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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  • Yes, many projects are delaying. After seeing an ad in paper from a major builder in pune, i called them up and enquired about the rates. they told me that the rates are valid for 3 days only and will go up by ~400 rs/psf after that. i called them after a month again for the same project and the rates were the same. that tells all the story.
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  • My 2 cents

    Originally Posted by wiseman
    Originally Posted by stinaikar



    You are correct in general. But the devil is in the details ...

    Let me give you an example ...

    Someone well known to me bought a flat at the perfect time of 2002 from a reputed builder for around 40 L. The floating rate at that time was 7.5% with fixed at 8.5%.

    Around 2006 I told him that my information was interest rates would start climbing and that he should switch to fixed asap. He nodded and didn't do anything.

    Remember, when he took the loan of 35L, he had 240 installments.

    ... today, after 8 years (96 installments) he has paid interest of 26 lakhs, principal is still 29 lakhs left, his current interest rate is over 16%!!!:bab (45): and still has got 208 installments to go (while he should have had only 144 installments left if interest hadn't gone up).

    Interest rate cycles are long drawn out cycles. In unprecedented times like these (which world has not seen for many decades) these can last as long as a decade!

    All-in-all, when you get into these long term up-cycles in interest, along with down-cycles in currency value, you could end up with a house nominally worth 5 crores but in real terms worth less than the originally bought 40 L (thus still having a real negative return).

    cheers


    Dear friends Wise, Real and Sanjana,

    I have been reading your posts with a lot of interest and benefitted immensely from them.
    Thank you ever so much. I just read the above post of wiseman and I completely agree with what he has to say on taking big loans.
    However, I have a few points to add to this topic which seems to me to be highly relevant under the circumstances.
    Now, the question of investment is intimately linked to savings , and a profitable investment of savings is what everybody here is looking for. The question is, what to do with one’s savings ? If you choose to keep it in the bank(FD or whatever) its value is halved in five years time( never mind the nominal increase in numerical terms ).That’s what inflation does, my friends. I have personally experienced this.
    On the other hand, the markets look precarious. The traditional haven for the hapless middle class has always been real estate and gold. Now, both real estate and gold has had an unprecedented rise in recent times. Both BLACK SWANS( you don’t expect to see a black swan till you see one).Both hit me at the wrong time. Once-in-a-lifetime opportunities that won’t come again.

    What are the options before a guy like me who has 10 lakhs worth of savings in cash ?Buying a house in the city I live in is ruled out(Chennai!).However, if I take out a home loan of 10 lakhs I can buy a house in my hometown for which I can even get a nice income tax rebate on interest paid( I pay 4 lakhs annually to the taxman).
    Look at it this way, once the interest component is taken care of, all I have to do is make sure the house I do buy is a sound investment. After all, in inflationary times, loan payers are the lucky ones. You see, the money I will be paying back will be lesser and lesser in value as times goes by. Seen in this light, a home loan is not such a bad idea. I was one of those lucky guys who took a home loan of 8 percent(back in 2002,not floating interest).But I closed it off in a hurry(I have an aversion to loans !!) .Imagine if I had stretched it, the bank would have been crying in pain !!!!

    Of course, buying a house in which you are not going to live (except on rare occasions) calls for additional draining of funds. Or dealing with tenants(God forbid!).

    But, maybe one day, God willing, I can get to live in a quiet , peaceful place with decent climate and pl enty of trees and flowers around me(though unlike in Sanjana’s case the people are far from “innocent and sweet”).I know a couple who managed to do just this.

    We Indian middle class are in a peculiar situation. In the book, “Through the looking glass” Alice arrives in the Red Queen’s kingdom where you have to keep running to remain in the same place. Our plight is similar. A big loan is stupidity. A small loan can take advantage of the unique situation we find ourselves in. Just my 2 cents.
    Regards
    Unlikely

    Dear friends Wise, Real and Sanjana,

    I have been reading your posts with a lot of interest and benefitted immensely from them.
    Thank you ever so much. I just read the above post of wiseman and I completely agree with what he has to say on taking big loans.
    However, I have a few points to add to this topic which seems to me to be highly relevant under the circumstances.
    Now, the question of investment is intimately linked to savings , and a profitable investment of savings is what everybody here is looking for. The question is, what to do with one’s savings ? If you choose to keep it in the bank(FD or whatever) its value is halved in five years time( never mind the nominal increase in numerical terms ).That’s what inflation does, my friends. I have personally experienced this.
    On the other hand, the markets look precarious. The traditional haven for the hapless middle class has always been real estate and gold. Now, both real estate and gold has had an unprecedented rise in recent times. Both BLACK SWANS( you don’t expect to see a black swan till you see one).Both hit me at the wrong time. Once-in-a-lifetime opportunities that won’t come again.

    What are the options before a guy like me who has 10 lakhs worth of savings in cash ?Buying a house in the city I live in is ruled out(Chennai!).However, if I take out a home loan of 10 lakhs I can buy a house in my hometown for which I can even get a nice income tax rebate on interest paid( I pay 4 lakhs annually to the taxman).
    Look at it this way, once the interest component is taken care of, all I have to do is make sure the house I do buy is a sound investment. After all, in inflationary times, loan payers are the lucky ones. You see, the money I will be paying back will be lesser and lesser in value as times goes by. Seen in this light, a home loan is not such a bad idea. I was one of those lucky guys who took a home loan of 8 percent(back in 2002,not floating interest).But I closed it off in a hurry(I have an aversion to loans !!) .Imagine if I had stretched it, the bank would have been crying in pain !!!!

    Of course, buying a house in which you are not going to live (except on rare occasions) calls for additional draining of funds. Or dealing with tenants(God forbid!).

    But, maybe one day, God willing, I can get to live in a quiet , peaceful place with decent climate and pl enty of trees and flowers around me(though unlike in Sanjana’s case the people are far from “innocent and sweet”).I know a couple who managed to do just this.

    We Indian middle class are in a peculiar situation. In the book, “Through the looking glass” Alice arrives in the Red Queen’s kingdom where you have to keep running to remain in the same place. Our plight is similar. A big loan is stupidity. A small loan can take advantage of the unique situation we find ourselves in. Just my 2 cents.
    Regards
    Unlikely
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  • Invest for better tomorrow

    unlikely,

    First & foremost, thanks for your words. :)

    See my replies below-
    Originally Posted by unlikely

    Now, the question of investment is intimately linked to savings , and a profitable investment of savings is what everybody here is looking for. The question is, what to do with one’s savings ? If you choose to keep it in the bank(FD or whatever) its value is halved in five years time( never mind the nominal increase in numerical terms ).That’s what inflation does, my friends. I have personally experienced this.

    Having FD in such situation is better for few reasons -

    > Your principle amount is secured,
    > You get positive returns (keep inflation part out for the moment),
    > You can encash the money within 2 hrs,
    > You need not pay any tax like capital gains tax etc.
    > You get loan of 80% against your FD (some people do such things for income tax benefits),
    > And then there is the peace of mind that your money is SAFE.

    On the other hand, the markets look precarious. The traditional haven for the hapless middle class has always been real estate and gold. Now, both real estate and gold has had an unprecedented rise in recent times. Both BLACK SWANS( you don’t expect to see a black swan till you see one).Both hit me at the wrong time. Once-in-a-lifetime opportunities that won’t come again.

    In case of stocks, the weight-age of FIIs have drastically increased from 2008 onwards, unlike earlier where domestic investors used to be the king.
    There is now guarantee to place bet on any sector but it has now become company oriented.
    Eg. RIL, once a darling on stock market has been hammered, while Godrej Prop, despite being a RE player has given good returns.

    MF (mutual fund), I never believed in. I never made good amount in MF, so not a single paisa is in MF.

    Coming to gold, this is a must in one's investment portfolio & this one is an asset which never goes waste. Best, it will get converted into jewelry for lady/ies in (or maybe outside :D) your home. The rise of gold in recent past was more due to weakening of rupee than actual price of gold in international market. If INR becomes 45 to $, see where gold falls to.

    Anyways, I prefer to have atleast 25% investment in metals. Also, never buy gold/silver etc. in one stroke. Let it be like SIP, buy some after every 2-3 months so that you are secured from price fluctuation to a large extent across a period of an year.

    What are the options before a guy like me who has 10 lakhs worth of savings in cash ?Buying a house in the city I live in is ruled out(Chennai!).However, if I take out a home loan of 10 lakhs I can buy a house in my hometown for which I can even get a nice income tax rebate on interest paid( I pay 4 lakhs annually to the taxman).
    Look at it this way, once the interest component is taken care of, all I have to do is make sure the house I do buy is a sound investment. After all, in inflationary times, loan payers are the lucky ones.

    What I fail to understand about RE investment is why do buyers only look at flat for investment purpose ??
    Man, one should explore better option than these-

    1.) Land &
    2.) Commercial (office or industrial).

    I know a person who stays in Chinchawad & makes INR 8 Cr/year in hand post taxes just based on the income he gets from the industrial premises he has leased to few cos in Chakan & Talegaon. His personal income from his own industry (he is a manufacturer himself) is less than this amount earned from leasing the premises !!

    My colleague's sister came from abroad, invested in commercial property & it has been leased out to a bank for an ATM. The returns she gets is atleast 3 times more than a flat of the same cost :bab (59):.

    So, why not explore these options ? It will diversify your cash flows & will provide additional good source of recurring income as well.

    But, maybe one day, God willing, I can get to live in a quiet , peaceful place with decent climate and pl enty of trees and flowers around me(though unlike in Sanjana’s case the people are far from “innocent and sweet”).I know a couple who managed to do just this.

    +1. I too love the idea of having a nice house on the countryside with great infra. And yes, there will be cow-shed as well coz I love cows man :). So simple, so innocent. I still remember how I had gone to a temple & was watching cow for good 40 mins & guess what, all my stress was gone !! They lift your spirits.

    So, why not start it today ?? With your money, buy land in your native town & then take loan for constro without over-leveraging yourself. This way you make an investment which will not only grow in terms of PRICE but even more in terms of VALUE.
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  • FD Schemes Are Back

    As builders aren't getting money from banks, PEs (stocks are already hammered), Delhi-NCR builders have now come up with FD schemes giving upto 16%* interest/annum. This clearly indicates in how deep mess some of the country's biggest builders are in.

    * Conditions apply :D.
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  • For NRIs: Buy houses in US/Europe. Much cheaper and much better infrastructure. And US/European RE market is at rock bottom level. One can buy much better house in US for 75L(or $150K) in quite a few places. Definitely better than Wakad and PS :-)
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  • Originally Posted by roshan5
    For NRIs: Buy houses in US/Europe. Much cheaper and much better infrastructure. And US/European RE market is at rock bottom level. One can buy much better house in US for 75L(or $150K) in quite a few places. Definitely better than Wakad and PS :-)



    People who bought their 2nd, 3rd or 4th house in USA for investment before 2008 they are still in loss after 5 years because of severe recession and subprime crises in USA in 2008. Why house market is still not picking up in USA after 4 years also because USA population is 300million and house ownership in USA is more than 70%.
    And India population is 1.2 billion and house ownership in India is 20% only.
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  • ^^

    The drop in property values is a problem only if a big downpayment was made. Most investors make small downpayments, so if the market value of the property drops, all that is needed is to mail the keys to the bank so they can take possession and try to sell it again. Meanwhile, the investor is out the downpayment and EMI, but gets to keep all the rental income derived in the meantime, which offsets the lost downpayment.
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  • GDP grows 6.1 pct in Q3, weakest in 3 years

    India's economic growth slowed to 6.1 percent in the three months to December, the weakest annual pace in almost three years, as high interest rates and rising raw material costs constrained investment and manufacturing. The dismal numbers are certain to intensify pressure on the authorities to stimulate the flagging economy and they render official forecasts for 6.9 percent growth in the financial year ending in March as optimistic.


    Full Article here GDP grows 6.1 pct in Q3, weakest in 3 years - Yahoo! India Finance
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  • Outlook on real estate sector for 2012 negative: Fitch

    Fitch said high equated monthly installments, resulting from significantly higher interest rates, besides lower household surplus due to high inflation and high residential unit prices, have reduced affordability for properties.

    It said that fund raising options are limited due to the cautious approach of banks, weak equity markets and dwindling investment by private equity funds.

    Outlook on real estate sector for 2012 negative: Fitch - Corporate News - livemint.com
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  • A few costs you should keep in mind while buying a resale property

    Here are three costs you should keep in mind while deciding on a resale property:-

    Did You Know | A few costs you should keep in mind while buying a resale property - Money Matters - livemint.com
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  • Private equity funds like Kotak Realty Fund, Redfort Capital and IL&FS plan to exit large townships

    Private equity funds are trying to exit their investments in large integrated township developments where the projects have been stuck for lack of demand or clarity on approvals.

    "Many funds are towards the end of their lifecycle. The year 2012 will see some distress exits at 20% discount or so, which will open up opportunities in the market to buy some of these projects at cheaper cost," says Jai Mavani, partner, real estate and infrastructure at PwC.

    Close to $2.5-3 billion worth of PE funds are expected to exit from the Indian real estate sector in 2012.

    Private equity funds like Kotak Realty Fund, Redfort Capital and IL&FS plan to exit large township projects - Economic Times
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  • This discount not for aam janta like you and me!

    Originally Posted by realacres
    Private equity funds are trying to exit their investments in large integrated township developments where the projects have been stuck for lack of demand or clarity on approvals.

    "Many funds are towards the end of their lifecycle. The year 2012 will see some distress exits at 20% discount or so, which will open up opportunities in the market to buy some of these projects at cheaper cost," says Jai Mavani, partner, real estate and infrastructure at PwC.

    Close to $2.5-3 billion worth of PE funds are expected to exit from the Indian real estate sector in 2012.

    Private equity funds like Kotak Realty Fund, Redfort Capital and IL&FS plan to exit large township projects - Economic Times



    These sales would be block sales to other institutions which will make the 20% killing while turning around and selling these properties to individuals at full price.

    I believe that we are seeing rising prices and continuing demand for 2 reasons ...

    1. Aam janta does not know where else to put their money to get inflation beating returns with some safety.

    2. People who continue to buy at "unaffordable" prices do not know how to calculate the REAL cost to them over the life of their loan taking into account various factors

    So long as these continue, I do not see prices declining. So long as there is s sucker born every minute, why blame the banker and builder to profit from it? Its just like the example of fruit/vegetable prices I mentioned in another post.

    Back in the old days, when money was not easy to come by, people would simply switch off from highly priced fruits/vegetable/anything. With crashing volumes, prices would automatically fall and volumes would pick up. This is called price elasticity.

    Now-a-days, there are enough fools with continuing supply of money and little sense, who chase ever-rising prices; the Govt couldn't care less about the ones who cannot afford and situation is proceeding till it reaches a turning point and all hell breaks loose. In this aspect, we are following the trend set by the west and large sections of people are getting poorer (in wealth terms) by the day.

    Whatever time it takes, I see no option but a mild form of high/hyper inflation setting in, riots on the streets and only then do I see the Govt taking drastic steps to cool things down.

    Till then, Gold and Silver (did you see the stealthy jump in prices?)

    cheers
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  • Originally Posted by wiseman
    These sales would be block sales to other institutions which will make the 20% killing while turning around and selling these properties to individuals at full price.

    I believe that we are seeing rising prices and continuing demand for 2 reasons ......

    cheers


    Right wisey. The prop will change hands at very high level in bulk and the guy will have good amount of holding power. In reality the houses will not change hands. They will remain on original builder but he will sell as some OTC arrangement against a DEBT at much unfavourable condition. What a builder needs is that someone who can take him through the rough period and bailing party must be having deep pocket and patience. Builder will settle for a lesser cut in exchange.

    Just posting one negetive new after another and infering a major correction, nothing has happened in practice for so many years. Simple stats : India at present has home ownership of only 20%. On top population is increasing and India is a structural bull for few decades to come. With the inflation rate touching double digit, a 10 to 12 % increase in house prices per year is straight logical. Given that the land is limited (I mean the land which has got relatively good proximity to aminities) , add a extra 5 to 7 % premium on same (such premium will be high initially but lower as city expands) and you can easily see that the current price increase are not that much irrational. I still feel Pune is underpriced compared to Mumbai (even you compare the infra/facilities etc etc). This has proven correct for past few years with steady rise in the prices (with some softening which in neglegible).

    The GDP growth of 6% is very good news. In such time the weak players are eliminated setting foundation for high future growth. If we go by all negetive predictions so far on this forum, apt price should have touched in 3 digits (500 Rs psf etc ) by now. In reality movement is seen in opposite direction.

    Time and again it was observed that people who have bought (when all the trumpet of major correction was being blown from 2008 onwards) are pretty happy. innocent, akssenti and many others are just having good time after their purchase. They spend less time in forum and more at home :D.
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  • Your words are only too true Mr.Wiseman. Nobody seems to be stopping to ask meaningful questions anymore.People seem to be too ready to grab apartments at godforsaken places as long as builder offers clubhouse, swimming pool etc.Bare minimum infrastructure and complete lack of social infrastructure does not seem to deter them.I don't understand these people at all!
    regards
    unlikely
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  • Is India Inc poised for a slowdown?

    Economist and Ficci secretary general Rajiv Kumar said the core sector numbers point towards slowdown in the economy. The industrial sector has been witnessing a slowdown under the impact of rising cost of borrowings.

    Full Report here : Is India Inc poised for a slowdown? Photos | Is India Inc poised for a slowdown? Pictures - Yahoo! India Finance
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