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 :
  • Originally Posted by wiseman
    I had a friend who had his main business in Spain. Warned him seriously around as late as 12-18 months back to get out asap. He assured me that things were quite okay. Today, his business is closed.

    You are correct. Bear phases jump out of the window. They occur so quickly that the majority (by now highly complacent about prices going up forever - remember USA in 2005/06?) move too slowly and by the time they finally come around to thinking of selling, price is below their purchase price + interest and then fear and confusion grips them.

    Finally its when prices are near bottom that most people sell in distress and swear never to get in again.

    The 2 things to be apprehensive about today is Rupee going to 90 (to the dollar, with dollar also falling against real assets like PMs) and the fact most people think 18L salary is middle-class. Are we living in an alternate reality? How many families have 18L as income level compared to the total?

    And if at 18L one can only save 2.5L, we are close to the tipping pont. These levels of salaries cannot be sustained in a global economy, especially when many other populations are in desperate situations.

    Please note that in a recent advert for 300 attendant positions by Delta in the US, 10000 applications came in during the first week alone. Back in 2010, for 1000 positions, 100,000 applied.

    Not being able to sustain our competitiveness globally, salary cuts are definitely coming. And with inflation (hyper-inflation?) coming up rather quickly, its going to get rather difficult to make ends meet, leave alone cover giant and rapidly increasing debt servicing needs.

    Think a little longer term when it comes to such large debts and you will be surprised how little we have as debt cover.

    cheers


    A different opinion..
    Spain, USA, UK, etc are "developed" economies and India is a "developing" economy..the dynamics involved are completely different...I don't see a USA or Spain like situation in India for many years ahead..we're just not at that level of maturity as an economy..

    I have this friend (and his wife) who have been working in the US for more than 5 years now..they have decided to consciously stay on RENT there but are buying RE assets in India..even though the ROIs for mortgages in US are a meagre 2.75% (on an average)...the underlying fear being that a housing market purchase will forever deteriorate..again..don't see this situation happening in INDIA anytime soon..

    In my opinion, a comparison with an economy in a similar situation as INDIA is currently would be more fruitful..
    CommentQuote
  • Ankit,
    Your friends in US are intelignet !
    CommentQuote
  • Lot of indians in US live in cheap, unsafe places to save money and may be buy properties in india.
    depending on what part of US you are in , you could pay as much in rent as you would in mortage, if renting in a nice area.
    CommentQuote
  • Right and wrong

    Originally Posted by AnkitS
    A different opinion..
    Spain, USA, UK, etc are "developed" economies and India is a "developing" economy..the dynamics involved are completely different...I don't see a USA or Spain like situation in India for many years ahead..we're just not at that level of maturity as an economy..

    I have this friend (and his wife) who have been working in the US for more than 5 years now..they have decided to consciously stay on RENT there but are buying RE assets in India..even though the ROIs for mortgages in US are a meagre 2.75% (on an average)...the underlying fear being that a housing market purchase will forever deteriorate..again..don't see this situation happening in INDIA anytime soon..

    In my opinion, a comparison with an economy in a similar situation as INDIA is currently would be more fruitful..



    I agree with you. The 2 economies are at different stages of "development". While India is still having its growth pains :), the US is fast heading for the stone age!

    You would have noticed that I was not comparing the two. I was pointing out to the fact that, India started by competing on wage arbitrage in the global market (not only IT but also in areas like Engineering Exports).

    This wage arbitrage is being squeezed by 2 factors. Too many Indians (many of them not upto international quality) being paid too much for shoddy work. Increasing number of rather good quality people all over the world becoming cheaper (and sometimes better) than us and taking away work that used to come to us by default.

    The danger is not only in deals falling through to competition from cheaper and equally good countries (we are losing voice BPO to the Philippines) but its what we don't see (deals where India is simply not considered) which used to come to us by default in the old days).

    You might also note that while exports account for around 20% of out GDP roughly, they account for a lot more of our disposable surplus. Specifically, its the IT crowd (especially, as you note, the crowd onsite) that saves up like crazy and puts it into RE here.

    Point I was trying to make is, it is dangerous to assume the 18, 24 and 30L jobs are going to continue for long in increasing numbers out here. These salary levels grew upon the outsourcing model India became famous for. While it grew, our capability to deliver at those elevated levels of salaries has not grown proportionately.

    Our large factory with cheap labor approach is based on 20th Century, large, expensive project model which is rapidly changing with the introduction of new methodologies, tools and processes which is cutting down project durations as well as product lifespans. That old model is becoming history (you might have noticed even many of our IT CEOs also taking this language, Phaneesh, Vineet, etc) slowly but surely and so will the kind of salaries to managers of our factories / bodyshops we have built so successfully.

    In the new model, we do not have the natural wage advantage we used to have and we have to unlearn the old stuff and re-learn the new, while the others don't have that baggage to deal with. Besides, we have to breakdown the old organizational structures and re-build new structures that is more suited for work with small, high-quality teams rapidly developing and delivering massively scalable products.

    While large IT companies continue to flog the old model (keeping that structure intact for now) as a cash cow, they are also throwing large sums of money trying to learn the new model (sometimes buying out companies that seemed to have succeeded here). Right now this does not seem to be yielding much as we don't seem to have the mojo to re-invent Indian IT yet (throwing money is not enough).

    In short ... rethink the belief that we will keep seeing 20, 30 and 60L jobs for the long term in absolute safety. The new model might also have such salary levels, but serious, long term weakness in global economies will lead to increasing levels of competition, putting a dent on cushy 30L jobs while increasing the stress levels to keep changing faster and faster (otherwise one becomes history very quickly and earning capacity drops precipitously).


    On another note, our IT industry will boom once again when we have the same kind of risk taking ability by the Venture Financing crowd and the ascendance of hands-on builders of product companies (please note that most of the highly successful product companies in the US and elsewhere were started by people who built those products themselves ... Hewlett and Packard, Page and Brin, Bezos, Gates, Jobs and Wozniak, etc, etc. WE also need a risk-taking population to try out new products as quickly as people in the West buy new stuff.

    Going to be an interesting journey in the coming years.

    cheers
    CommentQuote
  • Originally Posted by wiseman
    This wage arbitrage is being squeezed by 2 factors. Too many Indians (many of them not upto international quality) being paid too much for shoddy work. Increasing number of rather good quality people all over the world becoming cheaper (and sometimes better) than us and taking away work that used to come to us by default.

    Exactly. Here is the reality. My team in India is pompous, lazy and without any knowledge. Further they do not want to work (as they think that they are too valuable resources) and if they work, they deliver half cooked material. The work quality is bad and dedication is unheard of by a majority of them. While the european counterparts work 12 hours a day (seriously), the team stays in office for 6-8 hours and works for 2 hours a day (the rest of the time being spent in tea and other such TP things). If the trend continues, we will soon loose the work to either the Chinese or some of the east european nations. The rest of the world is not foolish enough to get sub-standard work from us and to support our life style to purchase those million dollar flats. It is going to collapse and when it will collapse, all these pompous would be jobless.
    CommentQuote
  • Originally Posted by Venkytalks
    I am more worried about rupee collapsing. 90 ruppes to dollar can mean havok

    Strangely re will protect you from this havoc though gold would be best



    By next quarter I expect rupee coming down to 60 with little bit of profit booking by FII’s.
    Also you can see some of the smaller banks have already raised their FD rates which is a sign that the market is already stretched on the longer-term as deposit growth is not adequate at the current interest rates on offer.
    Gold I see consolidating around 1600 for some time before bouncing back.
    CommentQuote
  • FII cumulative stock investment in 2012 reaches USD 125 bn

    FII cumulative stock investment in 2012 reaches USD 125 bn - PTI

    With so much of money pouring into equities I’m surprised to see rupee struggling at 55.
    Something is wrong somewhere.
    CommentQuote
  • What is in FII's mind?

    Originally Posted by CAPT RAJESH
    FII cumulative stock investment in 2012 reaches USD 125 bn - PTI

    With so much of money pouring into equities I’m surprised to see rupee struggling at 55.
    Something is wrong somewhere.



    Rajesh,

    Are you in markets? what do you think FII's are upto? Would there be a correction before budget? Can we position ourselves for a short trade?
    CommentQuote
  • Let us try to time the markets

    Originally Posted by CAPT RAJESH
    By next quarter I expect rupee coming down to 60 with little bit of profit booking by FII’s.
    Also you can see some of the smaller banks have already raised their FD rates which is a sign that the market is already stretched on the longer-term as deposit growth is not adequate at the current interest rates on offer.
    Gold I see consolidating around 1600 for some time before bouncing back.



    Since we ( many RE bears) in this forum, are pretty sure about the bubble bursting in the near future, shall we try to time it...I know timing this would be very difficult..nevertheless let us try this game....

    I start first .......

    Best Scenario

    1. Right after this budget 2013 - meaning February or March

    Medium Scenario

    2. Later half of the year - In the run up to the next general elections - I would take this....

    Worst Case
    3. After general elections...2014 Mid - This is worst scenario I feel, because of the assumed delay and expected chaos
    CommentQuote
  • I feel mango's post deserves a seperate thread. Somethign like "RE predictions for 2013 " or somethign like that.
    CommentQuote
  • Originally Posted by mangoman2012
    Rajesh,

    Are you in markets? what do you think FII's are upto? Would there be a correction before budget? Can we position ourselves for a short trade?


    Futures trading with access leverage are for fools and speculators and something I detest personally and will never advise anyone.:)

    Never trade on paid and free tips.
    CommentQuote
  • Originally Posted by compuwalah
    I feel mango's post deserves a seperate thread. Somethign like "RE predictions for 2013 " or somethign like that.


    You are right there. It should be in Stocks thread.
    It started with the response to Venky's post.
    CommentQuote
  • Most popular pune residential projects launched in 2012

    Builders in Pune have realized that 'Location...Location....Location...' is not all. So to tempt a property buyer to book a flat at the launch, builders in Pune create digital illusion about the project. It's called 'artistic impression' of the architectural drawings of the building's elevation. Sometimes digital animation film is also created and screened at the launch.

    However, the main attraction of the launch event is the builder himself.

    The builder of the project is present at the launch event. To seduce every Chulbul Pandey to book, the builder performs 'item song' in the launch pandal. Pointing at the digital image of the elevation of the building, the builder dances & sings..
    Mere photo ko seene se yaar chipka le saiyan Fevicol se...



    http://ravikarandeekarsblog..in/2012/12/Most-Popular-Pune-Residential-Projects-Launched-in-2012-1.html
    CommentQuote
  • Originally Posted by mangoman2012
    Worst Case
    3. After general elections...2014 Mid - This is worst scenario I feel, because of the assumed delay and expected chaos


    This is the most likely possibility, but only if the Congress party loses. The record from the 1990's shows that after the Congress party lost the 1996 general elections, the then developing bubble popped, and didn't resume building until after it returned to power in 2004.

    The reason for this is that in India the government controls the banks, and under the current dispensation, the banks will be asked to bail out projects (i.e. builders), instead of forcing distress sales of projects.
    CommentQuote
  • Do remember what happened last time the PE Funds and FIIs withdrew their money from our stock market, due to the retrospective tax laws and other restrictions on PE funds, the sensex fell heavily, it was not looooong ago.

    Originally Posted by CAPT RAJESH
    FII cumulative stock investment in 2012 reaches USD 125 bn - PTI

    With so much of money pouring into equities I’m surprised to see rupee struggling at 55.
    Something is wrong somewhere.
    CommentQuote