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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  • This project was built in 5 years which is less than what it takes Pune's builder to complete a single project of 4-5 buildings of max. 11 storeys.
    Anyways, check these pics:-

    http://www.burjdubaiskyscraper.com/photos.html
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  • I am looking at deccan hearld news paper today. They have a realty edition every friday. I was surprised to see it. They have converted the first 3 pages to a non realty section and only the 4th page is about realty. Even there, i could see only 3 low profile ads. and 3 articles.
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  • Babus' assets can now be disclosed through RTI



    Good News...Babus' assets can now be disclosed through RTI...:p

    DNA NEWS
    Corrupt babus, beware. The Central Information Commission (CIC) has just held that citizens have a right to know everything there is about the assets bureaucrats own, the expenses they incur, and their lifestyles. Those who seem to be living beyond their means will have a tough time explaining it.....

    Read the detailed story here...
    ]http://www.dnaindia.com/mumbai/report_babus-assets-can-now-be-disclosed-through-rti_1332199
    CommentQuote
  • Originally Posted by realacres

    Currently staying on rent (my rent is just more than 1/4th of what owner pays to the bank as EMIs:p).


    This is the basic elementary grade mathematics people have forgotten. The owner is pretty much paying you to live in his house!

    I've been following this thread from a month or so now, I was sitting on the buy /no buy wall. reading this thread...I continue sitting there :)

    You guys are doing a brilliant job in spreading awareness, Keep up the good work!!

    I am just waiting for the day when economics finally beats emotions in the Pune RE sector.
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  • Bubble warning

    A good article from Economist describing the real state of the markets.

    Markets are too dependent on unsustainable government stimulus:-

    http://www.economist.com/opinion/displayStory.cfm?story_id=15213157&source=hptextfeature
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  • Green Building Convention 2010

    Here is an email I received:-

    Dear Industry Colleague,
    It gives us immense pleasure to communicate with you once again regarding our forthcoming event, Green Building Convention 2010 (GBC’10) – An international event focused on sustainable development & eco-friendly construction, scheduled to be held at the Auto Cluster Exhibition Centre, Pune (INDIA) from the 18th to 20th February, 2010.
    As you know GBC’10 will also host two days conference alongside the expo on 18th & 19th Feb 2010 focusing on imparting knowledge and advantages of green building concept, it would also deliberate on addressing challenges and opportunities in the sector addressed by respective industry experts.

    GBC’10 is an initiative designed to promote the concept of Green Buildings in the design, construction & operation of building projects and serves as a platform to showcase the latest products & innovations in the industry. The event also proves to be an ideal forum for exploring new business opportunities and for dissemination of knowledge in the quest to deliver sustainable development & green architecture.

    In view of the above, we wish to invite you to participate in our forthcoming GBC’10 conference. Please find below the Conference Program for your ready reference & consideration.

    Come & meet the industry's elite at what will be a spectacular 3 days of the year.

    Feel free to forward this email to a colleague who you think might be interested in participating in this sensational event.

    We look forward to seeing you at the Event.

    Be part of the action! Note the event dates in your diary...
    *********************************************************************

    With warm regards,

    Nicholas Almeida
    Project Head
    INIS Enterprises Pvt. Ltd.
    210 Atlanta Estates, Vitth Bhatti,

    Goregaon (E), Mumbai - 400 063, India
    Tel: 91 22 28763111 / 40470600
    Fax: 91 22 28765444
    : 91 9820604754

    Website: ="http://www.greenbuildingconvention.com"]www.greenbuildingconvention.com

    * I could not upload the jpg attch due to size restriction. Visit the following link for more info:-

    ]http://www.inis-enterprises.com/gbc2010/index.html
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  • Originally Posted by rahulms
    This is the basic elementary grade mathematics people have forgotten. The owner is pretty much paying you to live in his house!

    I've been following this thread from a month or so now, I was sitting on the buy /no buy wall. reading this thread...I continue sitting there :)

    You guys are doing a brilliant job in spreading awareness, Keep up the good work!!

    I am just waiting for the day when economics finally beats emotions in the Pune RE sector.



    Please let us know about one RE growth area where Rent to EMI equation made sense. Going simply by equation is not correct. You need to put context and other potential aspects in to consideration.

    You shouldn't buy a stock with P/E more than 12 or book value more than 3x. Try that on a growing company/industry stock ... :)

    You will be a spectator forever or until the growth leg comes to an end ... good luck.
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  • Originally Posted by anikat
    Please let us know about one RE growth area where Rent to EMI equation made sense. Going simply by equation is not correct. You need to put context and other potential aspects in to consideration.

    You shouldn't buy a stock with P/E more than 12 or book value more than 3x. Try that on a growing company/industry stock ... :)

    You will be a spectator forever or until the growth leg comes to an end ... good luck.


    What are potential aspects of Pune real-estate. Is it good availability of water/roads?
    If Rent to EMI equation does not make sense, then why this urge/need to buy. Let the owner, pay EMI at 4X Rent.

    In case of stock one can pick and choose companies with good growth prospects, low P/E. It is easy to diversify portfolios and risk across industries and companies. And also one can buy in denominations of 1000 Rs and exit stock easily.
    Please note that none of these is true about Pune RE.

    Now a days good companies are trying to reduce their leverage (expecting rise in interest cost) and sometimes holding huge cash rather than investing.
    I find it foolish to invest or buy RE at EMI = 4X Rent when not sure how economy will perform in next couple of years.
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  • The Long Term view ...

    Originally Posted by anikat
    Please let us know about one RE growth area where Rent to EMI equation made sense. Going simply by equation is not correct. You need to put context and other potential aspects in to consideration.

    You shouldn't buy a stock with P/E more than 12 or book value more than 3x. Try that on a growing company/industry stock ... :)

    You will be a spectator forever or until the growth leg comes to an end ... good luck.



    Anikat,

    It takes a long time for one to get the experience you are talking about. In fact, the return on investment one makes waiting for a good growth company below 12 P/E is worth the wait.

    In fact, end of 2008 and beginning of 2009, there were many fabulously cash rich companies making tons of money even in the depths of recession, which were available for (hold your breath!) under 3 times P/E!!!!!!!!!!!!!!!!!!

    Take the Example of Guj Fluorochem (I have given this example long ago on this board). On a Re.1 Face Value, its Book Value was a phenomenal Rs.86. EPS was Rs.28, Dividend was 350% (thats Rs.3.50 per share). And you know what the price bottomed at? Rs.66!

    Can you imagine the bargain? P/E of 2.35! P/BV of 0.77! Dividend yield of 5.30%! And a REturn on Capital Employed of 27%! You can figure out the bargain!!!

    As Almighty might say, Kanna Mudindu Vanginen!:D And though its touched Rs.180 giving 172% best return in this period, it does not match others like Sesa Goa, etc which were also bargains! But since this company is throwing off so much cash, simply holding it over the years will give you phenomenal returns. You simply have to wait and meanwhile enjoy rising (tax-free) dividend yields! :D


    On the other hand, lets see the effects of participating in the rising bull market at high P/Es and check if this is a best strategy!

    For example, take Sobha (not a great share, but I'm taking this example anyway). It had an IPO at 640! Price went all the way to 1230 peak (giving a best return to IPO holder of 92% over nearly 2 years). Once could have bought this share at any point in the meanwhile at high P/Es (between 640 and 1230).

    But imagine if one had waited. Finally, it could've been picked (and in fact some of my friends picked it) at around 75-80.

    Comparing the two cases, assuming the guy who bought at even 640. Today at 270, he is sitting on a loss of over 57%. The 80 buyer is sitting on a 235% profit. If the share only goes back to IPO price the bargain buyer will have a 700% return while the IPO guy would have broken even and actually taken a loss on notional time value of money!

    If this share goes back to its previous highs over the decade, the 80 buyer would have done 1500% gain. The 600 buyer, only a 92% gain.

    I have experience this even in the case of Arvind, where I have seen people buy it in the 90s at 300+. And I have bought the same company at 8 and made over 1600% profit. Even if you have to wait for 4-5 years, its always great to wait for bear market bottoms to get phenomenal bargains which will give you returns that no other asset class can.

    And these cycles happen every 5+ years. Don't you think its a great way to invest? :D In the 5 years when all others are fighting for the paltry profits with risks attached, you could be honing your skills and rising in your profession stashing away the savings and shortlisting the best companies to get into. When bargain time comes, simply invest your money and get back to making more in your profession. Best way to become a very rich man (with high dividend cashflow as well as liquidity) in a 20 year timespan!

    But though it seems such a bad way to you, it happens to be the finest way to invest!!!

    As Benjamin Graham preached and Warren Buffett practiced, whatever be the asset, waiting for it to reach a great bargain price (when it also becomes the most hated asset class), is the best way to minimise risk and maximise returns. Isn't that what every investor wants to do, even if he is only buying the asset never to sell?!

    cheers
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  • Rahul MS, capital gains in RE outweigh rental yield, always, in India. Equations for US are not applicable in India. Even in US, rental yield is some miniscule percentage.

    Anikat I agree totally with you, RE is a long term growth area in India and hence commands a premium worth paying.

    Please note that buying RE in a new project on a CLP is like a SIP for 3 years. So the best time to invest is not at bottom but 2 years before bottom. i.e invest today if you think 2011 will be terrible and 2013 will be turnaround. If you wait till 2011 to book and it is indeed terrible that year, none of the new projects will take off the ground. YOu wont be able to buy. Your mind will not agree to invest in RE in doom and gloom times. And you will end up missing the long term growth. Also, most owners donot re-sell in bad times, so your chances of picking up a bargain ready built house are poor.

    Having said that, if you do want to buy a flat in resale, you can safely wait for 2-3 years for bottom. Prices are not going anywhere in a hurry. You will get that flat for same price 3 years later. Better to earn interest on your capital/ save for a downpayment for now.

    Not the same calculation for a new project. Hunt for a good one now.

    Wiseman, I have mistimed entry many times in stocks. I have not bought many great stocks because I thought they will fall more. I have also exited too early and missed the top 20-30 of gains. For every stock that outperformed, there were 3 that did OK but reduced the average returns.

    Picking stocks in a bear market is going to be difficult. And market is going to fall rather than rise. Bad time to be in stocks (except real long term buy and hold blue chips)

    No timing problems in RE - it is long term investment by definition. Less chance of mistiming.

    As I said before, RE is the only leveraged investment worth making. Leverage makes for supranormal returns.

    Also, please remember that most people got rich in England in 19th Century, US and Europe in 20th Century because of their RE investments.

    RE is the most common route to becoming rich. Commercial RE is the most common investment made by rich people all over the world, and they are well known to live off the rents.

    It is unlikely that India will follow some other road to middle class riches. There are FDs, then there are stocks and then there is RE. These are the three safe investments known to man.

    What else is there? (dont tell me derivatives or currency speculation or commodity derivative contracts - all of that is pure gambling, except if you actually deliver or use the commodity/stock, when it is hedging - not for lay people)

    So after you have done FDs and PPFs, then done mutual funds and stocks, what else is there to do except move on to RE?
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  • Originally Posted by Venkytalks
    No timing problems in RE - it is long term investment by definition. Less chance of mistiming.

    But I see no point investing long term through EMIs:o. This option is OK if you have surplus money & don't know what to do with that, most of which is cash or to save tax.

    Also, please remember that most people got rich in England in 19th Century, US and Europe in 20th Century because of their RE investments.

    Agreed, but one big aspect you missed:- The interest rates! It never made sense to put money in banks in West as the ROI were very less. Hence, it was only RE which was the good buck amongst all. RE investment was done as there was no other option. India's case is different. The bad part is land titles aren't clear in some cases & RE has no regulator. Hence, despite having money, RE investment in India is more risky than West.

    RE is the most common route to becoming rich. Commercial RE is the most common investment made by rich people all over the world, and they are well known to live off the rents.

    Commercial RE is good, but then you require surplus man. Here we are focussing on residential, that too more for end use.
    If you want, you can add warehousing too!

    It is unlikely that India will follow some other road to middle class riches. There are FDs, then there are stocks and then there is RE. These are the three safe investments known to man.

    Correct. Add to it GOLD. It's the best source known to Indians for ages, be it through white or black. Selling is simple, unlike RE and yes, it is long term too.

    So after you have done FDs and PPFs, then done mutual funds and stocks, what else is there to do except move on to RE?

    Well, hike the share holdings further;).

    Go on a nice vacation man, go crusing on carribean, buy supercars & private jets, get a nice yatch at Miami:). What's the use of only investments if you don't enjoy?
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  • RE appreciatin in past 2 years

    Check this post of Ajit Dayal about 'terrible investments'

    There is a chart of RE appreciation in past 2 years. Kolkatta tops, Pune is just around zero (if u take interest into account, it will be negative)

    http://www.equitymaster.com/5minwrapup/detail.asp?date=1%2F11%2F2010&story=1
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  • Originally Posted by aditi sharma
    Check this post of Ajit Dayal about 'terrible investments'

    There is a chart of RE appreciation in past 2 years. Kolkatta tops, Pune is just around zero (if u take interest into account, it will be negative)

    ]http://www.equitymaster.com/5minwrapup/detail.asp?date=1%2F11%2F2010&story=1

    Thanks Aditi,

    Another proof of price stagnation in Pune, for all those who do not believe prices have stagnated in Pune from 2008.

    Also RE bulls, who say that RE never falls and price correction happens only in USA and Dubai and NOT India, please look at the charts for Bangalore and Hyderabad, these cities are very well Inside India and have huge population.

    I very well expect negative chart for Pune for year 2011, and majority people feeling bearish about Pune RE by end of this year., please look at the charts for Bangalore and Hyderabad, these cities are very well Inside India and have huge population.

    I very well expect negative chart for Pune for year 2011, and majority people feeling bearish about Pune RE by end of this year., please look at the charts for Bangalore and Hyderabad, these cities are very well Inside India and have huge population.

    I very well expect negative chart for Pune for year 2011, and majority people feeling bearish about Pune RE by end of this year., please look at the charts for Bangalore and Hyderabad, these cities are very well Inside India and have huge population.

    I very well expect negative chart for Pune for year 2011, and majority people feeling bearish about Pune RE by end of this year.
    CommentQuote
  • Originally Posted by RAJESHP
    Thanks Aditi,

    Another proof of price stagnation in Pune, for all those who do not believe prices have stagnated in Pune from 2008.

    Also RE bulls, who say that RE never falls and price correction happens only in USA and Dubai and NOT India, please look at the charts for Bangalore and Hyderabad, these cities are very well Inside India and have huge population.

    I very well expect negative chart for Pune for year 2011, and majority people feeling bearish about Pune RE by end of this year.


    Have you seen period of that chart, if not see it again, its Jan'08 to Jun'09 and we have seen price rise in pune maybe after July'09.

    And also these analyst take very broad sample to plot these charts, so you wont get "Practical Picture" from these charts...Practically I have seen almost 15-20% price rise from July'09 to 2009 end....

    I am not saying that price can not fall from this level, but practically price wont go below 20-30% current rates (thats also may not be true in case of some good property)...This is what I have observed in Pune in last 1 & 1/2 year...
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  • Originally Posted by ash7979
    Have you seen period of that chart, if not see it again, its Jan'08 to Jun'09 and we have seen price rise in pune maybe after July'09.

    And also these analyst take very broad sample to plot these charts, so you wont get "Practical Picture" from these charts...Practically I have seen almost 15-20% price rise from July'09 to 2009 end....

    I am not saying that price can not fall from this level, but practically price wont go below 20-30% current rates (thats also may not be true in case of some good property)...This is what I have observed in Pune in last 1 & 1/2 year...



    OK saw the date on the chart. Also agree that there is price rise from july 09 till date, but still prices are mostly lower or at par with 2008 peak prices.

    Please see this post #10
    https://www.indianrealestateforum.com/forum/city-forums/pune-real-estate/6437-sudden-rise-in-re-adds-in-news-papers?t=8300

    I saw you never replied to this post, can you please reply to this and I will agree with you that price are not stagnated

    Until then for me this chart establishes 2 facts

    1) Prices in Pune are stagnated from 2008
    2) Prices in Indian can very well fall, and not just in USA or Dubai.
    Banlgalore and Hyderabad has lot of population, tons of black money
    less land and whatever fundas applied by RE bulls, and actually better infra than Pune.
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