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?

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  • Long term future is always a gamble ....

    Originally Posted by realacres
    Nice thoughts wiseman, frugality & sanjeev.

    20 years is a long period, almost a generation. So, I can't say what it (Pune RE) would be at that time. Maybe as said by some, house will cost INR 1.2Cr,2.4Cr or whatever but what needs to be seen is whether there will be indeed demand for houses in Pune like today at that time. If better green pastures are available elsewhere, why would one come to Pune? What was Pune when I was in primary school 15-17 years ago? It is smaller than even current tier3 cities like Indore. The sudden boom came only due to IT & IT alone. Else why would one pay 2.5k/sq ft for areas like Wakad where the land used to cost INR 20k/acre in late 80s,early 90s?

    My bottomline is this (atleast for myself):-

    Will I be alive after 20 years? If there is no guarantee about that, I would go with what the short-medium indicators are rather than calculating the interest gained on FD or EMIs paid to the bank. But one thing is for sure, at this time, it is better to get your money parked in banks rather than invest in RE as the money value will only go up but the same cannot be guaranteed for RE as it may fall by 80% after 10-20 years, who knows!!

    When I first bought land in Koramangala in Bangalore it was around Rs.7 per SFt. And it was a gamble because it was bought when shrubland/farmland was being cleared by buldozers and plots were being made.

    Similarly, back in early 90s, when I was looking for a place to stay (right opposite what is now Manipal Hospital) I was told that it was an unsafe area as dacoity was common (Leela and Manipal didn't exist then). Therefore, this whole IT thing was as surprising to the common man as it was to the IT heads (in fact, till 1999 even companies like Cognizant was only around 75 mil in size and considered a small company). So, this whole IT thing should be seen in such a perspective.

    My own belief is that, the growth period in IT (100% per annum in 90s to 30%-60% in this century) is over. Besides, while Net Profit margins in the 1990s were between 25%-40%, today (even with a zero tax situation, which will soon disappear) margins struggle between 15%-20%. So, if you bring in tax, there would be no difference between IT companies and other industries in India. Also, as tax comes in, expect salaries to take a permanent and serious hit otherwise margins will go below zero!!!

    My own take is that, with services (especially export) taking a sizeable hit due to the massive contraction in demand in the West, manufacturing, especially high technology manufacturing, will come up rather fast. All the elements are in place. Large number of high-tech ancillaries for modern cars and other equipement, large number of low-cost, well-trained workforce and an increasing number of companies setting up manufacturing in India under the model of Indiginize, sell in India and then export.

    Therefore, Bangalore will see flat growth as low tech work like BPOs will migrate out to cheaper locations (both within and outside India). Upscale technology companies will thrive in Bangalore, but it don't need millions of people working like zombies. So, there will be money spent in Bangalore, but by fewer people spending larger per capita.

    Chennai is a prime candidate for rapid expansion in manufacturing. This is probably why RE prices have been so solid in Chennai and strongest in India among Metros (though volumes have crashed). In fact, investing in Chennai RE (especially near Manufacturing export zones) and that too in medium cost housing will probably see the highest appreciation.

    A darkhorse is likely to be Coimbatore since it has along history with Engineering production, expecially Textile. But it, like Mysore took off too prematurely and land prices have gone up much too fast and too far and have not yet declined as much as they should!

    Anyway, as Real said, safety net cash in the bank is a must. Therefore, my model of high down payment, low debt, decent cash reserves (equal to 9-12 months living expenses), cash savings every month even on a lower salary are all a must if you want to have a home as well as not die a thousand deaths each time EMI day arrives!!! A home is to be enjoyed, not to be dreaded every EMI date till it finally becomes yours 20 years from now when the banks cancel the lien on the property!!!

    And, with the kind of deficits being created by Govts worldwide, there is bound to be Hyperinflation down the road (maybe a few years from now), while, for now it will continue to be deflation. 10-15% of your wealth in Gold/Silver mix is an absolute must as this will be the only asset to hold its own in deflation or high inflation.

    Even land will decline in these exceptional times!

  • A marathon discussion! Kudos for some excellent insights.

    Re: Long term gains, I am with Realacres, I would prefer to use my money now rather than have a big net worth when I die. So no RE unless I use it myself and no rent collection is my motto.

    Wiseman, I totally agree with you that at some time in the future hyperinflation is inevitable. Having seen its effect in the 80s, as long as Congress is in govt, I would keep a third of my assets in RE.

    Frugality, I was in cash throughout 2008 waiting for the perfect point to buy stock. I failed to recognise it in MArch 2009 and totally missed a chance to double my money.

    Timing may be everything, but is also very difficult.

    Stock buying is at the click of a button. I doubt if timing RE will be even remotely pssible.

    But I still sit on cash waiting for an opportunity
  • Real picture....

    Originally Posted by Venkytalks

    Frugality, I was in cash throughout 2008 waiting for the perfect point to buy stock. I failed to recognise it in MArch 2009 and totally missed a chance to double my money.

    Timing may be everything, but is also very difficult.

    Stock buying is at the click of a button. I doubt if timing RE will be even remotely pssible.

    But I still sit on cash waiting for an opportunity

    The stock markets boomed not due to domestic retail investors but FIIs. The FIIs pumped in INR 57, 530 Cr. This amount is greater than what they withdrew in 2008. And why single yourself out? Even leading MF companies sat on cash at that time. It is good that you have cash as nothing beats cash at this point of time. I have myself sold all of the investments in Indian stock markets. Continue to hold in foreign markets though.

    Gold has hit the sky or even gone over it due to purchase of gold in bulk by China as China is converting it's US$ reserves into gold. This is the first time I am seeing the prices of gold & platinum so close to each other.

    If you see, 150-200 points fluctuation is stock markets is common now. What does this indicate? That not's all well in the market. Again, only the small & mid-caps have increases exponentially, while the large caps didn't move at that rate.

    Other factor which influenced the decision of FIIs in Indian stock markets were:-

    1.) Indian Re/INR Vs US$ rates looked good in here, hence they could buy more at less.

    2.) China is on steroids & it's growth rate may soon drastically drop. The Yuan rate is fixed against US$ making it unpredictable. The more US$ reserves China had, more was loss for them, hence the conversion in gold & Euro.

    3.) Brazil has growth rate of mere 2.5%, China looked expensive, Russia has only single sector which looks promising:- Oil. This made India a favourite amongst all as it has good growth rate & diversified portfolios to invest in.

    Post hike in ROI due in next quarter or maybe even before will change the picture altogether. The FIIs will also be forced to leave as the cental banks in developed countires will sqeeze the liquidity to control inflation. After all there is a limit to the number of notes which the US Fed can print.

    The actual situation will be visible from early 2010 as the economy will be free from steroids & the actual picture will be seen. Expect inflation as 7-8% for WPI & 13-14.7% for CPI based index.

    It will be like seeing a bollywood actress without makeup at night:D.
  • Originally Posted by realacres

    Expect inflation as 7-8% for WPI & 13-14.7% for CPI based index.

    Inflation will be reported Monthly now.. am i correct?
    Seems trying to answer Weekly questions of Inflation will be a headache for the ruling government. :D

  • Hi realacres. You have pointed out most of the factors.

    One or two more: China is playing smarter than the best capitalists in the world. They have bought forward contracts and long term deals for huge amounts of commodities (oil, base metals). They continue to spend on their long term infrastructure.

    This they have done now for 2 years since their stock markets fell. Their 2 trillion in cash is already spent forward many times over and above (close to6-7 trillions) and they will not be affected by weak dollar any more.

    They may also succeed in a switch to domestic Chinese consumption.

    Very impressive moves by them.

    If US recession continues (most likely), interest rates will remain low since US will be deflationary. REst of the world may have inflation in dollar terms while US remains in deflation/depression.

    Thats a depressing thought. Inflation in India may run at 15% or so, similar to early 1980s. RE prices, especially basic 2BHK, will be high, luxury RE will not rise (no buyers), many stocks will tank, commodity stock will rise.

    I have absolutely no predictions for such bizarre scenarios.

    The worst is, cash will also lose value. Middle class dreams for wealth in India will be over even before it ever got off to a reasonable start.

    Veemkay, totally agree with your opinion - a quick fix aspirin by the govt to remove a headache
  • Did any of you sell at the 17350-500 levels as I'd mentioned?

    Originally Posted by realacres
    The stock markets boomed not due to domestic retail investors but FIIs. The FIIs pumped in INR 57, 530 Cr. This amount is greater than what they withdrew in 2008. And why single yourself out?

    If you see, 150-200 points fluctuation is stock markets is common now. What does this indicate? That not's all well in the market. Again, only the small & mid-caps have increases exponentially, while the large caps didn't move at that rate.

    The actual situation will be visible from early 2010 as the economy will be free from steroids & the actual picture will be seen. Expect inflation as 7-8% for WPI & 13-14.7% for CPI based index.

    It will be like seeing a bollywood actress without makeup at night:D.

    Real, Venkytalks, Veemkay, and others ...

    For the whole month of Oct, I have been repeatedly stating that around 10000 on DOW and 17350-500 (final figure) on the Sensx are probably the top. Also that Oct is typically the crash month when Stock markets crash many of the past few years.

    Did anyone sell at least something and take cash off the table? My advisory clients have sold above 17000 and are planning to sell more when one more short rally materialises soon (when the bulls come back to recover from the thrashing they are getting now!)

    Volatility is back with a BANG (yes real) and Sensx tanked nearly 420 points today and with most bulls caught on the wrong foot in the coming F&O settlement day after tomorrow, will be doubling shorts to make up. Expect market this week to tank further. I too started going short around 5100 levels and am back to the bad habit of making good money going short! Imagine, the Oct 4900 put I bought around 15 on friday got closed today at 75!!! 400% in 2 trading days! The market ALWAYS makes the greatest fools of the greatest number of people to the grreatest extent! In that regard, on Diwali day you would have found absolutely no bears left (me was an exception), had the maximum number of people sounding off about 21000 and 23000 and mximum number of people getting long.... And then it turned quietly and is taking many of them to the cleaners now!!! :D:D

    I had also mentioned that the worst hit would be the Realty stocks as well as Reliance group stocks (historically, every blow-off boom that was created by a certain sector resulted in that sector stocks being beaten to pulp in the next fall - ACC post 1992, IT post-2000, Reliance and RE post-2007).

    The problem with RE is that with the market finally deciding to fall (last one week it has swiftly broken through most important supports and has lost 1200 points since Diwali day thereby finally confirming that the 2nd or B leg rally since March 2009 is probably over and the next leg down has started), RE companies may not be able to get their IPOs thru in the market at any price, leave alone high valuations!!! By mid-2010, when the crisis will probably hit a new low in terms of depressed sentiments, sales should fall sharply and many RE companies will be in deeper debt and fighting for their lives. They will have to come in with distress prices as they cannot hold much longer!

    Unitech, which was one of the perpetrators of the Telecom fraud (and pocketed a cool 5000 crores from sale of 74% of their licence to Telenor will see some dramatic action in the near future when the Govt is forced to act to reverse the telecom scam and control damage!

    I had also indicated that the falling in DOW will be final straw for all markets to start falling in sync. Am waiting for that to happen. This fall will be very sharp, very violent and very swift!!! It will cause much more pain to investors than the 2008 fall since most investors finally jumped in at the worst point with their last reserves - that is, in Sep/Oct believing the analysts who quoted 21000+ who have no money in the game themselves!!!

    Therefore, this is definitely not the bottom. With the new credit policy, the Govt, thru RBI is telling RE, enough is enough with your short-sightedness, stupidity in not realising that its your customer that feeding you and its time they started looking at RE like its a business rather than doing dacoity every day of the year whenever opportunity arose!

    Venkit, don't worry! Stay in cash till mid-2010 at least, and you will get super bargains! Also don't forget to pick up a little gold/silver when it goes down a little in the coming weeks/months. The consensus being reached is that it will probably go up around 150% from here (maybe around 30k to 35k per 10 gms before it finally tops!!!

  • I agree with Wiseman. The markets are going or bound to have a dip. I am in financial sector- Equities market. We do predict that Mid 2010, the money inflow in US by Govt will be over and the kind of sanctions gievn will come to there year end. Then we do see a correction, though maybe as it was till now.....
    as for RE, I am myself looking for a good deal, but i too see that high end properties sales are not much, bargain deals though are happening, but at reasonable negotiated prices..
  • Hi Wiseman, I am waiting in the wings, licking my chops for this mouth watering fall you predict.

    I did sell 20% at above 17000. Cleaned out most stock funds. Stocks I am in for the long term. I dont trade short term.

    I would be careful shorting in F and O - global liquidity is too high, lots of chances of wrong footing.

    Gold is a problem. I dont trade in dollar gold. Rupee gold is a double play on gold plus dollar rupee rate. Very unpredictable. Burnt my fingers earlier.
  • I agree about the RE IPOs, wont go through.

    Emaar MGF is doubly unlucky I think :-)
  • Thank you

    Wiseman ,

    Thanks for your suggestion.

  • This is really nice discussion.

    Thanks for the info wiseman.

  • CommentQuote
  • RBI signalling end of easy money regime: Morgan Stanley

    RBI nudge for banks, builders

    On the RBI’s move to tighten non-performing asset (NPA) norms for banks and making loans costlier for the real estate industry, Ahya said it was a clear signal that RBI wanted to gradually decrease support for banks and the realty sector. “The RBI was a little aggressive in providing support to the banks during the crisis by relaxing the norms on restructuring of NPAs. Now that the recovery is underway, they are now signaling to the banks that they have to reduce risk taking by increasing the provisioning norms, particularly on property,” he said. He also pointed out that real estate industry got easy lending from banks, due to which they were able to hold back sales and not cut property prices too much.

    “The RBI governor, post the monetary policy, was clear the RBI would like to see more adjustment in the property sector on the pricing front and that there should not be aggressive price increases,” he said.

    For complete news. visit:-

    A very good corresponding video:-


    The news as far as RE is concerned echoes the point:- RE prices have to fall down.:)
  • Originally Posted by realacres
    RBI nudge for banks, builders
    RE prices have to fall down.:)

    RBI is pretty loud and clear in its view that RE companies should focus on clearing inventories rather than holding it.

    Common-men put money in fixed-deposits. Banks lend it builders and they use it to artificially, jack up RE prices.
    It is really a big-scam
    And some IT idiots claim that RE is going-up and would be good investment
  • Originally Posted by hitmady
    RBI, is pretty loud and clear in its view that RE companies should focus on clearing inventories rather than holding it and artificially jack up price.
    Common-men put money in fixed-deposits. Banks lend these money to builders. And builders, using these money hold-up inventories and artificially jack-up RE prices.
    It is really a big-scam.
    And some of IT idiots claim that RE is rising.

    Lets not call RE bulls idiots. Lets call them Extra Smart. Because the RE bull theroy is beyond
    our understanding. So may be they are extra smart to understand this.
    Time will tell.