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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  • Last few months noticing that TOI-let paper has teamed up with MagicBricks to report fake/false pro-builders news. I was wondering why are they advertising Magicbricks so much. Now the answer is that this website is a part of the Times Group. No wonder.....

    In todays' TOI-Bangalore edition, there is an article (aka advt) from Magicbricks about some discussion between Developers and most of the discussion is about RE in Pune. They are saying that the RE prices should increase about 10-15% instead of reducing. Also that Demand outstrips Supply in Pune, hence the RE prices may not come down. Boy, I really admire their "idiotic" optimism. Even when the RE purchases has slowed down and there are umpteen articles/news reports with appropriate data, these folks are showing old data about Dec 2010 and assuming the readers are more foolish. Let me see if there is a URL for that article. Its really funny....

    I think I should stop reading/buying TOI-let paper, instead buy local newspaper. We have made this monster and now it is devouring us. :)
    Saanp ko doodh pilaya, abhi ye hume hi nigal lega. :o
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  • Originally Posted by mymarji
    Last few months noticing that TOI-let paper has teamed up with MagicBricks to report fake/false pro-builders news. I was wondering why are they advertising Magicbricks so much. Now the answer is that this website is a part of the Times Group. No wonder.....

    In todays' TOI-Bangalore edition, there is an article (aka advt) from Magicbricks about some discussion between Developers and most of the discussion is about RE in Pune. They are saying that the RE prices should increase about 10-15% instead of reducing. Also that Demand outstrips Supply in Pune, hence the RE prices may not come down. Boy, I really admire their "idiotic" optimism. Even when the RE purchases has slowed down and there are umpteen articles/news reports with appropriate data, these folks are showing old data about Dec 2010 and assuming the readers are more foolish. Let me see if there is a URL for that article. Its really funny....

    I think I should stop reading/buying TOI-let paper, instead buy local newspaper. We have made this monster and now it is devouring us. :)
    Saanp ko doodh pilaya, abhi ye hume hi nigal lega. :o


    Perception management - Wikipedia, the free encyclopedia
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  • Originally Posted by punerebuyer

    of course CREDAI will immediately say that since there is a war going on, everyone needs a roof on their head.. hence more demand and hence we need to increase the RE prices by another 500 rs/psf... :D

    :D toooo good!!!!:D:D
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  • Originally Posted by wiseman
    China has had massive mis-allocation of funds primarily by Govt (due to policy) and more so by local Govts.

    But I have always had this feeling that the crash would be triggered off by compulsions of Private Loans - like our "Marwari" loans (no offense to Marwaris), or loans at punitive rates that can never be paid back.

    The most visible of this is in the real estate business where a person has even higher pressure to buy a house/flat at any cost - and they frequently do so with recourse to private loans (I've read these loans have interest rates of as high as 20% per month!

    Here is an article about how this is starting to come apart as it reaches a point of no return ...

    ********************
    I want to bring to your attention on a new development in China: private business owners are disappearing or jumping off buildings because they can no longer pay off black market shark loans.

    According to national new paper Economics Information (part of state media Xinhua), on 9/22, Hu Fulin, owner of the biggest eyeglass manufacture of the city of Wenzhou disappeared, leaving behind 2 billion RMB debt.

    On 9/25, 3 more business owners in Wenzhou disappeared (owners of copper, steel and shoe manufacture).

    On 9/27, owner of "Zhengdeli", a shoe manufacture jumped off of a 22 story building and killed himself.

    Since April this year 29 private business owners have disappeared, all of them had over 100 million RMB businesses. 11 of the 29 owned shoe manufacturing businesses.

    An analyst from China Investment (China's Sovereign investment fund) pointed out that it's because they are squeezed by a rapid increase of component and labor costs. A rising RMB is also a reason why many export oriented companies are hit. In August, Zhou Dewen, President of Wenzhou Small-Medium Business Development Association said the profit margin of Small-Medium businesses in Wenzhou has dropped to under 5% and absent of policy changes, 40% of businesses in Wenzhou will go out of business by next Spring Festival (late Jan 2012)

    The complete article is here (in Chinese): ¾­¼Ã²Î¿¼Íø.

    Another article ?? ????_?_??_ (titled: China's Shark Loans Crashing; "Grey Finance" Brewing the Chinese Crisis) states that most of those owners have borrowed "private" loans (typically 70% of all loans), with MONTHLY interest rate ranging from 3% to 10%.

    About 89% of families/individuals and 59% of companies in Wenzhou participated in such "private loan" schemes. In Erdos (the ghost city you blogged many times), such "private loans" are more than 200 billion RMB with annual interest rate over 60%. Now they are crashing, causing rampant unfinished real estate projects in Erdos.

    Note that Wenzhou is one of riches cities in China (No. 3 in disposable income per capita), and is considered the "Birthplace of China's Private Economy". Wenzhou people are among the first that got in trades, manufacturing, export, and in recent years real estate investment/speculation. The Wenzhou economy is considered the "weathercock" of Chinese economy.

    ******************

    Is this one of the factors that is relentlessly dropping the Shanghai Composite? Which, btw is only 500 points away from the 2009 crash bottom!

    So much for China bailing out the world .... India seems to be doing much better.

    cheers


    I have also been reading increasing news of economic problems in China.

    From 2005, I have been expecting crash and burn in China. Each year it has failed to materialise.

    Chinese economy managers have allowed 50% orice downturn in Shanghai composite. They have raised interest rates. They have allowed mild currency appreciation.

    So far, somehow, they have staved off the major economic dislocations which common sense predicts.

    Either they are brilliant (for a while I have been quite impressed) or they have postponed and magnified their problems.

    Anyway, global powers seem to be shifting towards formation of a Iran-Pakistan-CHina-North Korea axis with Russia helping from outside.

    If Pakistan breaks with USA totally (seems inevitable within 6 months) - expect a India Pakistan war in which CHinese will intrude into Kashmir, Sikkim and Arunachal in a major way, in addition to helping Pakistan in many other ways.

    Also expect use of tactical nukes chich CHina has given to Pakistan for just this eventuality.

    Expectation of these eventualities within 2012 = 5% by guesstimate
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  • Originally Posted by Venkytalks
    I have also been reading increasing news of economic problems in China.

    From 2005, I have been expecting crash and burn in China. Each year it has failed to materialise.

    Chinese economy managers have allowed 50% orice downturn in Shanghai composite. They have raised interest rates. They have allowed mild currency appreciation.

    So far, somehow, they have staved off the major economic dislocations which common sense predicts.

    Either they are brilliant (for a while I have been quite impressed) or they have postponed and magnified their problems.

    Anyway, global powers seem to be shifting towards formation of a Iran-Pakistan-CHina-North Korea axis with Russia helping from outside.

    If Pakistan breaks with USA totally (seems inevitable within 6 months) - expect a India Pakistan war in which CHinese will intrude into Kashmir, Sikkim and Arunachal in a major way, in addition to helping Pakistan in many other ways.

    Also expect use of tactical nukes chich CHina has given to Pakistan for just this eventuality.

    Expectation of these eventualities within 2012 = 5% by guesstimate


    Venkybhai,

    Running out of time currently, so just say this -

    a. Pakistan-China-North Korea..... already exists, i call them Axis-of-Evil.
    b. Don't think Iran will join this axis
    c. Russia helping Axis-of-Evil from outside, don't agree. Russia will dig its own grave if they do this, don't think they are that idiot.

    Will come back on Chinese
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  • Originally Posted by mymarji
    Last few months noticing that TOI-let paper has teamed up with MagicBricks to report fake/false pro-builders news. I was wondering why are they advertising Magicbricks so much. Now the answer is that this website is a part of the Times Group. No wonder.....

    I think I should stop reading/buying TOI-let paper, instead buy local newspaper. We have made this monster and now it is devouring us. :)
    Saanp ko doodh pilaya, abhi ye hume hi nigal lega. :o


    That is why I do not trust most of media outlets out there. Almost all of them have conflict of interest. TOI has fingers in too many pies. Same with Network 18 who owns CNBC, IBN and CNNIBN. These guys also own moneycontrol who in turn continue to feed about positives in stock market even in current scenario, for obvious reasons.

    Quite a few of them do the paid news (which IMO, is a bigger scam than 2G). This has long term damage prospect. It is served as a news however, in reality it is a paid advertisement. An average Joe thinking it as a news, considers it as source to his information. This is how perceptions are built in common public, their thought process is influenced.
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  • Originally Posted by bhuvang
    Venkybhai,

    Running out of time currently, so just say this -

    a. Pakistan-China-North Korea..... already exists, i call them Axis-of-Evil.
    b. Don't think Iran will join this axis
    c. Russia helping Axis-of-Evil from outside, can't accept this.


    a. True that Pak-China-North Korea axis has been formed on strategic requirements a long ago, however, US has been able to neutralize Pak-China to some extent for their own benefits via Military aids etc. US has always been vary of Pak-China nexus and China's growing influence on neighbouring countries. However US admonish Pak, I don't think they will do away with them as an ally specifically in order to prevent this Nexus get an official tag.

    b. Even though, Iran is trying hard to establish itself as a big influencer and leader of islamic world in middle east, their own stance is unpredictable. However, considering demographics (Shia vs Sunni majority in Pak), it is highly unlikely.

    c. Russia has their own huge problems to deal with right now, and I think they did learn a lesson from Chechnya.
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  • Joining dates of campus hires' by IT companies TCS, Infosys, Wipro others are delayed

    Today's ET reports that joining dates for freshers in all big IT companies have been delayed. Last time this happened was 2009. We all know what was the scenario then.

    Might serve as a wake up reminder to a few who live in denial of possibility of another recession (I know a few do).

    Joining dates of campus hires' by IT companies TCS, Infosys, Wipro, HCL and others are getting delayed - The Economic Times
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  • The possibility of full scale war between nuclear armed countries like India-China is quite low - simply because the consequences will not be limited to particular regions but will cause large scale destruction .
    Why will India - China have a war ?
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  • Chinese debt

    Originally Posted by Venkytalks
    I have also been reading increasing news of economic problems in China.

    From 2005, I have been expecting crash and burn in China. Each year it has failed to materialise.

    Chinese economy managers have allowed 50% orice downturn in Shanghai composite. They have raised interest rates. They have allowed mild currency appreciation.

    So far, somehow, they have staved off the major economic dislocations which common sense predicts.

    Either they are brilliant (for a while I have been quite impressed) or they have postponed and magnified their problems.



    Coming back for China, they did have a huge debt problem which has infused huge money in the economy leading to inflation + sky-rocketing commodity & RE prices. They may experience slowdown in growth if they try to cool down things (which they are already doing & i believe its just the beginning). However, a US/EU kind crash is unlikely in China.

    Reasons (source of all stats is Google baba, views are mine) -

    1. Till March 2011, China's outstanding external debt was around USD 585.97 billion. But no worry, since they got a forex reseve of over 3 trillion USD to service, though almost half of this is in US Treasuries.
    GDP wise, it constitues < 10% for China, whereas external debt of US/Greece and so many other nations have already reached there GDP mark or about to reach there. Hence, they can't get into an external soverign debt crisis like Greece/US.
    List of countries by external debt - Wikipedia, the free encyclopedia

    2. Real problem with China is its internal debt. i.e. - debt on local goverments, ministries, and, municipalities. Currently, it stands around 1.7 trillion USD. Attached link is quite informative -
    http://www.bloomberg.com/news/2011-09-16/local-government-debt-is-china-s-subprime-ex-lawmaker-says-1-.html

    I was particularly impressed by this line - "Cheng said today it would be the “wrong practice” for the central government to bail out these companies even though it has the capability to do so.". And don't think Chinese have ever concerned about right or wrong practices. They just know how to get the work done.... :-)

    3. A huge financial liability on US/EU Governments is their retiring population. Top-class social security measures regarding pension and medical benefits that they devised during last few decades have started back-firing. Their citizens never developed the habit of saving for easter years partially bcoz of these Govt. funded social securities. And as now as their population is ageing, Govt. revenue stream is trimming bcoz of reducing working class, and enough jobs are not creating due to China/India etc., Govt. is knee deep in such debt obligations. Check the austerity measures taken by Greece and Poland, and you would realize.

    In contrast, China virtually never had an social security setup comparable to West, hence citizens always had that savings habit engrained in them (just like us). Though in 2004, China came up with new guidelines and measures for ensuring pension, medical insurance etc. for its citizens have been taken, its still too early for these to hit Chinese govt. Besides, Chinese govt already has a robust revenue stream by way of taxes, exports and all.

    4. As Chinese are communist and citizens actually have no right to stand-up agains Govt., China can anytime abolist/reduce/curtail its newly established Social security setup. They can let their aged people die instead of becoming a burden on society & economy, and, bypass a huge liability (and i sincerely believe they can. Remember, annual death sentences in China are more than entire world's total. And about their Human Rights record, the less said the better).

    5. Also, the huge fiscal stimulus China issued post sub-prime crisis has actually been used to build its infra. Infact, China has got so much to develop (like India) that sooner or later, a huge part of that extra cash will get absorbed in nation building. Unlike US/EU, where infra is already world class and Govts actually don't have much to develop with all that fiscal stimulus. That's why all that money is going into GOLD and other commodities, besides emerging markets.

    Lastly, i do believe in Chinese attitude. They are to pro-active, aggressive, and, good executors. Don't think as the world is talking abt Chinese debt bubble, Chinese would be sitting with ease. I'm sure they must have drawn or in the process of drawing contingency plans to prevent the bubble bust or atleast deflate it gradually without causing too much economic shake-up. Unlike their US/EU counterparts who could never see beyond their past laurels, and, virtually believed that Developed Western Economies are full-proof.


    Meanwhile, i found a nice article -

    Does China have a debt problem? | Special Report
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  • Originally Posted by suryawork
    The possibility of full scale war between nuclear armed countries like India-China is quite low - simply because the consequences will not be limited to particular regions but will cause large scale destruction .
    Why will India - China have a war ?


    Bhuvang, agree with most of what you said on China. It is likely to weather the economic problems for the very reasons you have enumerated.

    China will encourage Pakistan India war - with tactical nukes. There wont be a direct CHina India war.

    But Chionese may put pressure on India at troubles times and encroach on disputed territories. We wont be able to do anything about it - we are too weak.

    Even Pakistan nuclear weapons are better than ours with better delivery systems and now they have tacticals also - given by China.

    Ignore this at our own peril.

    Iran and Pakistan are likely to get together if Paki-US relatins break totally.

    Russia might support this because it will improve its power in the UN - but only if their govt changes and hawks get into power after a major economic disruption - unlikely I agree - as stated, they are too smart to tie themselves to the Chinese bandwagon
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  • Originally Posted by Venkytalks

    But Chionese may put pressure on India at troubles times and encroach on disputed territories. We wont be able to do anything about it - we are too weak.


    Yes, when our Govt is more busy in saving itself, how are they going to think about the country.

    Its a shame, we have brought this kinds of politics. Next time, we vote, we should do to folks who are more interested in saving the country and not the party.

    We need Anna Hazare-type persons to take this up and remind the politicians that they stand for elections not to save/work for their party but for the country/people.
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  • Death sentences in China high?

    I remember a recent post by somebody showing the nexus between Judges and Private Jails in USA(Two Judges were arrested for sending thousands of teenagers to jail even for petty crimes).
    In the accompanying report there was was a comparison showing USA with other countries. It shows that the percentage of the population of USA lodged in Jails are much more than that of China.

    Originally Posted by bhuvang

    4. As Chinese are communist and citizens actually have no right to stand-up agains Govt., China can anytime abolist/reduce/curtail its newly established Social security setup. They can let their aged people die instead of becoming a burden on society & economy, and, bypass a huge liability (and i sincerely believe they can. Remember, annual death sentences in China are more than entire world's total. And about their Human Rights record, the less said the better).


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  • Originally Posted by varghese
    I remember a recent post by somebody showing the nexus between Judges and Private Jails in USA(Two Judges were arrested for sending thousands of teenagers to jail even for petty crimes).
    In the accompanying report there was was a comparison showing USA with other countries. It shows that the percentage of the population of USA lodged in Jails are much more than that of China.


    Chinese govt works because of a two fold pact between its govt and the people:

    1. Govt will make chinese rich

    2. Govt will make China superpower

    So far, they have delievred on both promises for over 30 years. Impressively.

    The day the system breaks down and Chinese people become poor - the govt is GONE
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  • Venky, You might be onto something here:

    China has warned India against collaborating with Vietnam over oil and gas exploration in the disputed South China Sea.

    India and the South China Sea | Indian Decade
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