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 :
  • One simple suggestion from Realacre will help a lot of bulls solve indigestion problem...you don't need to be obsessed with each and every comment he puts on it ...Just ignore his comments if you don't like or subscribe to it ... The more obsessed you become with his comments and keep on targetting people the more it will prove your credibility...People are wise enough to take decission on facts and figures then comments which harps on the same theory....
    CommentQuote
  • Originally Posted by pradip_pune
    One simple suggestion from Realacre will help a lot of bulls solve indigestion problem...you don't need to be obsessed with each and every comment he puts on it ...Just ignore his comments if you don't like or subscribe to it ... The more obsessed you become with his comments and keep on targetting people the more it will prove your credibility...People are wise enough to take decission on facts and figures then comments which harps on the same theory....


    What you are trying to say is that "please do not disturb when we are misguding people left and right. " . This is so much in line with Scorpio chaps :) .

    But anyway to answer on your own language "please do not read each and every comment we reply to ;) ... you can limit yourself to posts of your liking"
    CommentQuote
  • Originally Posted by compuwalah
    What you are trying to say is that "please do not disturb when we are misguding people left and right. " . This is so much in line with Scorpio chaps :) .

    But anyway to answer on your own language "please do not read each and every comment we reply to ;) ... you can limit yourself to posts of your liking"

    Omg...this scorpio chaps word is hilarious!! :)
    CommentQuote
  • Originally Posted by wiseman


    ....
    It appears that the common point made by both Compu and Real that one needs to take as little loan as possible is based on good thinking.

    Rest is upto each individual!

    cheers


    value of wisdom : priceless

    very good post wise.

    Edit
    --------------------------
    Folks just have look at equity variance

    Post that proves beyond any dispute as to what exactly is an ASSET

    Folks need to ponder who is it that the banks offer their loans against is it the individual or the so called asset ?
    CommentQuote
  • Awesome ... though i didnot double check your numbers ... assuming you did. The way these are presented may confuse.
    CommentQuote
  • Originally Posted by wiseman

    Now let us assume Realist wants to buy that house.
    He pays 55L for a 75L home and takes a loan of ONLY 20L for a brand new home. While Compufast has an outstanding principal of 37.66L for a 4-year old home.


    Wisey,

    Can you correct your calculation by considering following points:

    Income tax lost/saved. :

    Compufast will save at least 50K per year.
    Realist will loose 30% Itax on interest earned from Bank. - Itax saved due to rent paid. (after reducing Itax the interest earned will come down significantly .. assuming both are in 30% bracket)

    Maintenance and Property tax

    this will take calc closer to reality.
    CommentQuote
  • Can you explain how is Interest from Bank - Rs.26,00,000

    Originally Posted by wiseman

    Compu,

    You have given a golden opportunity to potray BOTH sides of the debate between Real's side of the argument and yours.

    The only point where you both agree is, buying a home should be for own use.

    FRom here your take is prices will keep on increasing and therefore buy no matter what. Real states that prices are already too high to afford and buying with lots of debt is a bad idea.

    I then decided, let me do a quick computation to see which is a better idea, taking your own parameters as the basis. Here goes ...

    Let us assume the following ...

    Assumptions. Home costing 50L. Home Loan rate 10%pa avg. EMI 50k. Initial Capital 5L (10%). Loan of 45L (90%). FD rate 10% pa. Rent 12k avg.

    Now let us flashback to 2009. After the HUGE crash in markets, things seem to be coming back.

    We now see 2 persons. One named Compufast and the other named Realist (any resemblance to Compu and Real purely coincidental :D)

    Compufast decides he has to buy a home asap! He puts down the 5L and starts paying EMI regularly.

    Realist decides he has to wait for prices to come down! He puts the 5L into FD and starts paying saving EMI amount regularly.

    Now, flash-forward to 2012, 48 months in the future. World looks bleaker, but surprise! RE has risen 50%!!!

    Compufast is laughing very hard! Realist is looking downcast. Looks like all the forum fence-sitters are ready to jump into Compufast camp and buy like mad!!!

    Real looks at wiseguy (again all resemblance purely coincidence) as if saying ... " Can you help me a little here?"

    Now, let is let us look a little harder … What do we see here?

    Compufast shows the following score …
    Down payment + EMIs - Rs.29,00,000 (5L+24L)
    Interest to Bank - Rs.16,65,000
    Principal paid down - Rs.7,34,000 (via EMIs)
    Total Equity in home - Rs.12,34,000
    Principal yet to be paid back - Rs.37,66,000

    Realist shows the following score …
    Initial Capital + Savingss - Rs.29,00,000 (5L+24L)
    Interest from Bank - Rs.26,00,000
    Rent paid out in 48 months - Rs.5,76,000 (already included in monthly calculation)
    Total Capital in hand - Rs.55,00,000

    Now let us assume Realist wants to buy that house.
    He pays 55L for a 75L home and takes a loan of ONLY 20L for a brand new home. While Compufast has an outstanding principal of 37.66L for a 4-year old home.

    If we assume that price growth will slow down over the next 4 years, then, in all probability
    Realist can perhaps buy out that home after 3-4 years with practically no loan if he continues saving 50K every month till he buys later!!!

    This is an a.pples to a.pples comparison and assumes the postponement also includes saving EMI amount every month till future purhase.

    What an Idea, Sirji!!!

    It appears that the common point made by both Compu and Real that one needs to take as little loan as possible is based on good thinking.

    Rest is upto each individual!

    cheers
    CommentQuote
  • Compuwalah,

    I've just joined IREF last month. I am a big fan of your posts :)

    Good going.

    Originally Posted by compuwalah
    What you are trying to say is that "please do not disturb when we are misguding people left and right. " . This is so much in line with Scorpio chaps :) .

    But anyway to answer on your own language "please do not read each and every comment we reply to ;) ... you can limit yourself to posts of your liking"
    CommentQuote
  • Originally Posted by mangopeople
    Compuwalah,

    I've just joined IREF last month. I am a big fan of your posts :)

    Good going.


    Thanks mango. Quiet encouraging especially when one has been surrounded by hungry bears for long and only thing he get to see is dark blank hairs and white shiny canines :)
    CommentQuote
  • Doesn't sound right.

    Lets assume that both R and C get 1 lakh in hand per month
    And their expenses are 30K per month and saving of 5 lakhs

    If Realfast invests first 5 lakhs and then 60,000 (100-30 expenses -10 for rent) per month at 9%, then he would have accumulated 42 lakhs in 4 years (not counting in the income tax on FDs...as one could easily go for FMPs and do indexation).

    Compu, on the other hand, buys flat for 5 lakhs downpayment and 50K EMI (at 10%)
    and invests 10K per month (at 9%)
    And after 4 years sells his flat for 75 lakhs
    SO he would have: 75 - 42 (owing to the bank+variety of fees) + 6 (on 10K PM investment) + 6 (income tax saved) = 45 lakhs
    ---------------------
    Now, 50% increase in 4 years is like 10% per year returns. Pretty slowly appreaciting asset IMO.
    CommentQuote
  • NG2012: A flat costing 55L and on rent 10k is not worth buying (strictly for Pune)! Either increase the rent to 15-20k or reduce the price of the flat to 30-35L max in your equation. When you screw up the equation to show one sided math of low rental yield, of course the returns will be dismal.
    CommentQuote
  • Originally Posted by tushart
    Can you explain how is Interest from Bank - Rs.26,00,000

    I have same question.
    CommentQuote
  • Originally Posted by BearORBull
    Wisey,

    Can you correct your calculation by considering following points:

    Income tax lost/saved. :

    Compufast will save at least 50K per year.
    Realist will loose 30% Itax on interest earned from Bank. - Itax saved due to rent paid. (after reducing Itax the interest earned will come down significantly .. assuming both are in 30% bracket)

    Maintenance and Property tax

    this will take calc closer to reality.


    +1
    What is guarantee that Compufast got the pocession of the flat
    within a year. See the Blue ridge still have not given the pocession, If he is in that situation he has to pay Rent + EMI
    CommentQuote
  • Folks. corrections and tax inclusions coming up for a 10-year period

    Originally Posted by msp1976
    I have same question.


    I got into the trap again. What was a back-of-envelope is now becoming a full-fledged spreadsheet! :)

    Double-checking data + tax breaks + other costs being included and coming up.

    Hopefully we will see other experts put in their bit and make it a spreadsheet worth keeping for reference!

    A little time please?

    cheers
    CommentQuote
  • Indians wary of investing in property: Survey

    MUMBAI: Uncertainty in the real estate sector is keeping the Indian home buyers away, according to a survey.

    "While property still remains the preferred choice of investment of nearly all the Indians, as high as 92 per cent, they are pretty scared of trading in the property market now," real estate market tracking news portal Track2Realty's survey titled `Home Buyer's Satisfaction Index' said.

    The survey further said that buyers are looking at other options including infra bonds for investment.

    "Nearly 70 per cent of Indians who are looking to invest again after occupying a house assert they prefer relatively safer bets like infra bonds than be sorry after the new launches are stuck up due to developers' poor financial condition, regulatory hassles or other legal issues."

    The survey was conducted in ten cities: Delhi, Mumbai, Kolkata, Bangalore, Kochi, Ahmedabad, Chennai, Patna, Pune and Chandigarh. As many as 2,000 house-buyers were surveyed.

    "Almost 60 per cent of home seekers active in the property market believe there is artificial demand in a new launched project and after 12-24 months, prices can be realistic, if not outrightly downward," it said.

    Due to lack of confidence in the new launches, buyers are preferring ready-to-move properties.

    "Nearly 62 per cent prefer to settle for a flat in the secondary market as against the temptation of brand new in the recently launched apartment."


    Indians wary of investing in property: Survey - The Economic Times
    CommentQuote