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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  • When UPA 1 came into power...market crashed fearing that economy will go for a toss as Left will be part of government...but what followed was easily a golden era for equity in India

    When UPA 2 came into power...markets got locked on upper circuits seeing Congress being more poewful in coalition and without left..and performance and pessmism in UPA-2 till last July was easily one of the lows of Indian markets

    So dont be such a simpleton on such complex matters

    And what if Modi comes into power ?
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  • Originally Posted by abc111
    If we get a hung parliament in next election ( an event which has a very high probability) ; then we will know who was swimming naked.


    With so many regional parties in the pciture and each one having supported either BJP or Congress to form govts in the past it looks less likely that we will end up with no govt for period of more than few months.

    No doubt the elections will be entertaining but dont think the political parties will let the manipulated RE market fall apart as they are the ones who benefit the most by keeping the bubble going.

    Indian RE is like a Govinda movie - logic is not to be used :)
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  • Also remember what happened when Third Front came to power in 1996.

    5-6 years of stagnant real estate.
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  • Originally Posted by Venkytalks
    And today we have sen in real time how situations (same as 3 years ago) described by the author, are true !!!! Nobody has explained our banking system as well as this.

    Pages 51-54. I was trying to see if Compu was a part of the discussions on this thread.

    I had forgotten some of these posts.

    And after 3 years, we find that central banks did print, it did have the expected effects, they could be fully anticipated. We could anticipate the inflation in food, the recent upward trend in rents at least here in Delhi it is up by 60-80%.

    And despite weighing in all of these effects, bullish scenario in RE did come true.

    I have always maintained that India's RE bull will burst through its currency, not through its psf price.


    Great collection Venky . If people read this properly you can see the post make it look like its end of the world. So people have to be beware and learn from the past before basing any decision on such post. This makes me think that in spite of things being projected as end of world , the RE market remained sound for long enough (now don't tell me a bubble can be sustained for 6 years 2006-2012 , ignore the small softening in between in 2009).

    Now more or less same "end of the world crowd" is saying that RE has some steam left, what can happen to RE ? :rolleyes2:
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  • (Not sure if this was posted. I copied it from a Bangalore post. Appropriate credit to the person who posted it there.)

    8 Jan, 2013, 05.32PM IST, PTI

    Housing sales fall by 16% in 2012; new launches drop by 30%

    NEW DELHI: Housing sales have declined by 16 per cent to nearly 2.10 lakh units during 2012 in the top six cities as high property prices and costlier home loan affected demand, property consultant Knight Frank said in a report.

    The new launches of homes, too, fell by 30 per cent with developers shying away from announcing fresh projects. Delhi- NCR, Mumbai, Pune, Bengaluru, Hyderabad and Chennai are the six cities tracked by the Knight Frank.

    "A lacklustre residential market in 2012 was plagued by high property prices, relatively higher mortgage rates, weak business sentiments and a bleak employment scenario. This is reflected in the launches, which declined by 30 per cent in 2012 in comparison to a fall of 7 per cent in 2011," it said.


    Housing sales fall by 16% in 2012; new launches drop by 30% - The Economic Times
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  • http://www.nytimes.com/2013/01/10/world/middleeast/uae-plans-to-limit-lending-to-home-buyers.html?partner=rss&emc=rss

    I think this is one of the best moves by any government globally to check real estate prices. UAE suffered a massive real estate meltdown in 2008, and this rule that homeowners have to cough up 50% of the price of the house as downpayment will ensure that speculative pricing is reduced to a large extent.

    I firmly believe a legislation or Diktat like this in India will do wonders to the entire market and will reduce the chances of asset bubble formation drastically. Although the hawks of the free market will disagree with this stand and thus I think such moves are nearly impossible in India
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  • Originally Posted by Baruch

    And what if Modi comes into power ?


    If this happens, then areas within 30 km radius is the place to be in. His penchant for de-centralizing & giving enough incentive for people to move out from densely populated areas is well documented.

    Cheers!
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  • Originally Posted by badanalyst
    http://www.nytimes.com/2013/01/10/world/middleeast/uae-plans-to-limit-lending-to-home-buyers.html?partner=rss&emc=rss

    I think this is one of the best moves by any government globally to check real estate prices. UAE suffered a massive real estate meltdown in 2008, and this rule that homeowners have to cough up 50% of the price of the house as downpayment will ensure that speculative pricing is reduced to a large extent.

    I firmly believe a legislation or Diktat like this in India will do wonders to the entire market and will reduce the chances of asset bubble formation drastically. Although the hawks of the free market will disagree with this stand and thus I think such moves are nearly impossible in India

    There are reports doing the rounds that bankers are mulling commercial interest rates for home loan seekers for their 2nd flat & onwards. This is being done in view of rising NPAs in realty sector which are putting pressure on bank's books. For the same reason, Bank of Baroda has blacklisted heavily investor driven market like G.Noida & no loan is sanctioned in entire region.
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  • Originally Posted by realacres
    There are reports doing the rounds that bankers are mulling commercial interest rates for home loan seekers for their 2nd flat & onwards. This is being done in view of rising NPAs in realty sector which are putting pressure on bank's books. .


    Another utter nonsense...actually in last 3 months all banks have both reduced rates and slashed loan processing charges to attract more home loan buyers...they realized the mistake to lend to large corporates in sectors like mining & infra....they obviosuly see that Indian psyche will ensure defaults in extreme situations only + component of black in most deals gives a lot of cushion against any price drops

    Originally Posted by realacres
    For the same reason, Bank of Baroda has blacklisted heavily investor driven market like G.Noida & no loan is sanctioned in entire region.


    Do you cook up these inferences into facts ? How do you know that BOB has done so because of " heavily investor driven market" ? You are stating as if BOB itself said it in a press release...G Noida is notorious for crimes and doubious land deals...that might be d reason if at all BOB has done so...but then I dont know so its just a guess
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  • I have a strong feeling that Dr Chidambaram who is pro growth (business) and hence there is a good possibility of RE sops being given like he had given to auto industry few yrs ago (e.g less than 4 meter length vehicles at lesser excise duty).

    Some thing similar wud be given in coming budget to jump-start the lethargy in RE sector - BTW RE sector is not yet given "industry status" - with Realty Bill coming ...such and similar announcements can be expected....which wil eventually mean banks to will re-structure the home loans ...shud they care if it's for 2nd or 3rd home as long as EMI's are paid on time...

    Also, what abt the investors with self-funding...are they not he ones gobbling-up RE units rather than salaried who are desperately seeking a decent shelter above their heads..

    I think maybe the Income Tax rules may get amended to additionally tax properties which are not occupied / not used ....so that more property is available for sell or renting...

    BTW - Dr. Chidambaram doesn't give anything "free" so developers will have several riders - foremost being transparency of business, accounting cash flows..eschrow accounts for projects etc..

    these are just my personal thoughts....one thing is for sure with less than 2 yrs to general elections - govt needs to desperatly look for ways & means to jump start economy so that the fruits are visible close-up to the general elections...direct cash is sure shot jackpot for UPA-2..like NREGA for UPA-1...

    healthy comments & responses are welcome...
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  • Originally Posted by simsagar

    I think maybe the Income Tax rules may get amended to additionally tax properties which are not occupied / not used ....so that more property is available for sell or renting...


    Wealth tax already takes care of this. I am not sure how many pay Wealth Tax though.
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  • Originally Posted by simsagar
    I have a strong feeling that Dr Chidambaram who is pro growth (business) and hence there is a good possibility of RE sops being given like he had given to auto industry few yrs ago (e.g less than 4 meter length vehicles at lesser excise duty).

    RBI won't permit as it has already put RE in 'High Risk' class.
    And comparing 4m in auto won't be good atleast in RE as this incentive was more for car buyers rather than auto makers, & 75% sales of cars is hatchbacks in India, so all stood to gain.

    In RE, Govt had already given IT benefits to builder under 80IB where builder was exempt from paying income tax from sale of flats smaller than 1500 sq ft. This was made to make flats cheaper for end user & boost RE, but builders increased the rate, minted crores & didn't pay single paisa as income tax. This was discontinued later (2-3 years back).

    Some thing similar wud be given in coming budget to jump-start the lethargy in RE sector - BTW RE sector is not yet given "indusrt status" - with Realty Bill coming ...such and similar announcements can be expected....which wil eventually mean banks to will re-structure the home loans ...shud they care if it's for 2nd or 3rd home as long as EMI's are paid on time...

    Giving RE Industry Status will be good only for professional players like Shapoorji, Tata, Godrej, Mahindra etc. CREDAI has opposed realty bill as this bill will consider the interest of buyers also which builders are not in favour of.
    This bill is good for buyers as it has potential to wipe out entire scorpio grade builders out of market. So, either builders accept RE regulator or be deprived of industry status. Lets see what builders do.

    Also, what abt the investors with self-funding...are they not he ones gobbling-up RE units rather than salaried who are desperately seeking a decent shelter above their heads..

    How will cash component be checked in a deal ?? Investors will simply buy in someone else's name. Many politicos declare wealth of 50L or 1 Cr in election affidavit but are biggest source of finance to major builders. :bab (45):
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  • Realtors take new industrial policy with a pinch of salt

    The state’s new industrial policy, which has thrown in a huge supply of land in the market, is making realtors jittery. They fear that land prices will drop and, could even throw them out of business.

    For you, as a buyer, it means houses will be available at cheap rates.

    The industrial policy announced last week has opened up 35,000 acres of land worth Rs3.08 lakh crore in various cities. The land, earlier meant for special economic zones, will now be used for housing and commercial projects. Most of it is near cities like Navi Mumbai, Pune, Nashik and Nagpur.

    The country’s biggest body of developers, Credai-MCHI, has opposed the states industrial policy. President of Credai, Lalit Kumar Jain, said that instead of allowing agriculture land to be converted into non-agricultural, the government should give higher floor space index in the city to construct more houses.

    Floor space index refers to the ratio of constructed carpet area as against the size of a plot. An index of 2 on a plot of 100sq mt means one can construct 200sq mt.

    “Floor space index below 5 is disastrous. A low index will only destroy the city’s greenery,” said Jain. “Only a few influential corporate groups will reap benefits of this policy.”

    In Navi Mumbai, Mukesh Ambani and his aide, Anand Jain, own over 3,500 acres meant for special economic zones. A realty expert said that if they throw in 3,500 acres to construct houses at low rates, it will cause tremors in the market. “Also in Pune where Bharat Forge owns 11,500 acres...” said the expert.

    Navi Mumbai resident, advocate Mahendra Sandhansiv, welcomed the new policy. “Presently, the property market is beyond the common man’s reach. And groups of small developers jack up rates without justification,” said Sandhansiv.

    An office bearer of the Nationalist Congress Party, which has criticised the policy, said that the government should give 15% of developed land to farmers whose land was acquired for economic zones.

    Realtors take new industrial policy with a pinch of salt - Mumbai - DNA

    * PS:- I am very happy with this news though. :)
    And NCP will oppose it as it stands to be biggest looser in this. :D
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  • I disagree here... in fact NCP will be happy that now they will have more land to play with and will add local goondas as new builders. The rates will remain jacked up.

    Dada will make sure that the new land is made available in short steps... pattern will be to pre-lauch a township, get booking amounts and then open another piece of land for pre-launch...

    who cares about completion dates once you get the money in hand :bab (3):

    Originally Posted by realacres
    The state’s new industrial policy, which has thrown in a huge supply of land in the market, is making realtors jittery. They fear that land prices will drop and, could even throw them out of business.

    For you, as a buyer, it means houses will be available at cheap rates.

    The industrial policy announced last week has opened up 35,000 acres of land worth Rs3.08 lakh crore in various cities. The land, earlier meant for special economic zones, will now be used for housing and commercial projects. Most of it is near cities like Navi Mumbai, Pune, Nashik and Nagpur.

    The country’s biggest body of developers, Credai-MCHI, has opposed the states industrial policy. President of Credai, Lalit Kumar Jain, said that instead of allowing agriculture land to be converted into non-agricultural, the government should give higher floor space index in the city to construct more houses.

    Floor space index refers to the ratio of constructed carpet area as against the size of a plot. An index of 2 on a plot of 100sq mt means one can construct 200sq mt.

    “Floor space index below 5 is disastrous. A low index will only destroy the city’s greenery,” said Jain. “Only a few influential corporate groups will reap benefits of this policy.”

    In Navi Mumbai, Mukesh Ambani and his aide, Anand Jain, own over 3,500 acres meant for special economic zones. A realty expert said that if they throw in 3,500 acres to construct houses at low rates, it will cause tremors in the market. “Also in Pune where Bharat Forge owns 11,500 acres...” said the expert.

    Navi Mumbai resident, advocate Mahendra Sandhansiv, welcomed the new policy. “Presently, the property market is beyond the common man’s reach. And groups of small developers jack up rates without justification,” said Sandhansiv.

    An office bearer of the Nationalist Congress Party, which has criticised the policy, said that the government should give 15% of developed land to farmers whose land was acquired for economic zones.

    Realtors take new industrial policy with a pinch of salt - Mumbai - DNA

    * PS:- I am very happy with this news though. :)
    And NCP will oppose it as it stands to be biggest looser in this. :D
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  • I hope the authorities realise this that if they "allow" the RE prices to remain at sky-high levels as per the local purchasing power than one day the "masses" shall storm into the properties that are either empty or available and forcefully occupy them.

    Remember the french revolution that lead to WW - the force of masses will be too strong for any lobby or authority to stop...

    I think govt. realizes this and makes amends sooner the better...
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