbai, Delhi etc as per the article (Remove space between live and mint):
    http://www.live mint.com/2011/02/14232213/The-bubble-may-be-set-to-burst.html

    Interesting point made:
    ".. may further tighten lending to property developers after DB Realty Ltd and Unitech Ltd have been linked to ongoing investigations into the allocation of telecom spectrum."
    CommentQuote
  • An issue of logic ...

    Originally Posted by kaushik.v
    There is probably one thing that we are missing while discussion the Real Estate melt down. I agree all the economics suggests that RE is at peak and will definitely correct. But what about the Black Money. Most of the high end RE are purchased by people with lots of black money. Very few of the salaried people afford premium RE. And the people with black money have the potential to keep the RE invested for probably their entire life time. This results in eroding of common resources of the country and ever increasing price of RE. And people like us can definitely not compete with these people/investors.



    Kaushik,

    Using black money as a catchall reason to argue that RE prices will not fall is a little weak.

    This assumes that ALL RE deals are done substantially in black, that all people have invested black money into the market and that most homes have people who have lots of money and will have the capacity to hold their investment for perpetuity.

    If such is the case, then surely there will be no distress due to job loss, salary loss, loss to builders due to high debt levels and large amount of illiquid inventory, etc.

    Do you subscribe to all of the above? I don't. Because the RE landscape is much more diverse than just a monolithic structure with all people who bought property having loads of black money and never in distress.

    As I had said earlier many times, Indian RE will start sliding due to one or both of following reasons ...

    1. Increasing job or salary loss situation on a national basis

    2. Builders starting to succumb to pressures of too much debt and not enough sales volumes.

    Both of these are on the cards because of the highly risky global economic situation as well as the Indian growth story which is showing its true colors of being existent mainly due to money (liquidity) pumping by Govt to keep GDP growth going.

    This will inevitably lead to a sustained high inflationary situation which will negate all the salary hikes you get and bring us all back to square one.

    Just a matter of time. Keep watching.

    cheers
    CommentQuote
  • Originally Posted by wiseman
    Kaushik,

    Using black money as a catchall reason to argue that RE prices will not fall is a little weak.

    This assumes that ALL RE deals are done substantially in black, that all people have invested black money into the market and that most homes have people who have lots of money and will have the capacity to hold their investment for perpetuity.

    If such is the case, then surely there will be no distress due to job loss, salary loss, loss to builders due to high debt levels and large amount of illiquid inventory, etc.

    Do you subscribe to all of the above? I don't. Because the RE landscape is much more diverse than just a monolithic structure with all people who bought property having loads of black money and never in distress.

    As I had said earlier many times, Indian RE will start sliding due to one or both of following reasons ...

    1. Increasing job or salary loss situation on a national basis

    2. Builders starting to succumb to pressures of too much debt and not enough sales volumes.

    Both of these are on the cards because of the highly risky global economic situation as well as the Indian growth story which is showing its true colors of being existent mainly due to money (liquidity) pumping by Govt to keep GDP growth going.

    This will inevitably lead to a sustained high inflationary situation which will negate all the salary hikes you get and bring us all back to square one.

    Just a matter of time. Keep watching.

    cheers


    Thanks. my intention was not questioning but to get a clarification on the same. Your reply is very detailed and clarifying.
    CommentQuote
  • Corruption, Black Money and RE

    Found an interesting article...

    The Economics of Corruption - Value Research: The Complete Guide to Mutual Funds

    A snippet that is relevant in this forum...

    This kind of money has to stay invisible, and that is its biggest priority. So it must be spent as soon as possible: either as consumption, or in real assets, or sid off abroad, where it lies, profitless, in some Swiss Bank, reducing the cost of international capital. All possibilities have a salubrious effect on their respective economies, which is why some pretty rich and otherwise sensible countries don’t mind keeping ‘dirty money’ in their banks.
    The rather large amount of black money lying in Indian real estate has helped keep leverage low, and arrested bubble collapses. A lot of this money is thanks to corruption. The lower leverage improves the debt quality of mortgage lenders like HDFC, besides reducing the cost of capital indirectly. Rentals are always below the cost of mortgage finance, making it easier for those who cannot afford housing. As the old saying goes, “Fools build houses, and the wise live in them."

    ]

    Not sure how many builders are actually completely dependent on the banks (or any legal financial means) for their funding. I wonder if a politician who makes 100CR in a scam and gives to his builder friends, really cares to get that money returned as quickly as other legal financial institutes. For him, it is asking for trouble. There lies the true capacity of the builder to hold up the prices and not budge. Despite all the signs that the RE is about to correct, the black money may just lock the anticipated huge fall.

    ]

    Not sure how many builders are actually completely dependent on the banks (or any legal financial means) for their funding. I wonder if a politician who makes 100CR in a scam and gives to his builder friends, really cares to get that money returned as quickly as other legal financial institutes. For him, it is asking for trouble. There lies the true capacity of the builder to hold up the prices and not budge. Despite all the signs that the RE is about to correct, the black money may just lock the anticipated huge fall.

    ]

    Not sure how many builders are actually completely dependent on the banks (or any legal financial means) for their funding. I wonder if a politician who makes 100CR in a scam and gives to his builder friends, really cares to get that money returned as quickly as other legal financial institutes. For him, it is asking for trouble. There lies the true capacity of the builder to hold up the prices and not budge. Despite all the signs that the RE is about to correct, the black money may just lock the anticipated huge fall.
    CommentQuote
  • India seen as least preferred among Asia Pacific markets

    Check this article.....
    India seen as least preferred among Asia Pacific market

    will this effect RE market in India.
    CommentQuote
  • Good post wisey :).

    Kaushik,

    Even if there is black money in RE, at the end of the day, it has to be purchased by white money!! Will the investor with cash give the money to builder with no returns or for infinite time just because it is black money?? NO.

    Man, in business, money is money, it has no color.
    CommentQuote
  • Originally Posted by vivek.cap
    Check this article.....
    India seen as least preferred among Asia Pacific market

    will this effect RE market in India.

    And cities like Mumbai are amongst highest price in the world & with some of the worse infra. Recently, Delhi has over-taken Mumbai for best place for business for the first time in history.

    In latest survey, Mumbai's population density is 27000 people/sq km while Singapore is the Greenest city in this part of the world.
    CommentQuote
  • Originally Posted by realacres
    Good post wisey :).

    Kaushik,

    Even if there is black money in RE, at the end of the day, it has to be purchased by white money!! Will the investor with cash give the money to builder with no returns or for infinite time just because it is black money?? NO.

    Man, in business, money is money, it has no color.


    I completely agree with the theories related to this. However when we observe the things around us we don't feel the same. Your original post on this thread was around 2.5 years back and since then the RE prices have gone real high. I have heard about builders in Mumbai who can keep their flats unsold for years but will not do deal in white. At least in Pune builders are ready to sell in full white.

    My observations are that the black money is in abundance. Small shops are bought and sold for almost a crore in Pune. And the buyers are the businessmen who will not give you any receipt of the purchase. e.g. medical shops will not give u a receipt unless you ask for it. Other kirana, sweet and misc shops never give you any receipts. And even those who do like the clothes shops they have kaccha and pakka receipts. I have seen these shops doubling or trebling their business in the last few years in the area I live in where. This makes me believe that RE is full of black money. Certain section of people seems to have money and inflow of money such that they can hold for at least a century.

    Personally I don't like the idea of RE as investment because when I see around so many land kept vacant lying around which otherwise could be used for agriculture and increase the food production. Some of these land I have been seeing since my childhood which is more than 30 years. Investors in RE without any goal to use it just wasts resources which otherwise could be used for the betterment of the society.
    CommentQuote
  • Originally Posted by kaushik.v
    I completely agree with the theories related to this. However when we observe the things around us we don't feel the same. Your original post on this thread was around 2.5 years back and since then the RE prices have gone real high. I have heard about builders in Mumbai who can keep their flats unsold for years but will not do deal in white. At least in Pune builders are ready to sell in full white.

    My observations are that the black money is in abundance. Small shops are bought and sold for almost a crore in Pune. And the buyers are the businessmen who will not give you any receipt of the purchase. e.g. medical shops will not give u a receipt unless you ask for it. Other kirana, sweet and misc shops never give you any receipts. And even those who do like the clothes shops they have kaccha and pakka receipts. I have seen these shops doubling or trebling their business in the last few years in the area I live in where. This makes me believe that RE is full of black money. Certain section of people seems to have money and inflow of money such that they can hold for at least a century.

    Personally I don't like the idea of RE as investment because when I see around so many land kept vacant lying around which otherwise could be used for agriculture and increase the food production. Some of these land I have been seeing since my childhood which is more than 30 years. Investors in RE without any goal to use it just wasts resources which otherwise could be used for the betterment of the society.


    Kaushik's observations are correct. Businessmen periodically park their illicit money in RE.
    CommentQuote
  • You have every right to question ...

    Originally Posted by kaushik.v
    Thanks. my intention was not questioning but to get a clarification on the same. Your reply is very detailed and clarifying.



    Kaushik,

    Except for statements of fact, everything eise (especially analysis and deductions) are only opinions. So you have every right to question if you don't share the view.

    I am careful in only stating things neutrally and not getting aggressive o personal (since that only distracts people from the actual point).

    An interesting point made was that if a politician wanted to place 100 Cr somewhere and not necessarily to get quick returns then this money might support price levels. This is a good point and sounds logical.

    I also go with the theory that when there is substantial black money into an asset class (as a proportion of total money in that business) then there will be less distress and therefore less chances of price reduction.

    The only issue is whether this can happen nationally and whether it can weather the storm of a large supply of investment properties into a market due to sudden strain of job/salary losses as well as builder losses. Can the amount of black money run into 10s of thousands of crores?

    Then this country is in deeper sh** than I thought! :)

    cheers
    CommentQuote
  • Worth reading...

    They made Mumbai Builders' own island and How - The Economic Times

    Builders, who make and, more often, break rules in the island city, are in a bit of a spot. The chief minister keeps away from them. The civic authority is holding back multiple approvals for their projects. Most banks have stopped lending to them. And buyers are unwilling to buy, at least not at prices that builders want them to. In Lower Parel, the Central Mumbai district, where developers have sold new dreams to homebuyers, tall cranes stand idle.

    Six months ago, property analysts talked of thousands of new apartments that would add supply in a city where the rich and even those who are not-yet-there have a strange fondness for buying second home in crammed localities. Today, they are less sure.

    There’s an unusual combination of forces. The CM doesn’t want a quiet chat with a builder to cast a shadow on his impeccable reputation. He will, understandably, be extra careful as the 2G scam probe could lead to the PMO where he once worked. At the civic authority, which has the last word on everything in a new building — from fire exits to parking lots — a new straight-talking chief is taking on powers that rule the place; it’s a new tussle that has slowed down waivers and approvals.

    Builders were banking on the parking FSI clearance — where 200 sq feet is available free of cost for development for every 100 sq feet that’s developed as parking area in the same land parcel. That will have to wait for now. On the other hand, bankers, shaken by scams and a prolonged money crunch, have shut the doors while buyers are betting that prices will soon dip.

    Well, it may a little, and may be just for a while. No big builder will default in a way that will spark a fire sale of apartments. It never has. A builder in distress will always find a diamond trader who will lend against half-built towers and plots of land; or, he may cut a deal with an MNC to offload 50 apartments at a negotiated price to tide over the crunch. It may be done quietly with the least noise to avert an army of buyers spotting an SOS signal. At the end of the day, developers have assets which can be used to raise some money to pay off a tough lender.

    Even buyers, who are lucky to catch a dip, should never forget that they have to deal with a tough lot. It’s a world where brands matter little beyond a point. Some of the biggest realtors are yet to hand over the apartment keys to buyers who have been kept waiting for a year-and-a-half. One such gentleman, who prefers to remain unnamed, asked the builder to pay the penal interest he had promised for any delay. He was calmly told to look at a particular clause in the agreement that dealt with the penal rate. It said that penal interest would be paid on any “excess money” that a buyer gives to the property firm.

    It’s a line the buyer — who will have to move out of his official residence a year later when he turns 58 — never quite understood while flipping through the agreement four years ago. While going through it again the other day, he sensed how bizarre it was. Why on earth should a buyer give extra money to the builder? The penal interest is not on the amount he has paid to the builder, but the extra he could have paid by mistake. Our man thinks it’s pointless to move the court against the realtor or talk about it to the world. Once again, he is inclined to believe his builder, who has promised that things, will be sorted out soon
    CommentQuote
  • Kaushik,

    I agree to several points you made & you rightly said about bills for kirana etc. But then even look elsewhere:-

    Rickshawala, the maid (bai), milkman, newspaper vendor.......all deal in cash but you need to see that the amount involved in this with a particular person is very small.

    Coming to RE, builders take money from HNIs in cash at the rate of 25%/annum. Now, even if this loan is not seen on the balance sheet of the builder, it doesn't make him debt free.

    As far as this thread is concerned, you need to see that prices indeed dipped in 2009 & in areas like Mumbai, it was as high as 45%+. So, see the time-line rather than seeing starting & current rates from this thread. Also, the intention of the thread was not just prices but to expose the tricks played by the builders & co. to con the buyer.

    At the end of the day, be it white or black money, the end user will be with white money. And the best eg. that builders nego really hard when you can give him cash can be seen as a clear eg. how the investors want to exit RE.

    Eg. Park Titanium in Park Street offered rate of 2700/sq ft if atleast 30+% could be paid in cash. If not the rates were around 3850-4000/sq ft then. Even today, offer builder cash element & see price/sq ft being slashed.

    Problem today is builders are ready to sell at lower price but only if considerable amount is paid in cash.

    * PS:- Don't bring commercial areas here coz in such cases, both the buyer & seller prefer cash as both benefit due to less SD + reg & buying property at market rates may lead to possibility of buying beyond sources of income. I know a person who has lacs in his lockers but buys car on loan coz his official earning doesn't make him eligible to buy car on full down-payment.
    CommentQuote

  • Good link man. It really speaks well about current RE scenario. Here is one more:-

    HDFC realty fund starts off loading select assets:-

    HDFC realty fund starts off loading select assets - The Times of India
    CommentQuote
  • Realty cos hit with Rs 20,000 cr demand

    Public sector banks including State Bank of India, Bank of Baroda, Bank of India, Indian Overseas Bank have served notices to dozens of real estate companies to recover around Rs 20,000 crore of their exposure by March. The banks are now making efforts to recover their real estate loans which were restructured in the aftermath of global financial crisis in 2008.

    However, some of the real estate companies which are currently witnessing low volume of business have already asked for further restructuring of these loans, a proposal which banks are generally not willing to endorse. M Narendra, CMD, IOB confirmed that the bank has sent notices to some of the real estate firms.

    Nagesh Pydah, CMD, Oriental Bank of Commerce and RK Bakshi, executive director, Bank of Baroda, said efforts were being made to recover the loans to realty companies. A senior SBI official requesting anonymity said that the bank has taken action under the Sarfaesi Act which empowers the banks to seize and sell assets in case of defaults to recover their dues.

    No confirmation of the banks’ move was available from the real estate companies.

    “We have sent notices to five-six real estate companies and asked them to repay our entire outstanding amount within 40-50 days. A majority of such accounts are related to IT parks and located at places like Bangalore, Hyderabad and Mumbai,” said Narendra.

    Realty cos hit with Rs 20,000 cr demand
    CommentQuote