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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  • LOL! Please dont forget the gun and ammo if you live in Noida.
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  • I think the writings on the wall -

    < "Joint liability can only happen when sufficient controls are in place," Merkel said, according to Reuters. Merkel is set to meet with French President Francois Hollande in Paris later Wednesday as European leaders prepare for a two-day Brussels summit that begins Thursday. Merkel is resisting pressure from Hollande and other European leaders to facilitate a move toward mutualizing euro-zone debt in an effort to bring down borrowing costs for countries such as Italy and Spain. >>

    So, now, if EU breaks up and members go their own way and fall back upon their old currencies etc etc. (basically the doomsday scenario), what happens to the world? What happens to Euro obligations in banks, businesses, bonds, derivatives etc. etc. in the member countries? Who makes good of those obligations and in what currency? How will the exchange rates be decided when Italy pays back in Lira and Greece pays back in Drachma to US or some other creditor?
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  • Originally Posted by SGanguly
    I think the writings on the wall -

    < "Joint liability can only happen when sufficient controls are in place," Merkel said, according to Reuters. Merkel is set to meet with French President Francois Hollande in Paris later Wednesday as European leaders prepare for a two-day Brussels summit that begins Thursday. Merkel is resisting pressure from Hollande and other European leaders to facilitate a move toward mutualizing euro-zone debt in an effort to bring down borrowing costs for countries such as Italy and Spain. >>

    So, now, if EU breaks up and members go their own way and fall back upon their old currencies etc etc. (basically the doomsday scenario), what happens to the world? What happens to Euro obligations in banks, businesses, bonds, derivatives etc. etc. in the member countries? Who makes good of those obligations and in what currency? How will the exchange rates be decided when Italy pays back in Lira and Greece pays back in Drachma to US or some other creditor?


    This is where the Germans policy doesnt make sense. They are already funding billions and billions of euros towards bailing out other european countries and still they thing there is no join liability. The day they adopted the euro was the day the euro zone accepted joint liability.

    ECB has bought 200+ billion euro in govt (spain, italy, greece etc) debt
    The money leaving Spanish, Italian and Greek banks is going into French and German banks which are lending it back to the ECB and the ECB is giving it lending it back to "solvent" Spanish, Greek and Italian banks.

    The german banks and govt is on hook for atleast 1 trillion euros and still merkel is saying germany wont adopt joint liability without more control. She spent 1 trillion with no controls attached but now she says it has to stop :) you cant just take the drug addict off drugs in one single day.

    Options to save the euro in the medium term
    1. ECB print money
    2. Europe wide gaurantee on bank deposits
    3. Selling of govt stakes in major european companies
    4. Lets banks which made bad bets fail and bond holders who invested into those bank debt take a hit. Dont take the liability of the bank bonds on govt books
    5. Get Italy and Spain to give up budget control to EU / EC till budget is balanced
    6. Get same retirement age in all of euro zone (france just reduced it retirement age as they had a new leftist govt)
    7. Open the services sector in Euro to competion

    Can this be done? No. So the bond markets will force change their way. Default of Spain. Greece exit. Germany then agrees to print money.
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  • But you're saying the Euro will stay in some form or other?
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  • Its all politics ...

    Originally Posted by herohiralal
    This is where the Germans policy doesnt make sense. They are already funding billions and billions of euros towards bailing out other european countries and still they thing there is no join liability. The day they adopted the euro was the day the euro zone accepted joint liability.

    ECB has bought 200+ billion euro in govt (spain, italy, greece etc) debt
    The money leaving Spanish, Italian and Greek banks is going into French and German banks which are lending it back to the ECB and the ECB is giving it lending it back to "solvent" Spanish, Greek and Italian banks.

    The german banks and govt is on hook for atleast 1 trillion euros and still merkel is saying germany wont adopt joint liability without more control. She spent 1 trillion with no controls attached but now she says it has to stop :) you cant just take the drug addict off drugs in one single day.

    Options to save the euro in the medium term
    1. ECB print money
    2. Europe wide gaurantee on bank deposits
    3. Selling of govt stakes in major european companies
    4. Lets banks which made bad bets fail and bond holders who invested into those bank debt take a hit. Dont take the liability of the bank bonds on govt books
    5. Get Italy and Spain to give up budget control to EU / EC till budget is balanced
    6. Get same retirement age in all of euro zone (france just reduced it retirement age as they had a new leftist govt)
    7. Open the services sector in Euro to competion

    Can this be done? No. So the bond markets will force change their way. Default of Spain. Greece exit. Germany then agrees to print money.



    The Eurocrats would like to go by the strict definition of "Default" so that they can have the music continue to play and they can continue with their dance. This is why they arm-twisted the banks to "voluntarily" agree to the 50% haircut (recollect that earlier they were not even willing to take a 21% haircut on the same debt!).

    Luckily for us on this forum we don't have such a problem and can call a spade a spade and a default as a default. So, when I return the nominal amount of money back to you at 10% of its loaned out value, I have not defaulted. But what would your POV be on this? To you, I would have defaulted in spirit while not literally.

    Second, Germany is expected to have the most severe impact of the coming end of the EU as it stands today. Their banks will take the most hit and their exports will take the most hit and some estimates are that a EU collapse may reduce German GDP by as much as 50%!!!

    So, Merkel is absolutely correct in saying that Germany will NOT continue with this dance as it will only make things much worse for them.

    The coming Summit this weekend is already in danger of not emerging with anything concrete. Italy's Bond yields have jumped close to 5%. Expect July to much more volatile.

    Taking your definition of death comparison, the EU is now more like putting a dead man on a ventilator and forcing breathing and stating he is alive ... " See he is breathing!" :D

    And all this managing money (by printing endlessly) is merely managing to postpone the inevitable - thats not exactly what you would call managing in the normal sense, right? Its more like damaging! :)

    cheers
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  • Originally Posted by SGanguly
    But you're saying the Euro will stay in some form or other?


    Yes. Germans are playing hard ball but they will have to start seeing the point when their GDP starts getting impacted (not directly but a Euro slowdown will bring reduce Chinese exports which will impact German exports to China) and when unemployment starts going up in Germany.
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  • Originally Posted by wiseman
    The Eurocrats would like to go by the strict definition of "Default" so that they can have the music continue to play and they can continue with their dance. This is why they arm-twisted the banks to "voluntarily" agree to the 50% haircut (recollect that earlier they were not even willing to take a 21% haircut on the same debt!).

    Luckily for us on this forum we don't have such a problem and can call a spade a spade and a default as a default. So, when I return the nominal amount of money back to you at 10% of its loaned out value, I have not defaulted. But what would your POV be on this? To you, I would have defaulted in spirit while not literally.

    Second, Germany is expected to have the most severe impact of the coming end of the EU as it stands today. Their banks will take the most hit and their exports will take the most hit and some estimates are that a EU collapse may reduce German GDP by as much as 50%!!!

    So, Merkel is absolutely correct in saying that Germany will NOT continue with this dance as it will only make things much worse for them.

    The coming Summit this weekend is already in danger of not emerging with anything concrete. Italy's Bond yields have jumped close to 5%. Expect July to much more volatile.

    Taking your definition of death comparison, the EU is now more like putting a dead man on a ventilator and forcing breathing and stating he is alive ... " See he is breathing!" :D

    And all this managing money (by printing endlessly) is merely managing to postpone the inevitable - thats not exactly what you would call managing in the normal sense, right? Its more like damaging! :)

    cheers


    Right this is taking us deeper and deeper into how CDS and bonds works but hopefully its worth the effort

    Greek bonds were essentially of 2 type - 1) based on greek law and 2) based on english law.

    English law says you cant change the term of the bond after it has been issued i.e. u cant change the rules of the game during the game

    Greek law dosent say anything so the private investors who agreed to take a haircut did so under a) tremendous pressure form germany and france b) cause greece said it will change the law and make it so that if 60% or something of the bond holders by value agreed to new terms then all the others would have have to agree.

    Now you have remember who the private invvestors of greek bonds were in late 2011 and early 20122 were. they were french (BNP Paribas) and german banks. Now you see why they accepted? Charles D the head of the institute who was responsible for negotiating the haricut was forced by Merkel and Sarkozy to take a bigger haricut.

    So one set got a raw deal and the insurance which they had bought against the bond defaulting was useless cause the exchange was voluntary (no default). The investors who has bought greek bonds issued upon english law got 100 cents to the dollar :) cause greece defaulted on those bonds and the investors insurance policy paid out the 100 cents.

    So having a proper defination of default is very imp. It may not be for you cause you dont have any money at stake in euro bonds but investors who have billions invested in bonds (you may be invested via your pension fund) cant take such things lightly.

    And ECB hasnt printed any money yet so not sure how you are relating printing money with greece or italian or spanish default? If ECB had printed money like UK and US then we wouldnt have a problem in the short term.

    Germany not allowing ECB to print money and not allowing it to buy Italian and Spanish debt in the 2nd market is causing all the yields to rise. Germany isnt right now. If it was so relectant in sharing debt then it shouldnthave joined the euro atleast we would not have to sit waiting for merkel so see sense and while she does that she takes the world economy down with it. There is not point following the correct path with the euro which is essentially a wrong concept. What do the say? When in Rome do as the Romans do or when in Madrid spend heavily on foreign football players :)
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  • You are technically correct

    Originally Posted by herohiralal
    Right this is taking us deeper and deeper into how CDS and bonds works but hopefully its worth the effort

    Greek bonds were essentially of 2 type - 1) based on greek law and 2) based on english law.

    English law says you cant change the term of the bond after it has been issued i.e. u cant change the rules of the game during the game

    Greek law dosent say anything so the private investors who agreed to take a haircut did so under a) tremendous pressure form germany and france b) cause greece said it will change the law and make it so that if 60% or something of the bond holders by value agreed to new terms then all the others would have have to agree.

    Now you have remember who the private invvestors of greek bonds were in late 2011 and early 20122 were. they were french (BNP Paribas) and german banks. Now you see why they accepted? Charles D the head of the institute who was responsible for negotiating the haricut was forced by Merkel and Sarkozy to take a bigger haricut.

    So one set got a raw deal and the insurance which they had bought against the bond defaulting was useless cause the exchange was voluntary (no default). The investors who has bought greek bonds issued upon english law got 100 cents to the dollar :) cause greece defaulted on those bonds and the investors insurance policy paid out the 100 cents.

    So having a proper defination of default is very imp. It may not be for you cause you dont have any money at stake in euro bonds but investors who have billions invested in bonds (you may be invested via your pension fund) cant take such things lightly.

    And ECB hasnt printed any money yet so not sure how you are relating printing money with greece or italian or spanish default? If ECB had printed money like UK and US then we wouldnt have a problem in the short term.

    Germany not allowing ECB to print money and not allowing it to buy Italian and Spanish debt in the 2nd market is causing all the yields to rise. Germany isnt right now. If it was so relectant in sharing debt then it shouldnthave joined the euro atleast we would not have to sit waiting for merkel so see sense and while she does that she takes the world economy down with it. There is not point following the correct path with the euro which is essentially a wrong concept. What do the say? When in Rome do as the Romans do or when in Madrid spend heavily on foreign football players :)



    All of what you say is correct technically.

    Though the ECB has not printed money, they have done a swap with the US, which has printed and needs to be paid back. This is tantamount to the ECB indirectly creating money, right?

    Also, when Greece, Spain, Italy and possibly even Germany leaves the EU, and lets say hypothetically the EU is dissolved, then in what currency will the Euro denominated debts be settled? will English law hold if the exiting countries refuse to pay back the loans made under English Law? What will be the penalty? War?

    Trying to act normal in a world that has long stopped being normal (by changing the goalpost during the match and changing rules to suit the ECB whenever it pleases) is a pretense which will return to reality when the Emperor is seen to have no clothes!

    Let us wait and watch this interesting Greek Tragedy unfold. No one knows what the end result is going to be.

    cheers
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  • Originally Posted by wiseman
    All of what you say is correct technically.

    Though the ECB has not printed money, they have done a swap with the US, which has printed and needs to be paid back. This is tantamount to the ECB indirectly creating money, right?

    Also, when Greece, Spain, Italy and possibly even Germany leaves the EU, and lets say hypothetically the EU is dissolved, then in what currency will the Euro denominated debts be settled? will English law hold if the exiting countries refuse to pay back the loans made under English Law? What will be the penalty? War?

    Trying to act normal in a world that has long stopped being normal (by changing the goalpost during the match and changing rules to suit the ECB whenever it pleases) is a pretense which will return to reality when the Emperor is seen to have no clothes!

    Let us wait and watch this interesting Greek Tragedy unfold. No one knows what the end result is going to be.

    cheers


    If you are talking about the dollar liquidty swap that the US fed has opened up with major central banks of the world then its a swap. Give and take.

    Normal market - US Bank (e.g. JPM) swaps dollars for euros with EU bank (e.g SocGen). Now if JPM thinks SocGen has a load of crap assets on its books and not enough equity to cover the losses (i.e. insolvent) then it will not want to lend Dollars to SocGen in exchange of Euro. This has happened across the EU region as other major global banks have stopped or reduced swapping dollars for euros due to the fear that they have Spanish RE assets, Greek bonds, etc.

    So the normal money markets have stopped working. What do you in this situation? One option for EU banks is to sell all the dollar denominated assets and generate free dollars to pay back creditors or bonds denominated in dollars. If all of them sell at the same time prices will falls so instead of that the European banks go to the ECB and in exchange of their dollar or euro denominated assets it take out a euro or dollars.
    The ECB here is just doing what the money market which operates between private sector US and european banks would have usually done. The ECB is taking excess euro from the strong european banks (all the euro leaving spain , italy and greece ends up in french and german banks) and either lending the euros to the weaker banks in exchange of euro denominated assets or exchanging the euro with the US fed for dollars and then lending the dollars to weaker european banks by taking from them dollar denomiated assets.

    The UD fed charges a interest rate (0.5%) for swaping dollars with the ECB for euro. The ECB charges interest rates to the european banks who want to take euro or dollars from it and also takes security.
    Now the ECB is the one stuck with all the crap assets and its using it standing in borrowing dollars and euro from other banks and other central banks.

    Now if Germany says that it wont help the other euro region countries then its actually getting the ECB standing in doubt. what you have with the Euro is one big mess which can only be solved by Germany willing to print money and but govt debt in the 2nd debt markets along with other structural reforms.

    Euro as a currency wont go away. Germany will adopt the Euro along with Holland and Austria and Belgium and other countries might go back to their old currencies. The debt that Spain has in Euro will get converted in new currency with agreement of the bond holder. Those who dont want to take the new currency conversion will not get any money back and these will be investors who have bought insurance on the bonds (hedge funds and smart money) and will get paid 100 cents to the dollar. The point to remember here is that they would have bought insurance at a cost of say 30-40 cents so their gain would be 60-70 and they would have bought the bonds 60-70 cents to the dollar so it isnt like that the insurance would be available at a cheap cost.

    If and when countries decide to leave the euro there will be a massive global credit crunch cause europe is the biggest world economy so the impact will be massive.
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  • kudos to herohiralal and wiseman for some good discussion on the world economy. Gives different perspective to the scenario.
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  • Default definitions as per ISDA

    Bankruptcy
    Failure to pay
    Restructuring
    Obligation default or acceleration
    Debt payment moratorium
    Sovereign debt CDS use west sov default where default definition varies from standard instruments.
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  • Will Europe crash OR India ?

    Everyone is busy with Europe but Indian govt decided to make it happen.
    "The imposition of the service tax will adversely affect millions of Keralities, especially those working in low-paid jobs in the Gulf region. This tax of Rs.1,236 for every Rs.10,000 sent home will be an unbearable burden on these ordinary people... and their dependent families at home," he said.
    Put service tax on NRI remittances on hold: Tharoor - NY Daily News
    If we go by 12.6% calculation, it means for each EMI , NRI has to shell out 12.6% to govt. Bingo!!!!:bab (59):
    NRI will not dare to buy RE OR send remittance. Means we have govt organized crash in economy.
    Jai ho Congress ki !!!!! :D:D:D
    BTW, Indian banks already started implementing GHAR for NRI. They are demanding more details with documents to forex account holders.
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  • With the faith in our govt I am already targeting 70+ INR to USD in next 2 years.:D:D:D
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  • Listed realty firms' revenue hits downside

    Revenues of 25-listed real estate companies dropped 9.30% to Rs 8143 crore in the fourth quarter of the last financial year primarily due to slow sales offtake. Many real estate companies did very little to woo back customers to the market. Buyers shied away from the market as companies held on to their pricing in a high-interest rate scenario that has dampened the sentiment further, said a report by real estate consultancy Knight Frank India.

    Listed realty firms' revenue hits downside - The Times of India
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  • Originally Posted by compuwalah
    kudos to herohiralal and wiseman for some good discussion on the world economy. Gives different perspective to the scenario.


    Thank you.

    I noticed that everytime I bait Hero (politely, of course) he comes up with some technically sound stuff. So I keep baiting him so that the audience can enjoy a content rich conversation and get some fundas straight! :)

    cheers
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