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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  • 1. We can't talk about 'today's money', that factor is already taken in to account.

    e.g., todays rent is 12k. Next year rent is 13.2k. Inflation is 10%. So after applying discount factor of 10%, we have added next year's rent as 12k only, not 13.2k.

    This is the way CF model works. It is obviously one model out of several possible ones, none of which are perfect. But the beauty of this model is that it can be applied across the asses classes.

    Whether one is willing to pay that price is subject to one's capability. If a car is offered to me at 1L while it can be rented at 10k pm, it makes sense to buy it. But if one doesn't have money to buy, renting is the only option. Now I am not saying that you don't have money. It is just that you are believing a different model of finding the intrinsic value.

    Could you tell me the rationale behind choosing 250 as multiplication factor? Why not 200? or 300?

    Originally Posted by abeerbagul
    So you would be willing to pay for next 100 years rent income in advance today, in today's money? Not me.

    Way I would look at it: Rent today already takes into account all economic opportunities available for the tenant who is ready to stay in that flat.

    So a rent of 12k per month would make this flat worth max 30L. Now lets look at the dilemma of the tenant.
    He wants to buy this same flat, but today it is available for 50L. Should he pay a premium of 20L or wait on rent and save the difference?

    Suppose in 5 years, rents rise to 20k. Rents rise only when disposable incomes go up. So the tenants income is also going up correspondingly, and percentage of income he spends on rent remains constant.

    Also, keep in mind that tenant is not "compromising" on his today's lifestyle in any manner. He is living in a posh 2 bhk flat in new society with all amenities, and no maintenance headache.
    Also he has to keep investing the difference between rent and EMI to build a lumpsum.

    If this decision has to be taken by an "investor" and not a "home owner", all value considerations go out of the window and what remains is speculation.
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  • Reason for the 1:250 ratio

    I believe real estate is always cyclical. If there is a boom today, there will be a bust tomorrow. It might be in inflation adjusted terms, not absolute terms.

    So a 50L flat might not go down to 30L, but it might remain at 50L for 5 years, in which case inflation is eroding its value.

    Bubble is when price : rent ratio starts going above 1 : 300, bust is when price : rent ratio starts going below 1 : 200.

    E.g. If a flat is worth 50L and rent for the same is 30k per month, it is a definite buy scenario. Because rents will keep increasing 10% per year.
    If a flat is worth 50L and rent is 12k, it is a definite rent scenario.

    The grey zone is in between, i.e. a 50L flat gets 18k rent.

    I would prefer to wait till the cycle swings over into bust, when people suddenly discover that real estate is flat for a couple of years. In such cases, usually external environment is blamed such as political unstability (e.g. Telangana in Hyderabad). In such cases people ignore that rental demand is strong and rents are high.

    At this time, banks have very stringent finance requirements and cash is king. If you have more than 50% downpayment, then you can get big size flats 3 bhk or 4 bhk at very low prices.

    Demand for small flats is always constant, but demand for big flats and penthouses is very volatile.
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  • Some of my friends told that even Kerala market is dead for past 3 years.
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  • Originally Posted by abeerbagul
    I actually am staying on rent, waiting for the price : rent ratio to turn favorable. In Dahanukar Colony, Kothrud, current prices for a 1 BHK are 40L, rent is 10k per month.

    EMI for a 40L flat would be 32k per month. So I need to invest the extra 22k per month which I am saving by staying on rent. This saving adds up while waiting for either rents to go up or prices to go down.

    Case 1: Rents go up, price remains constant. So a 1 bhk flat rent becomes 20k per month, price 40L. Now the rent : price ratio becomes 1 : 200, which is decent enough for buying.

    Case 2: Prices crash, which I dont think will happen in Dahanukar colony, Kothrud.

    In case 1, if it takes 5 years for rent to reach 20k, then I am saving on an average 17k per month. Investing this at 15% p.a. will give me 16L, and the 8L downpayment which I already have will become 16L in 5 years.

    So waiting on rent gives me a downpayment of 32L, and need to take a home loan of 8L only, at the end of 5 years.

    The other pain in a rented flat is only that you need to shift periodically. I think this is more of an urban myth. If you have a decent landlord, and you are a decent tenant, every landlord will prefer to keep on extending the tenure with you rather than find a new tenant every 3 years.

    In rental properties, a known devil (tenant) is always better than an unknown one. Nowadays, with leave and licence agreement, a tenant never gets a right on the property.



    Abeer sir,
    Price of the flat will also go up in these 5 years.
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  • Originally Posted by abc111
    Some of my friend told that even Kerala market is dead for past 3 years.


    add jaipur to this list.
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  • Originally Posted by abeerbagul
    I actually am staying on rent, waiting for the price : rent ratio to turn favorable. In Dahanukar Colony, Kothrud, current prices for a 1 BHK are 40L, rent is 10k per month.

    EMI for a 40L flat would be 32k per month. So I need to invest the extra 22k per month which I am saving by staying on rent. This saving adds up while waiting for either rents to go up or prices to go down.

    Case 1: Rents go up, price remains constant. So a 1 bhk flat rent becomes 20k per month, price 40L. Now the rent : price ratio becomes 1 : 200, which is decent enough for buying.

    Case 2: Prices crash, which I dont think will happen in Dahanukar colony, Kothrud.

    In case 1, if it takes 5 years for rent to reach 20k, then I am saving on an average 17k per month. Investing this at 15% p.a. will give me 16L, and the 8L downpayment which I already have will become 16L in 5 years.

    So waiting on rent gives me a downpayment of 32L, and need to take a home loan of 8L only, at the end of 5 years.

    The other pain in a rented flat is only that you need to shift periodically. I think this is more of an urban myth. If you have a decent landlord, and you are a decent tenant, every landlord will prefer to keep on extending the tenure with you rather than find a new tenant every 3 years.

    In rental properties, a known devil (tenant) is always better than an unknown one. Nowadays, with leave and licence agreement, a tenant never gets a right on the property.


    So where exactly are u investing that you are going to get 16% returns every yr for 5 yrs and dont you think if return in stock market are going to be so high then wont it affect real estate prices and so case 1 is not possible?

    I mean where are u going to have a situation that rates in kothrud stagnate whereas the broader economy doubles after 5 yrs in nominal terms. unless you are betting on a Hyderabad like situation with Pune cause I dont think IT jobs are going to go so down that we have a Jaipur or a Kerala like situation.
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  • I didn't find "reason for 250:1 ratio" in the entire post, as the title had suggested :(

    Originally Posted by abeerbagul
    I believe real estate is always cyclical. If there is a boom today, there will be a bust tomorrow. It might be in inflation adjusted terms, not absolute terms.

    So a 50L flat might not go down to 30L, but it might remain at 50L for 5 years, in which case inflation is eroding its value.

    Bubble is when price : rent ratio starts going above 1 : 300, bust is when price : rent ratio starts going below 1 : 200.

    E.g. If a flat is worth 50L and rent for the same is 30k per month, it is a definite buy scenario. Because rents will keep increasing 10% per year.
    If a flat is worth 50L and rent is 12k, it is a definite rent scenario.

    The grey zone is in between, i.e. a 50L flat gets 18k rent.

    I would prefer to wait till the cycle swings over into bust, when people suddenly discover that real estate is flat for a couple of years. In such cases, usually external environment is blamed such as political unstability (e.g. Telangana in Hyderabad). In such cases people ignore that rental demand is strong and rents are high.

    At this time, banks have very stringent finance requirements and cash is king. If you have more than 50% downpayment, then you can get big size flats 3 bhk or 4 bhk at very low prices.

    Demand for small flats is always constant, but demand for big flats and penthouses is very volatile.
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  • What if we apply the DCF (Discounted Cash Flow) model to RE?

    In simple words, DCF states that

    intrinsic value of an asset is equal to the sum of all future income expected from the asset. The future income has to be expressed in today's currency.

    Let us take a plain vanila example - a 2 BHK 1000 sqft flat in Kharadi.

    Since we are talking about "all future", we have to make several assumptions.

    1. Life of building is 100 years.

    3. After 100 years, the building will be demolished free of cost. The owner will retain the land share. The pricing of the land share is complex - will look at it later.

    It is good to have healthy discussion with you man, but above 2 points made me .

    Man, seeing current constro in Pune, I will be happy even if it lasts 25 years & what's the user of ownership of flat after 100 years, when owner himself is defaulted :D.

    Seems kids will say, " Yeh Hamara Pushtaini Flat Hain (aur DP road abhi baaki hain) " :D.
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  • Originally Posted by realacres
    It is good to have healthy discussion with you man, but above 2 points made me .

    Man, seeing current constro in Pune, I will be happy even if it lasts 25 years & what's the user of ownership of flat after 100 years, when owner himself is defaulted :D.

    Seems kids will say, " Yeh Hamara Pushtaini Flat Hain (aur DP road abhi baaki hain) " :D.




    It pains me to see that people who are devoid of even basic knowledge of economics and finance like realacres have been made senior mods and they keep joking and making fun of every argument which cannot see with there way of looking things.
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  • Builders to Cut Prices

    CREDAI has asked its members to cut prices & reduce inventory overhang (in reality reduce debt). This was conveyed by CREDAI to all it's members.

    Now here is the inside story :-

    As you all know, members of CREDAI are bound to obey the diktat of CREDAI. Several builders across the country complained that they no longer can hold the inventory & facing severe liquidity crunch. When the voices of such builders grew louder, CREDAI had no option but let loose. Expect individual correction in prices very soon & as seen, Mumbai has already started witnessing fall in RE prices.:)

    Apart from this, NDTV reported this week how builders have taken money from buyers in launch & pre-launch stage and builders are not constructing anything. The buyers are being threatened that incase they cancel the booking, few lacs will be deducted. The situation is severe in Bangalore & Delhi-NCR. A long list was put up for the same.

    In reality, builders are taking money from buyers even in Pune & using it to pay off debts rather than to complete the project. Hence, it is now best to buy ready possession flats to be on safer side & having 60% investors in market, makes things even more easier for buyers, what one needs is some ground-work.

    Apart from this, BoB or Bank Of Baroda has stated that it will not give loan to builder or buyer (home loan) for entire area of Greater Noida due to legal issues & poor track records of the builder. Bankers say that similar policy will come up across the country where loans in future will not be sanctioned for projects having some or the other issues, which is now on rise even in cities like Pune.

    And last but not the least, just speak with your banker, you will be shocked to see the fall in home loans. My bankers informed that in their branch, not a single home loan was taken in this month & overall the fall is over 80% !!
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  • Originally Posted by realacres

    Seems kids will say, " Yeh Hamara Pushtaini Flat Hain (aur DP road abhi baaki hain) " :D.


    Change that "Hain" to "Tha". So it will read "Yeh Hamara Pushtaini Flat Tha"....
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  • Originally Posted by mymarji
    Change that "Hain" to "Tha". So it will read "Yeh Hamara Pushtaini Flat Tha"....


    In some cases, it may even need to be changed to

    " Yeh Hamara Pushtaini Flat Tha. DP road abhi baaki hain.
    Aur zameen ki ownership builder ke par-pote ke pas hai :D:D:D

    Is mitti se tilak karo yeh mitti hai hamare par-dada ke flat ki" ;););)
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  • Newspaper being used to spread opposite story !

    Originally Posted by realacres
    CREDAI has asked its members to cut prices & reduce inventory overhang (in reality reduce debt). This was conveyed by CREDAI to all it's members.

    Now here is the inside story :-

    As you all know, members of CREDAI are bound to obey the diktat of CREDAI. Several builders across the country complained that they no longer can hold the inventory & facing severe liquidity crunch. When the voices of such builders grew louder, CREDAI had no option but let loose. Expect individual correction in prices very soon & as seen, Mumbai has already started witnessing fall in RE prices.:)

    Apart from this, NDTV reported this week how builders have taken money from buyers in launch & pre-launch stage and builders are not constructing anything. The buyers are being threatened that incase they cancel the booking, few lacs will be deducted. The situation is severe in Bangalore & Delhi-NCR. A long list was put up for the same.
    !!


    Today's Sakaal has a news like item suggesting real estate to have great time going forward due to anticipated reduction in interest rates etc. etc. etc. :D:D:D
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  • Originally Posted by pune_friend
    In some cases, it may even need to be changed to

    " Yeh Hamara Pushtaini Flat Tha. DP road abhi baaki hain.
    Aur zameen ki ownership builder ke par-pote ke pas hai :D:D:D

    Is mitti se tilak karo yeh mitti hai hamare par-dada ke flat ki" ;););)


    Similar situation for people deciding not to buy and stay on rent forever..

    "YEH HAMAREY MAKAAN MALIK KEY POTEY ka pushtaani flat hain..hum yahaan pein rent par rehtey the aur rent bharney key alaava piggy bank mein paisey daaltey the..piggy bank toh nahi raha par tum zaroor aur ek piggy bank kholna..NDTV neh bola tha keh rates kam ho jayenge..NDTV bhi zaroor dekhna..:D
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  • Originally Posted by realacres
    It is good to have healthy discussion with you man, but above 2 points made me .

    Man, seeing current constro in Pune, I will be happy even if it lasts 25 years & what's the user of ownership of flat after 100 years, when owner himself is defaulted :D.

    Seems kids will say, " Yeh Hamara Pushtaini Flat Hain (aur DP road abhi baaki hain) " :D.

    As mentioned in the post, you are free to use your own variables in the equation provided. You will get the intrinsic value as per your taste.
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