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 :
  • Things to know before buying a property under construction

    A useful article for property buyers:-

    Things to know before buying a property under construction - Economic Times
    CommentQuote
  • Realtors fail to repay bank loans

    They are likely to default,” the chairman of a large public sector bank said, adding that some of these firms already have overdue interest repayments. He declined to be named.

    The loans, however, will not be immediately categorized as non-performing assets (NPAs). A loan becomes an NPA when interest is not paid for 90 days. Banks do not earn interest on such loans and are required to set aside money for NPAs. For a loan defaulter, securing fresh debt becomes difficult.

    Realtors fail to repay bank loans - Home - livemint.com
    CommentQuote
  • High Vacancy - High Speculations

    The high vacancy rates(18%) shows that Pune became the ghost city. 18 out of 100 houses are un occupied by Human. The normal vacancy rate in India & around the world is 10%. This clearly shows the speculative nature of Pune real estate. As there is more supply, the rent will fall further. Speculators can’t hold long & keep paying property taxes & maintenance.:bab (35)::bab (35)::bab (35):
    CommentQuote
  • Originally Posted by khbarilal
    The high vacancy rates(18%) shows that Pune became the ghost city. 18 out of 100 houses are un occupied by Human. The normal vacancy rate in India & around the world is 10%. This clearly shows the speculative nature of Pune real estate. As there is more supply, the rent will fall further. Speculators can’t hold long & keep paying property taxes & maintenance.:bab (35)::bab (35)::bab (35):


    Yes, its true...Investors are moving away from real estate market, and now the real buyers are in the market. There are one or two articles published in newspapers in a week predicting that property prices are sure to fall in 2011, and in fact, falling. Buyers are getting calls from sales executives once they visit there projects.
    CommentQuote
  • Builders corruption exposed

    Watch UTV Bloomberg program "Exposed" Saturday morning 10:30 IST.

    Shows how builders are trying to push sales and frauds committed by builders even listed Reality co.s.

    Builders are giving lesser carpet-area to existing customers to make up for low sales.
    CommentQuote
  • Long term Slump Ahead...

    Indian developers will have to repay 1.8 trillion rupees ($40.8 billion) of debt to state-run banks, private equity funds and other lenders over the next two to three years, said Amit Goenka, national director of capital transactions at the Indian unit of Knight Frank. Their cash flow may also be under pressure as creditors seek earlier repayments, he said.

    I see large-scale distress coming up,” Goenka said in an interview today. “Right now it’s more of financial jugglery which is keeping builders alive for a few months before everything starts to cave in.”

    Many property companies raised capital at interest rates of between 21 percent and 25 percent from finance companies, while sales volumes dropped by about 50 percent, Sanjay Dutt, chief executive officer of business at the Indian unit of Chicago- based Jones Lang LaSalle Inc., said last month.

    India Builders Face
    CommentQuote
  • Interest Rate Hike Ahead...

    Few days ago, some one raised a concern in the forum that what will happen if interest rates go up by 2 %? At that time it appeared that it’s just absurd but recent inflation number indicates that there will be more rate hike to the tune of 100 to 125 BPS till year end.
    2% is a possibility if oil goes to $130 barrel. Last time at ~145/barrel, global economy went into recession, let’s see what happen this time.

    No wonder gold crossed 21K mark.:bab (35)::bab (35)::bab (35)::bab (35):

    http://www.expressindia.com/latest-news/RBI-to-hike-rate-by-50-bps-Goldman/779317/
    CommentQuote
  • Builders becoming NPAs was for sure by end of 2010 itself. And just to give artificial boost to RE, builders jacked up prices but hike in interest rates backfired this strategy.

    Builders have now fallen in their own trap. I pity buyers who are buying in to be busted builders. Hence, either sit back for now but if someone wants to buy in anycase, opt for ready possession & confirm that builder hasn't mortgaged this property, else the builder defaults & buyer pays for it.
    CommentQuote
  • Originally Posted by realacres
    Builders becoming NPAs was for sure by end of 2010 itself. And just to give artificial boost to RE, builders jacked up prices but hike in interest rates backfired this strategy.

    Builders have now fallen in their own trap. I pity buyers who are buying in to be busted builders. Hence, either sit back for now but if someone wants to buy in anycase, opt for ready possession & confirm that builder hasn't mortgaged this property, else the builder defaults & buyer pays for it.

    If builder mortgaged the property then he will not able so sale it. Because bank own the papers. Pls. correct me.
    CommentQuote
  • It will be uploaded here too
    YouTube - BloombergUTV's Channel

    Originally Posted by hitmady
    Watch UTV Bloomberg program "Exposed" Saturday morning 10:30 IST.

    Shows how builders are trying to push sales and frauds committed by builders even listed Reality co.s.

    Builders are giving lesser carpet-area to existing customers to make up for low sales.
    CommentQuote
  • Perverse effect of 16000 DDA flat launch: Price escalation of 30% in Delhi

    (Reproducing my post from Delhi forum - it has bearing on the RE bull theory)

    Last 6 months has seen a massive price rise in Delhi. Prices of DDA flats have gone from 1Cr to 1.5Cr (2BHK), from 1.;5 Cr to 2 Crore (3BHK GF) and builder floors from 3.25 Cr to 4.5 Cr (300 sy/1900 sf carpet).

    A lot of us (including me) said the DDA were selling for too much - that price was not justified (at 70L for 3BHK, 1.1 Cr at prime area with better quality). We (including I) felt that supply and demand would bring down prices in Delhi.

    Instead the reverse has happened. Prices of already existing flats have risen like crazy and now the prices charged by DDA seem justified - instead of prices falling, prices rose to make the whole price equation justifiable.

    BAsically DDA has effectively jacked up the base price of flats by 30% by launching at such atrocious prices. They have done a disservice to
    Delhi.

    Delhi and India as a whole is perverse as far as RE is concerned - the reverse of what should happen is what actually transpires.

    Anyone talking supply and demand is being foolish. The more the supply, the more prices rise - we have seen it in GGN, NOIDA and now in Delhi (Mumbai is of course the ultimate in this perversity).
    CommentQuote
  • Individual Mortgage VS Project Financing

    Originally Posted by Saurabh01
    If builder mortgaged the property then he will not able so sale it. Because bank own the papers. Pls. correct me.


    In individual mortgage, bank lend money to person & keep the property document as collateral. In case of any issue/recovery they held person liable.

    Builders get finance through various routes.



      Equity Capital –by raising money through IPO.

      Debt financing – by selling bonds , ECB(External commercial borrowing) etc.

      Project financing – project specific debt finance from Banks.

      Special purpose vehicle (SPV)- Builder transfer all project asset to a separate entity & take a debt against it.

      Private Equity- This is similar like equity but the fund manager involve in operation to recover the money.

      If builder goes bankrupt, first claim goes to debtors(bank, bond holder) , second claim goes to suppliers & project buyers, then third claim is for equity holders.

      The debt can be secured or unsecured, for unsecured debt builder do not need to keep the papers with lender. When bank lends money against project they do not take agreement of individual apartment as collateral. In this case builder can sell the apartment without obligation which is a normal scenario. Else no transaction could happen as each project have bank(debt) financing.
    CommentQuote
  • Drawing inferences without complete details is very difficult. I think ~2-3 years back, in Mumbai MHADA had received huge number of applications & jacked up the rate in Navi-Mumbai. They also offered luxury apartments above 1Cr . As usual it was a mad rush, after completion, complaints are coming out & people are posting ghost town pictures of Navi-Mumbai.

    The interesting fact is that besides having low response to private launches, MHADA received huge response. Because of people’s perception about govt as 1. Low cost 2. No litigation etc….

    BTW, some part of the Mumbai is showing price correction, though it’s not meaningful but it’s on the track.:). As usual it was a mad rush, after completion, complaints are coming out & people are posting ghost town pictures of Navi-Mumbai.

    The interesting fact is that besides having low response to private launches, MHADA received huge response. Because of people’s perception about govt as 1. Low cost 2. No litigation etc….

    BTW, some part of the Mumbai is showing price correction, though it’s not meaningful but it’s on the track.:)
    CommentQuote
  • Originally Posted by Venkytalks
    Your reason is right for US to some extent - real reason is that US has some 18 MILLION more homes than the 150 million odd households.

    These remain empty always - US has MORE SUPPLY THAN DEMAND. What happened in USA was that every body decided to play a game of musical chairs, moving to one step bigger house than where they were before.



    Originally Posted by Venkytalks
    (Reproducing my post from Delhi forum - it has bearing on the RE bull theory)
    Anyone talking supply and demand is being foolish. The more the supply, the more prices rise - we have seen it in GGN, NOIDA and now in Delhi (Mumbai is of course the ultimate in this perversity).



    ........................................ :bab (7):
    CommentQuote
  • Real estate & Black Money

    According to the official data, the real estate sector seems to have become the biggest source of black money in the state. The data about I-T raids and revelation of unaccounted money in financial year 2010-11 show that real estate has become the safest place to park black money. :bab (59):

    http://www.dnaindia.com/india/report_i-t-data-shows-black-money-has-found-a-good-home-in-real-estate_1535273
    CommentQuote