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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  • Pune..Mumbai or Thane everywhere in country .. investors are owning minimum 5-10 houses. And genuine buyers cant afford one purchase for end use. Home is a basic necessity. In this great counrty even DINK family is not able to afford a house in decent location till they have financial support and heavy savings of their parents. I know I am telling nothing new, just letting out my frustration.
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  • Originally Posted by dhoom
    The US housing market had 'significantly gone up' between 2004 and 2008 and see where it is now!!! You don't want a $300,000(1.4 Cr) 3 BHK sword hanging above your neck, do you?


    Parallels with US have been provided since 2008. However, the fact remains that India market had also gone up excessively high during the same period but has not come down but has kept going up.

    Even if tomorrow prices come down they may not go below 2008 levels. In India there is great mismatch between demand and supply which is not the case with the US.
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  • Originally Posted by stoxxx
    It has been nearly two years since this thread was started. The prices have significantly gone up since it was started. So probably builder and RE bulls have been right on the money.


    Right on the ball!!!!

    The time this thread was started (May June 2009 I think) was actually the best time to buy!!!!

    The builders and RE bulls theory has actually been proved right over the last two years, over and over again.

    Most people see the bubble after it has burst and start shouting "bubble bubble"

    The time to shout bubble was in 2006 and 2007.

    Shouting bubble bubble after it has burst only ensures that people get scared of bubble and dont buy at the best time - when the prices are low. ALWAYS ALWAYS happens in stocks, also in RE.

    Of course, if you shout bubble bubble continuously for 7 years, you will finally be proved right, because RE cycle has boom and bust in this time frame.

    So the biggest bubble here is actually this thread itself - which has been ballooning for 2 years now and has reached 353 pages of verbiage, a giant hot air balloon!

    If people keep this bubble of a post alive for another 5 years, then finally the prediction of "50%/60% price correction will actually come true!!!!!
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  • Is April 12th still on the radar ? Is the bubble bursting anytime soon ?
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  • I'm repeating myself, but ...

    Originally Posted by stoxxx
    Parallels with US have been provided since 2008. However, the fact remains that India market had also gone up excessively high during the same period but has not come down but has kept going up.

    Even if tomorrow prices come down they may not go below 2008 levels. In India there is great mismatch between demand and supply which is not the case with the US.



    You are absolutely correct about the erroneous comparisons between the US and India.

    But please note that the error is mainly in the extent of the problem. The US is at one end of the problem of to much credit given out and an inability to either pay (income loss) OR inability to borrow more.

    Ultimately the impact of recessions on bubbles is not based on demand alone. Its based on demand at various price levels.

    Therefore you will suddenly see that demand for 10000 per SFt in 2011 when jobs and salaries are plenty (or so the media tells us) will suddenly come crashing down when jobs and/or salaries show serious and significant declines. The same demand might then perk up at 6000 oer SFt based on new economic realities.

    One is not arguing about the latent demand per se. Crashes happen even when latent demand is same but ability to borrow sufficiently OR pay high amounts is lost due to economic crisis.

    Price levels of 2008 (or lower) still very much in the ballpark if we are to believe the severity of the coming economic crisis which is nothing but the 2008 crisis (which was cut short due to secondary bubble blowing via stimulus and bailouts) playing itself out in more virulent form. Emerging markets are right in the path of the Hurricane and will actually lead the crash via high inflation and rising interest rates; simply because Emerging Economies may promise a great future but right now they are rather weak.

    Consumer Confidence also plays an important role.

    cheers
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  • Originally Posted by wiseman
    You are absolutely correct about the erroneous comparisons between the US and India.

    But please note that the error is mainly in the extent of the problem. The US is at one end of the problem of to much credit given out and an inability to either pay (income loss) OR inability to borrow more.

    Ultimately the impact of recessions on bubbles is not based on demand alone. Its based on demand at various price levels.

    Therefore you will suddenly see that demand for 10000 per SFt in 2011 when jobs and salaries are plenty (or so the media tells us) will suddenly come crashing down when jobs and/or salaries show serious and significant declines. The same demand might then perk up at 6000 oer SFt based on new economic realities.

    One is not arguing about the latent demand per se. Crashes happen even when latent demand is same but ability to borrow sufficiently OR pay high amounts is lost due to economic crisis.

    Price levels of 2008 (or lower) still very much in the ballpark if we are to believe the severity of the coming economic crisis which is nothing but the 2008 crisis (which was cut short due to secondary bubble blowing via stimulus and bailouts) playing itself out in more virulent form. Emerging markets are right in the path of the Hurricane and will actually lead the crash via high inflation and rising interest rates; simply because Emerging Economies may promise a great future but right now they are rather weak.

    Consumer Confidence also plays an important role.

    cheers


    Thanks wiseman, very nicely put.
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  • Originally Posted by madhura dixi
    Pune..Mumbai or Thane everywhere in country .. investors are owning minimum 5-10 houses. And genuine buyers cant afford one purchase for end use. Home is a basic necessity. In this great counrty even DINK family is not able to afford a house in decent location till they have financial support and heavy savings of their parents. I know I am telling nothing new, just letting out my frustration.


    Absolutely right Madhura.
    When everybody feels that house is great investment which never goes down (when most in upper-middle class find it unaffordable), my bulb lights up and says, "Oh its like 2008 when BSE went up 21000 and experts had 26000 in sight. We end up with 8000 :D"

    I feel govt is fueling RE with a negative interest-rate. Next 2-3 quarters would be interesting.
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  • Originally Posted by Saurabh01
    In last one year Waked prices has increased by 40-60%. I don't know anyone salary increased by the same way. But problem is, still people buying it. I don't know how they are getting this money.


    For different price level there will be a different demand. Low sales doesn’t mean zero sales, there will be some sales. Volume is the correct indicator to judge the market.

    In 2007 last quarter & 2008 1&2nd quarter had the highest prices & low volume. Whoever purchased during the peak are still under water.
    In early 2008, there was indication about forthcoming tsunami. As market is full of informed & uninformed buyers; uninformed buyers didn’t had a clue.

    The important point is, is it a correct time & decision? One should always make an informed decision.
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  • Originally Posted by wiseman

    People must never forget that Real Estate is the largest Govt-sponsored g,ambling / ponzi game in the world.
    cheers


    Govt. have vested interest in RE. In every transaction they get 10% cut as taxes. So that politicians can blow up money. Another reason is to cook the GDP numbers, higher the RE prices higher will be the GDP.

    After central takes one time cut, municipalities keep collecting property taxes for corporator’s long lasting enjoyment. As per the new property tax system, taxes will be collected based on property value & property value will be decided based on ready recokner rate. By increasing the RR rate govt is competing with builders in price hike.
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  • Originally Posted by khbarilal
    Govt. have vested interest in RE. In every transaction they get 10% cut as taxes. So that politicians can blow up money. Another reason is to cook the GDP numbers, higher the RE prices higher will be the GDP.

    After central takes one time cut, municipalities keep collecting property taxes for corporator’s long lasting enjoyment. As per the new property tax system, taxes will be collected based on property value & property value will be decided based on ready recokner rate. By increasing the RR rate govt is competing with builders in price hike.


    Absolutely crystal-clear :D
    People sucking into RE, need to learn that there're other more important things in life besides owning a house with over-leverage.
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  • Originally Posted by hitmady
    Absolutely crystal-clear :D
    People sucking into RE, need to learn that there're other more important things in life besides owning a house with over-leverage.


    It is all a matter of relativity and perspective. May be there are more important things in life than spending excessive time on forums and spreading wishful thinking of impending correction / crash. May be one of them includes buying a house within your means.

    How does one know as a matter of certainty that RE buyers are over leveraging. What if they miss the boat again and again with runaway inflation which is what have happened continuously over last decade.

    I dont support high prices or RE bulls or builders. But life is short. One may not want to wait forever and cause oneself heartburn thinking 'if only I had bought then'. Going by some boarder's history they have been calling RE crash since 2004 and since then prices have only gone up multiple times. These are facts. Even a broken clock is correct twice a day.
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  • And all I need is only one chance, not even two!

    Originally Posted by stoxxx
    It is all a matter of relativity and perspective. May be there are more important things in life than spending excessive time on forums and spreading wishful thinking of impending correction / crash. May be one of them includes buying a house within your means.

    How does one know as a matter of certainty that RE buyers are over leveraging. What if they miss the boat again and again with runaway inflation which is what have happened continuously over last decade.

    I dont support high prices or RE bulls or builders. But life is short. One may not want to wait forever and cause oneself heartburn thinking 'if only I had bought then'. Going by some boarder's history they have been calling RE crash since 2004 and since then prices have only gone up multiple times. These are facts. Even a broken clock is correct twice a day.



    I hear a lot about how analysts who call crash all the time will be rewarded with one sometime in their lives - and then claim they were right all along! see? ...

    And the analogy used is, "Even a Broken Clock is correct twice every day".

    Do you see? There are 2 lessons here for those who buy at high levels and have no option but to pay a heavy price to the banker (via interest), the builder (as overpayment) and the Govt (as taxes).

    1. Cycles happen with regularity and when prices are high its very important that we hold back our impulse and wait for the other side of the cycle

    2. I don't even need 2 chances to be correct. Al I need is ONE opportunity for low prices and I get to buy my home at a low and affordable price. And enjoy a low-cost home and a better lifestyle rest of my life.

    The lessons of good analysts are still important even if they are wrong sometimes :).

    cheers
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  • Originally Posted by stoxxx
    How does one know as a matter of certainty that RE buyers are over leveraging. What if they miss the boat again and again with runaway inflation which is what have happened continuously over last decade.


    Even with run-away inflation in last few years/decade, Pune rents are still affordable.
    A person buying 1-BHK in 2004 for 6L in an developed area, may fetch 8K rent. Which is -ve return considering double-digit inflation/EMI + maintenance charge.

    Another person who had then put money in good-stock or MF must have got better returns.
    Above case in BULL phase of RE :D. What if next few years are BEAR phase?
    Stocks atleast give options to pack-up & run :D

    Remember high-inflation not only increases EMI but also other costs of living for e.g. school/tuition fees, transportation/travel/fuel costs, grocery, entertainment charges etc. So owning a house with higher EMI (> 30% of salary) in inflationary period is double-whammy.

    Frankly speaking when I am paying rent which is #10% of take-home salary and owning same costs 30% of salary, I see NO incentive in buying even-if it's affordable.
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  • Originally Posted by hitmady
    Even with run-away inflation in last few years/decade, Pune rents are still affordable.
    A person buying 1-BHK in 2004 for 6L in an developed area, may fetch 8K rent. Which is -ve return considering double-digit inflation/EMI + maintenance charge.

    Another person who had then put money in good-stock or MF must have got better returns.
    Above case in BULL phase of RE :D. What if next few years are BEAR phase?
    Stocks atleast give options to pack-up & run :D

    Remember high-inflation not only increases EMI but also other costs of living for e.g. school/tuition fees, transportation/travel/fuel costs, grocery, entertainment charges etc. So owning a house with higher EMI (> 30% of salary) in inflationary period is double-whammy.

    Frankly speaking when I am paying rent which is #10% of take-home salary and owning same costs 30% of salary, I see NO incentive in buying even-if it's affordable.


    You are missing the capital appreciation on RE. No one invests in RE for rental income alone - not only in India but in many other countries.

    A stock may not give dividend but if it appreciates then you are happy aren't you.

    Also RE is the only investment where you can get the gearing. if you had 1 million dollars you could invest that in MF / Stocks. But with the same 1 million dollars you could buy a house worth 4 million. If it is a very long term purchase you are bound to come out good - except if bought at unaffordable gearing or to flip it in a couple of years.

    Also a major crash in housing most likely would lead to a crash in stock market in India where the GDP growth is based on real estate boom and domestic consumption.
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  • Originally Posted by stoxxx
    You are missing the capital appreciation on RE. No one invests in RE for rental income alone - not only in India but in many other countries.

    A stock may not give dividend but if it appreciates then you are happy aren't you.

    Also RE is the only investment where you can get the gearing. if you had 1 million dollars you could invest that in MF / Stocks. But with the same 1 million dollars you could buy a house worth 4 million. If it is a very long term purchase you are bound to come out good - except if bought at unaffordable gearing or to flip it in a couple of years.

    Also a major crash in housing most likely would lead to a crash in stock market in India where the GDP growth is based on real estate boom and domestic consumption.


    You are assuming guaranteed capital appreciation in RE.
    In developed countries in-spite of stock mkts has recovered, +VE GDP growth and low home-loan rates, RE is still a laggard where in some places AVG apartment cost has gone down by 40% in last 3 years.
    Easy leverage is precisely the reason for RE bust in USA, can't the same be the case in INDIA?

    You are right that most are buying RE thinking capital appreciation, but aren't RENT trends give actual picture of demand & supply?
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