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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  • Originally Posted by Karan Dheer
    3 requests put forward by the housing industry to our FM include:

    1) Increasing the tax deduction limit to 2 lacs from the current 1.50 lac

    2) Allowing a person having capital gains in property, to buy more than 1 property to offset it. Current rule allows only 1 property for the offset.

    3) Increasing the standard deduction for rental income to 40% from the existing 30%.

    Point 2 is a sweet one...provided we have the property to make those gains

    Cheers!


    There are too many scams that have been unearthed against UPA II recently..the chopper deal being the latest..there are even some talks on the CAG submitting a report on their "farm loan waiver" scheme (UPA I)

    They need some pointers to divert the common man's attention..Expect some populist measures in the budget..
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  • Salaries and prices

    We always talk about increase in RE prices, but average salaries too have increased many folds in last 10 years right? I agree increase in both RE and salaries will be tough from now onwards.
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  • Originally Posted by RP Pune
    We always talk about increase in RE prices, but average salaries too have increased many folds in last 10 years right? I agree increase in both RE and salaries will be tough from now onwards.


    Not quite.
    I have data only for IT companies and so cannot comment on other sectors, but IT salaries have only marginally increased.

    e.g.
    1. Average salary in 2003 for fresher - Rs 18,000 per month (Infosys)
    in 2013 - Rs 25,000 per month

    2. Average salary in 2003 for 8 year experience guy with vanilla skills - Rs
    8 lakhs per year
    in 2013 10-12 lakhs per year

    So salaries have increased only 1.5 times for most jobs...but expenses and RE has gone thru the roof.

    Now, if somebody was a fresher in 2003 earning 20,000 and now after 10 years he is earning 1 lakh per month so you could say that his salary has gone up five folds...but thats not the right way to compare.
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  • 1 BHKs gaining popularity

    Just something that seems relevant..

    A 2 BHK 1000 sqft saleable area flat seemed to be the norm for the first time buyer for quite some time now..

    With prices increasing, salaries pretty much stagnated & ticket size of 2 BHKs going above 50 lakhs easily (most areas of Pune)..it seems that the 1 BHKs are now gaining popularity..

    Another trend seems to be that the loading % is going up from 30% to 33%..first instance that I recently noticed was on the new 100 acre township by KUL in Manjari..
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  • Originally Posted by AnkitS
    Just something that seems relevant..

    A 2 BHK 1000 sqft saleable area flat seemed to be the norm for the first time buyer for quite some time now..

    With prices increasing, salaries pretty much stagnated & ticket size of 2 BHKs going above 50 lakhs easily (most areas of Pune)..it seems that the 1 BHKs are now gaining popularity..

    Another trend seems to be that the loading % is going up from 30% to 33%..first instance that I recently noticed was on the new 100 acre township by KUL in Manjari..


    Just like in few other fields e.g. fashion where we are trying to mimick old age clothing like langots we might be revisiting the old culture in real estate too . First apts in Pune for middle class were about 500-600 sq.ft. , 1 bhk apartments whereas most of the customers who bought them were renters staying in wadas in about 1/2 rooms . Pune city had migration mostly from Maharashtrian rural side , people migrating were hardworking , spent there lifetime working here , retired , bought land/apt and settled down .
    Current major source of migration , especially in Pune outskirts is unskilled labour from the North , some of which is also migrating from Mumbai to Pune , slowly changing the social,cultural fabric of the city .
    We might witness the following degradation to maintain the price tag of 50 lakh+ in steps in time to come :
    1. 2 bhk from 1000 sq.ft. going down to 800,700,600
    2. 1 bhk from 600 sq.ft. going down to 500,400,300
    3. 1 hk from 300 sq.ft. going down to 300,200,100
    4. 1 room from 200 sq.ft. with toilet/bath going down to 100 with public toilet
    Human greed can make further degradation possible to an unknown extent . Net result will be lot of people will start migrating out of the city .
    By the way , new projects already have loading in the range of 40% if you do a real check .
    Furthermore those who have seemingly big houses might have to shell heavily on taxes and maintenance which will be difficult especially for honest people having private jobs .
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  • Originally Posted by suryawork
    Just like in few other fields e.g. fashion where we are trying to mimick old age clothing like langots we might be revisiting the old culture in real estate too . First apts in Pune for middle class were about 500-600 sq.ft. , 1 bhk apartments whereas most of the customers who bought them were renters staying in wadas in about 1/2 rooms . Pune city had migration mostly from Maharashtrian rural side , people migrating were hardworking , spent there lifetime working here , retired , bought land/apt and settled down .
    Current major source of migration , especially in Pune outskirts is unskilled labour from the North , some of which is also migrating from Mumbai to Pune , slowly changing the social,cultural fabric of the city .
    We might witness the following degradation to maintain the price tag of 50 lakh+ in steps in time to come :
    1. 2 bhk from 1000 sq.ft. going down to 800,700,600
    2. 1 bhk from 600 sq.ft. going down to 500,400,300
    3. 1 hk from 300 sq.ft. going down to 300,200,100
    4. 1 room from 200 sq.ft. with toilet/bath going down to 100 with public toilet
    Human greed can make further degradation possible to an unknown extent . Net result will be lot of people will start migrating out of the city .
    By the way , new projects already have loading in the range of 40% if you do a real check .
    Furthermore those who have seemingly big houses might have to shell heavily on taxes and maintenance which will be difficult especially for honest people having private jobs .


    Another Mumbai in the making..;)
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  • Originally Posted by NG2012
    Not quite.

    Now, if somebody was a fresher in 2003 earning 20,000 and now after 10 years he is earning 1 lakh per month so you could say that his salary has gone up five folds...but thats not the right way to compare.


    Sorry but why isnt this a right way to compare? If someone had bought a house in 2005 for 20 lakhs and is paying EMI of say 15,000 on a loan. Today a simlar house will cost 60 - 70 lakhs so the EMI isnt going to increase for this person who has already bought a house so as the price rise is not relevant to this person so is the salary of freshers 10 yrs back irrelevant to freshers joining the industry now.

    Looking back 10 yrs and saying prices were X and salaries were Y and then comparing it with things today is incorrect. A lot of things have happened other than just salary rise which have caused house prices to go thru the roof. More people are earning 20-30K straight out of college today than 10 yrs back. In 2003 a few thousand joined the IT industry every yr. Today lakhs join it.

    Confidence is high. People think jobs in IT are secure and if you stay the course then good money is guaranteed. House prices are in a bubble fueled by lack of other investment avenues and restricted supply.

    Other industries have grown in the last 10 yrs again giving jobs to millions of people. People have more money today (net to inflation) than they did in 2003 - GDP per capita (net to inflation) is up almost 100% since 2003.

    Small and medium businesses have had a tremendous run over the last 10 yrs and so have many big business.

    What started as a IT driven demand for house is now changing. People working in other industries, investors, speculators are as active today as IT folks today.
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  • i dont think we have a fix rate concept in India , it is a floating rate ?

    i dont think we have a fix rate concept in India , it is a floating rate ?

    Originally Posted by herohiralal
    Sorry but why isnt this a right way to compare? If someone had bought a house in 2005 for 20 lakhs and is paying EMI of say 15,000 on a loan. Today a simlar house will cost 60 - 70 lakhs so the EMI isnt going to increase for this person who has already bought a house so as the price rise is not relevant to this person so is the salary of freshers 10 yrs back irrelevant to freshers joining the industry now.

    Looking back 10 yrs and saying prices were X and salaries were Y and then comparing it with things today is incorrect. A lot of things have happened other than just salary rise which have caused house prices to go thru the roof. More people are earning 20-30K straight out of college today than 10 yrs back. In 2003 a few thousand joined the IT industry every yr. Today lakhs join it.

    Confidence is high. People think jobs in IT are secure and if you stay the course then good money is guaranteed. House prices are in a bubble fueled by lack of other investment avenues and restricted supply.

    Other industries have grown in the last 10 yrs again giving jobs to millions of people. People have more money today (net to inflation) than they did in 2003 - GDP per capita (net to inflation) is up almost 100% since 2003.

    Small and medium businesses have had a tremendous run over the last 10 yrs and so have many big business.

    What started as a IT driven demand for house is now changing. People working in other industries, investors, speculators are as active today as IT folks today.
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  • Originally Posted by NG2012
    Not quite.
    I have data only for IT companies and so cannot comment on other sectors, but IT salaries have only marginally increased.

    e.g.
    1. Average salary in 2003 for fresher - Rs 18,000 per month (Infosys)
    in 2013 - Rs 25,000 per month

    2. Average salary in 2003 for 8 year experience guy with vanilla skills - Rs
    8 lakhs per year
    in 2013 10-12 lakhs per year

    So salaries have increased only 1.5 times for most jobs...but expenses and RE has gone thru the roof.

    Now, if somebody was a fresher in 2003 earning 20,000 and now after 10 years he is earning 1 lakh per month so you could say that his salary has gone up five folds...but thats not the right way to compare.



    I agree this is not the right way to compare but I also think people arent comparing apples to apples. 10 years ago there were few societies making townships, and most were making just standalone buildings. Focus was more on basics that time. Additionally, the surrounding infrastructure also matters. E.g. What wagholi is today is what aundh was 10 years ago. Having said that, I too believe market is overpriced but not to the extent some people are pointing out.

    Prices in Aundh have gone up from1500 to 6500 but is Aundh the same as 10 years ago. If We compare today's Aundh to yesteryears kalyani nagar what is the percentage increase?
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  • Bangalore is going the Mumbai way.. There were 2-3 recent launches at 8500 psft, 10300 psft. Also these are supposed to be pre-launch offers. Not sure how many people can afford these. Also these are branded as Ultra-Luxurious apartments. When the price of land is less than the apartments, doesn't make any sense in buying apartments at these rates.

    Looks like the RE builders/developers in Bangalore are going mad. Very few people here have that kind of money. Also it is mostly end-user driven.

    2008-2009 really gave a scare to these folks and everyone was jumping up and down to sell their apartments at 15-30% discounts. After surviving that phase, they have got the over-confidence and are creating a bigger financial mess for themselves. All the best to these folks.

    With elections in a few months, the property market will be uncertain. The state governments have no clue where to take the state in terms of economy. The recent global investments summits didn't yield the expected amount of investment. Though there were some companies which promised lots of investment in the next 10-20 years. How many of them can survive the global effects, is not known.
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  • Originally Posted by RP Pune
    If We compare today's Aundh to yesteryears kalyani nagar what is the percentage increase?


    thats a fantastic point
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  • Originally Posted by RP Pune

    Prices in Aundh have gone up from1500 to 6500 but is Aundh the same as 10 years ago. If We compare today's Aundh to yesteryears kalyani nagar what is the percentage increase?


    So we will need a new yardstick to compare Aundh of 2003 to whatever areas of 2013 and then factor in 100% increase.

    If AUndh was 1500 in 2003, what are the areas that are at Rs 3000 per sqft in 2013? Talegaon, Talawade, Moshi, Kasarwadi, Uruli Kanchan, Ranjangaon, SHirur comes to my mind.

    Your point is correct but that simply assumes that Pune as a whole will continue to see the growth for another decade.

    The question we need answer for is whether Pune's economy will grow with the same pace? Will it add jobs with the same speed that it witnessed in last decade?

    If your answer is yes, then current prices are not only sustainable but also justified.

    I don't have any answer.
    Personally I think that crash in RE will be a disaster and if Rs 5000 per sqft is very expensive, prices of Rs 2500 persqft will be even more expensive due to negative sentiments in the market and laggard economy and uncertain future.

    If given a choice, I would prefer ever increasing asset inflation...but it never happens so. Every asset eventually correct and like a pendulum swings back to very negative territory. This is when people with cash invest and lay back for years.

    House is the most emotional purchase and susceptible to mistakes that come with being emotional.

    20 somethings with their raging harmones and hot new wife are trapping themselves in these unaffordable boxes. 10 lakhs salary and 50 lakhs house is unsustainable unless salaries keep beating inflation. Every year.

    A decade ago, IT salaries were far removed from the reality of inflation. at 8 lakhs per year salary, even 20% inflation wouldn't make you lose sleep...but in 2013, with 12 lakhs salary and 35,000 EMI and 1 lakh per year as kiddo's education expenses and Rs 75 per liter petrol, a theorotically well-to-do guy will live in fear of losing jobs (and I see that coming).

    It does not make financial sense...at least not on paper (or on the old version of Excel that I have).

    My family expenses easily cross Rs 50000 per month, without carloan and homeloan. And I wear underwears even after elastic band has given up. A long time ago. I don't see how this all can end well.
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  • Originally Posted by NG2012

    Personally I think that crash in RE will be a disaster and if Rs 5000 per sqft is very expensive, prices of Rs 2500 persqft will be even more expensive due to negative sentiments in the market and laggard economy and uncertain future.


    not many bears understand this...thanks for highlighting

    Originally Posted by NG2012

    20 somethings with their raging harmones and hot new wife are trapping themselves in these unaffordable boxes.


    some even buy homes to get a hot new wife :-)

    Originally Posted by NG2012

    And I wear underwears even after elastic band has given up. A long time ago. I don't see how this all can end well.


    :-)...
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  • Originally Posted by NG2012

    My family expenses easily cross Rs 50000 per month, without carloan and homeloan. And I wear underwears even after elastic band has given up. A long time ago. I don't see how this all can end well.


    LOL.

    Dont take off your pants buddy.

    Perhaps a new EMI for underwear banyan is warranted ?????

    EMI for onions, clothes, petrol coming soon to a flat near you.
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  • Here is the latest news :-

    Amanora hasn't made timely payments for past 2 months. This has also led to many people quitting their jobs. There is acute labour problem too as payments have not been made. Sources say main reason is lack of sales and the possession date for new buildings will be pushed farther. Before Amanora, Rohan already had many layoffs.

    Also came to know a RE agent in Ambegaon had to sell off his Toyota Fortuner few weeks back to repay some debts.

    Btw, Kolte Patil shares plunged 13.5% last week !
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