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 :
  • Originally Posted by kingmanish
    South Mumbai bungalow sold for record Rs 350 crore


    When builders are themselves ready to pay such exorbitant prices then they will defintely make the buyers pay for this....

    looks like they have no intentions of reducing the prices.....

    plus they have plenty of cash to keep holding than negotiating.........




    I dont know what this "record" means . The plot is 2092 sq meters ans there is a construction of 28000 sq feet on the plot. Also south mumbai FSI was recently increased. One should compare a persq feet cost of the plot taking into consideration the construction FSI available. If someone tomorrow buys a plot twice th size of this at 400 crores media will again report that as "record". But is it a record deal?

    One of a famous company in healthcare/diagnostics bought a plot from HDIL at 70% the rate HDIL had bought it in a full cash deal. That is the reality of today's market.

    Yesterday DNA carried an article on Runwal in trouble due to exit of Singapore fund. Today there is a completely different article with statement from Runwal that the exit of the fund was planned and as per strategy (though with much less returns). Same day Runwal gives a full page ad on front page of ET. Same day this "record" deal is published in Times of India. Isnt it too obvious that we are living in a world where paid news exist.
    CommentQuote
  • Yes, you are absolutely right.

    How long can they sustain on such false news. Sometime back some YES Bank head bought some property at a very high rate, same news had flashed. But remember that it is in the self interest of such people to show such exhorbitant prices. But after that, how many deals of that size took place ? Very few.

    Let us take such articles with appropriate perspective and not get carried away by such words as "Record", "Prices will only go North" etc.

    How long do these companies show "healthy-but-fake" balance sheets just so create a hype. After all now banks have started tightening on the banks loans and also economy is going to go down due to high inflation.
    TOI-let paper has started reporting that due to petrol/diesel hikes, people have cut down on shopping and visiting malls. Same with hike in prices of food products and LPG, people have reduced going to Hotel for eating. Some teenagers also said that they had to cut down on their parties due to petrol prices. So one can only imaging where our economy is headed. In such a scenario, where will RE be ? Will it not get affected ? If commercial space starts becoming vacant due to loses, residential RE will also suffer. Isn;t it ?


    Originally Posted by rkv_hunter


    I dont know what this "record" means . The plot is 2092 sq meters ans there is a construction of 28000 sq feet on the plot. Also south mumbai FSI was recently increased. One should compare a persq feet cost of the plot taking into consideration the construction FSI available. If someone tomorrow buys a plot twice th size of this at 400 crores media will again report that as "record". But is it a record deal?

    One of a famous company in healthcare/diagnostics bought a plot from HDIL at 70% the rate HDIL had bought it in a full cash deal. That is the reality of today's market.

    Yesterday DNA carried an article on Runwal in trouble due to exit of Singapore fund. Today there is a completely different article with statement from Runwal that the exit of the fund was planned and as per strategy (though with much less returns). Same day Runwal gives a full page ad on front page of ET. Same day this "record" deal is published in Times of India. Isnt it too obvious that we are living in a world where paid news exist.
    CommentQuote
  • Originally Posted by rkv_hunter


    I dont know what this "record" means . The plot is 2092 sq meters ans there is a construction of 28000 sq feet on the plot. Also south mumbai FSI was recently increased. One should compare a persq feet cost of the plot taking into consideration the construction FSI available. If someone tomorrow buys a plot twice th size of this at 400 crores media will again report that as "record". But is it a record deal?

    One of a famous company in healthcare/diagnostics bought a plot from HDIL at 70% the rate HDIL had bought it in a full cash deal. That is the reality of today's market.

    Yesterday DNA carried an article on Runwal in trouble due to exit of Singapore fund. Today there is a completely different article with statement from Runwal that the exit of the fund was planned and as per strategy (though with much less returns). Same day Runwal gives a full page ad on front page of ET. Same day this "record" deal is published in Times of India. Isnt it too obvious that we are living in a world where paid news exist.



    Great information!!! Thanks.

    We need to be aware of everything around us and not get carried away by media.
    CommentQuote
  • Originally Posted by mymarji
    Yes, you are absolutely right.

    How long can they sustain on such false news. Sometime back some YES Bank head bought some property at a very high rate, same news had flashed. But remember that it is in the self interest of such people to show such exhorbitant prices. But after that, how many deals of that size took place ? Very few.

    Let us take such articles with appropriate perspective and not get carried away by such words as "Record", "Prices will only go North" etc.

    How long do these companies show "healthy-but-fake" balance sheets just so create a hype. After all now banks have started tightening on the banks loans and also economy is going to go down due to high inflation.
    TOI-let paper has started reporting that due to petrol/diesel hikes, people have cut down on shopping and visiting malls. Same with hike in prices of food products and LPG, people have reduced going to Hotel for eating. Some teenagers also said that they had to cut down on their parties due to petrol prices. So one can only imaging where our economy is headed. In such a scenario, where will RE be ? Will it not get affected ? If commercial space starts becoming vacant due to loses, residential RE will also suffer. Isn;t it ?


    If people have to spend entire salary on expenses, where will be the margin for EMI?

    RE crash is here and will stay for as long as the repo rates are over 6% - probably for 1.5 years is my guess.

    This is the real recession, 2008 was only a market crash due to liquidity crunch.

    You should buy into both the RE and Stock corrections it will be LEGEN - wait for it - DARY.
    CommentQuote
  • Originally Posted by Venkytalks
    You should buy into both the RE and Stock corrections it will be LEGEN - wait for it - DARY.


    Would be interested in both if they fall 50 % from these unrealistic, unsustainable levels.

    Simple logic : if RE prices can zoom 150 % to 300 % between 2002 - 2008, with hardly any supporting fundamentals, why will they not correct 40 % - 50 % ?

    Concentrate on the deteriorating macroeconomic parameters. The rest is just noise.
    CommentQuote
  • So venky - you also a Barny Stinson fan


    Originally Posted by Venkytalks
    If people have to spend entire salary on expenses, where will be the margin for EMI?

    RE crash is here and will stay for as long as the repo rates are over 6% - probably for 1.5 years is my guess.

    This is the real recession, 2008 was only a market crash due to liquidity crunch.

    You should buy into both the RE and Stock corrections it will be LEGEN - wait for it - DARY.
    CommentQuote
  • The banks are now giving preference to only ready possession flats than under-constro. Reason :-

    Banks fear that their money will go down the drain as builders are unable to complete projects due to liquidity crunch & negligible sales with high debts.
    This has been confirmed by the SBI Chairman Pratip Chaudhuri.
    When I spoke with my bankers, they informed that now the banks are looking at the builders' strength & stage of completion & not just eligibility of loan seeker.

    Hence, one may get a loan of say INR 50L for ready poss flat but not for under-constro flats.
    Banks have also reduced lending amount to 75% of agreement value, which also means they want a safety buffer for price drops & default of borrower.
    CommentQuote
  • Some more RE updates

    Here are some more updates to show current scenario of RE:-

    In India, there are 9L flats being up for sale & of this, over 5L flats are unsold.
    In Pune, Mumbai the inventory is more than 54%, in NCR it is even more.

    In Mumbai, there have been just 3 land deals in past 6 months!! All these were distress sales.

    The builders who bought land in 2010 are yet to make even a single paisa profit from it.

    Builders are not getting loans from banks as before. The non-paper investors too are pulling out. Hence, the builders are ready to offer discounts of even 20+% today if about 35% amount can be paid in cash.

    FDs are being provided by builders for interest rates of 15-18% p.a ....though all are not officially announcing it.

    The recent hike in diesel is going to make matters worse for builders (& banks) as RBI has said that the interest rates may go up by 100 bps or 1% by the end of this year. This will take floating home loan interest rates over 12% & fixed close to 15% .

    And many builders are not buying land as they too expect strong correction in coming months. This is is the case even in Pune.
    CommentQuote
  • Staring at slump, realtors line up freebies

    Another eg. which show RE prices & builders are cracking:-

    Staring at slump, realtors line up freebies - Indian Express

    Note that such freebies & offers like free stamp duty, free car, holidays etc. are reduction in prices though rate/sq ft is the same. Once these freebies fail, builders are forced to decrease rates.
    CommentQuote
  • Home loan fraud in Pune rising

    Property Pulse - the Realty Plus Newsletter
    CommentQuote

  • FDs are being provided by builders for interest rates of 15-18% p.a ....though all are not officially announcing it.



    Yes, many of them have started offering these FD/NCDs at high rate with a higher risk. Many investment consultants have advised against taking these FD/NCDs as the risk is very huge. There is also no guarantee for such FD/NCDs. There was an article on CNBC sometime back . Let me locate it.
    CommentQuote
  • Originally Posted by SanjanaSingh
    Would be interested in both if they fall 50 % from these unrealistic, unsustainable levels.

    Simple logic : if RE prices can zoom 150 % to 300 % between 2002 - 2008, with hardly any supporting fundamentals, why will they not correct 40 % - 50 % ?

    Concentrate on the deteriorating macroeconomic parameters. The rest is just noise.


    Buying into a correction means waiting for the prices to fall and picking up assets real low.

    If RE falls 50%, nothing better
    CommentQuote
  • Originally Posted by SanjanaSingh
    Would be interested in both if they fall 50 % from these unrealistic, unsustainable levels.

    Simple logic : if RE prices can zoom 150 % to 300 % between 2002 - 2008, with hardly any supporting fundamentals, why will they not correct 40 % - 50 % ?

    Concentrate on the deteriorating macroeconomic parameters. The rest is just noise.


    Sanjana, your statements appear contradictory to me. How can RE and Stocks come down in nominal terms if we have choking liquidity around the world where fiat currency can collapse and we are going to face hyperinflation. What Am I missing here?
    CommentQuote
  • THE MORE THEY PRINT, THE POORER WE ARE !!

    What we are witnessing is actually a paradox of the Keynesian endgame.

    The crash of 2008 was not just a normal correction in financial markets, but a syndrome of a deep malaise that had been festering for decades. After this epic crash, more and more people are becoming aware that the ' prosperity ' of all developed countries and most developing countries was nothing but a house of cards -- achieved by piling debt upon debt.

    Was the malaise treated ? Was the system purged ? Was the global economy reset and a fresh start effected ? Of course not ! The brilliant ' solution ' arrived at by ALL countries was to crank up the printing presses and spew out paper currency 24 X 7. This has started an irreversible process of competitive devaluation of all paper currencies, which can only end in the total collapse of the fiat monetary system.

    This toxic liquidity flowing into the financial system has several unintended consequences, but the singlemost important is : PRICE INFLATION. Paper money can be printed to infinity, but natural resources cannot be printed or created. So with increasing quantities of paper currency chasing finite resources, the result is prices of those resources adjusting to reflect the increased supply of paper. This is the reason for sharp price inflation since 2008.

    BUT INCREASING LIQUIDITY LEADING TO UPWARD SPIRALLING PRICE INFLATION ACTUALLY AFFECTS RE & STOCK MARKETS ADVERSELY.

    1] Historically, RE has always had an inverse relation with inflation. The liquidity generated by central banks around the world does not go into RE directly. Instead, it leads to a vicious cycle of increasing commodity & raw material prices, leading to higher interest rates, in turn causing demand destruction.

    At some point in this cycle, the AFFORDABILITY factor kicks in. The majority of RE consumers are middle-class -- and they cannot afford unrealistic RE prices or interest rates. When a thing becomes unaffordable, demand plummets -- and this is the stage of RE price downturn we are in. With interest rates expected to be at high levels atleast for the next 4 years, buyers will either opt for less leverage or prefer not to take loans at all. SO RE PRICES WILL HAVE TO COME DOWN TO LEVELS THAT REFLECT THE REAL PURCHASING CAPACITY OF BUYERS. In this process, no doubt, there is a lot of pain in store for builders & hoarders

    2] Admittedly, some of this massive liquidity has gone into pumping up the stock markets around the world But this liquidity is as poisonous for the stock markets as it is for the RE market -- and for the same reason : price inflation leading to margin pressures; higher interest rates causing demand destruction. There is a limit upto which markets can be goosed -- reality catches up and induces recessions or stagnation

    So you see, there is ' good ' liquidity and ' bad ' liquidity Bad liquidity is poisonous for the entire economy.

    Yes -- the inflationary recession is firmly in place. In fact, I'm wondering if there are certain indicators of global hyperinflation showing up. Did you know that in the primary stages of hyperinflation, massive amounts of paper currency is printed, and yet there is scarcity of cash ? !!

    But that's a topic for another day :) :) :) :) :) :) :) :) :) :)
    CommentQuote
  • Well written SanjanaSingh. It all makes sense.
    CommentQuote