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?

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  • Originally Posted by akhilpai
    Prices in Pune RE have fallen 20%, but the Rupee has also fallen 25% against the US dollar, making it favourable for NRI investors (Total 45% off from Peak). They also fear that in the long run dollar will fall, so they will keep investing in India. Just a thought...btw...its a very informative post.

    Have you looked at the USA job scene recently?
    I work here and I have lot of friends unemployed. Do you think NRIs would still be pumping money in Indian RE?
    They would keep investing if they have jobs..
  • Differential

    Its actually the sentiments.

    The $vs Rs differential is very attractive preposition.
  • Originally Posted by dd123
    Have you looked at the USA job scene recently?
    I work here and I have lot of friends unemployed. Do you think NRIs would still be pumping money in Indian RE?
    They would keep investing if they have jobs..

    US has lost 425,000 jobs last month & fiscal deficit is currently at $1tr which is expected to go to $2tr in coming months.
    India's fiscal deficit is around 7%. There is going to be interest rate hike by Sept 09 according to SBI.
  • Better Infrastructure Required to Boost Pune Real estate- ASSOCHAM

    Pune Head
    July 18, 2009

    There are often comparisons made between the infrastructure of Mumbai and Pune. The popular consensus seems to be that both cities are equally challenged as far as supportive infrastructure is concerned. This is inappropriate for two reasons – one, Mumbai’s growth pattern has been very different from Pune’s. The city has evolved into the country’s financial capital, and the pressures on it are enormous and overwhelming, considering the fact that a significant part of it is an island that cannot grow horizontally to accommodate the growing real estate demands.

    Pune, on the other hand, has an advantage by virtue of the fact that it has been able to add to its borders by means of surrounding villages. This has served to decreased pressure on the central city and encourages an outward growth pattern. The challenges on Pune’s infrastructure – particularly its road network - have more to do with the speed of this growth. While there are various proposals for roads and road widening, these have to be translated into real time to be effective. The pockets of infrastructural under-development are the result of both developers and the government concentrating on existing growth areas and sidelining those with high future potential. It is a known fact that no area can grow in terms of residential, commercial and retail real estate unless the necessary infrastructure is first put in place. This is quite a common phenomenon that is the result of the principle of fastest returns almost instinctually followed by both developers and the government. Bangalore, for instance, was initially not well planned for radial expansion. The approach in this city was simple – where information technology projects went, residential projects followed. IT and ITeS, as business lines, are not dependent on a city’s CBD areas and can workably exist in areas where property prices are low. Once such a project is established, residential, commercial and retail establishments follow. Since this kind of growth in no way follows a master plan, the result is haphazard pockets of growth. This naturally leads to the neglect of areas that have not been so favoured. The syndrome is also evident in the case of other industries such as manufacturing.

    To identity another factor that has compromised Pune’s holistic growth in terms of real estate viability - the first master plan for the city designated a much more progressive ‘roadmap’ for the city’s road network, while the second one is decidedly sotto voce on these. Also, key roads leading to new growth areas are not being put in place with the speed necessary to ensure that these new areas have the requisite connectivity. The roads leading to Kharadi – a major real estate growth nexus – have not been put in place due to an inappropriately slow speed of development initiative. Similarly, the Eastern bypass has been at the proposal stage for many years. In these and various other instances, the result is compromised potential.

    In comparison, the Pimpri Chinchwad Municipal Corporation (PCMC) has been proactive in terms of a proper road network. This explains why there have been such spurts in growth and corresponding real estate values in this region. Considering how much the authorities have already achieved, it is distressing that certain pockets in the region still show signs of infrastructure deficit. The Pharande Group, which has made significant land bank investments in Phase II, across Sectors 4 and 6, had already launched residential projects in Pradhikaran’s Phase I. However, because of the lack of proper roads, only the Pharande Group and a handful of smaller developers have taken the risk of venturing into this area to open it up for the times to come. The potential of this key area apparently lacks from recognition of its inherent future value. A closer look at its promise for the PCMC real estate market would very likely cause a more fast-paced development of its road network. There are earlier precedents in Pune, wherein languishing areas were given fast-paced infrastructure upgrades because of an upcoming market catalyst.

    When the recent Youth Commonwealth Games loomed closer, the enhancement of Baner Road and Pashan Road were put on the fast track. In the same manner, it is not unreasonable to anticipate that the PCNDTA will take cognizance of the fact that Pradhikaran’s Phase II is extremely important by virtue of the fact that strategically juxtaposed New Rajguru Nagar has now been identified as the location of Pune’s new airport. This being the case, putting down adequate roads in this area will set the stage for immense future growth of this strategically placed locality.
  • Poor infrastructure won't support city's expanding population: Experts

    They say Pune's planning will have to be scaled up to support the projected 62 lakh people in 2027

    Nilanjana Ghosh Choudhury
    July 19, 2009

    The Gokhale Institute of Politics and Economics' (GIPE) study projecting a 62 lakh population for Pune in 2027 has architects and urban planners in the city in a tizzy. Many felt that the present infrastructure is inadequate to meet the needs of the burgeoning population. The study was commissioned by the Pune Municipal Corporation (PMC).
    "The last city development plan was sanctioned by the state government in 1987. But only 40% of the plan has so far been implemented by the civic body, " said former assistant director of the town planning department of the state Ramchandra Gohad.
    According to him, the city would require an additional Rs25,000 crore to carry out different development project that can sustain the growing population. "The PMC also needs to address the issue of funds. In case of the last development plan, although the sanction came in 1987, work could begin only in 1994 because the funds arrived late," added Gohad.
    Leading city planner and executive director of Centre for Development Studies Aneeta Gokhale Benninger said, "The city was not prepared for the large influx of migrants that has happened in the last few years. The last DP had projected a population of 20 lakhs. But it is almost double at present and hence the next planning requires proper vision."
    She added that to assess the kind of infrastructure the city would require in the next 20 years one has to first know what category of people would form the major chunk. "If it is unskilled labourers we will need schemes for affordable housing and other infrastructure developments, but if the influx of the IT crowd continues we will require different planning."
    The Railways, Road & Traffic Management Committee of the Mahratta Chamber of Commerce Industries and Agriculture has taken a lead. It will soon send a proposal to the union urban development ministry to stop the vertical growth in the city and instead focus on increasing the city's boundaries.
    "The current infrastructure is not adequate to deal with such a large population growth, therefore the city needs to grow horizontally," said its chairman Chandmal Parmar. The report would be sent within the next two months.
    "The city would need amenities like mass transport like monorail and BRT and proper slum development planning and comprehensive planning on water distribution in the city," said president of the Confederation of Real Estate Developers Association of India (Pune) Satish Magar.
    The builders' fraternity feels that only slum re-development can help tackle the problem of growing population.

    * This news is just to inform that the builders are quoting illogical rates & giving false claims about PROPOSED roads etc. as the DP plan has not yet been sanctioned. Hence, buy where infra is already in place. DP roads, proposed garden, proposed.......... kick this out.:D
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  • #69,
    I don't how people agree to buy such expensive flats (2.4 cr, 1 cr) from some other country. for every payment you must check the status.
  • The top 10 global business risks for real estate
  • State

    The present state seems of stagnation, with general slide as the Govt has not doled out any thing for the buyers read Bldrs in the current budget.:D
  • govt has indeed taken the bait of bldrs

    central govt has announced interest rate subsidy of 1% for loans up to 10 lakh. let us see how it stimulates RE growth.
  • Originally Posted by lt_prakash
    central govt has announced interest rate subsidy of 1% for loans up to 10 lakh. let us see how it stimulates RE growth.

    Its like giving biscuit to the dog. They are giving 1% discount but did they say for how many year ? I believe this is a political pressure from all side. As this RE sector is down Politician are not generating much money.
    Basically the Ultimate word is "Developer should think of having less margin and give house on less"
  • Originally Posted by arin_12
    "Developer should think of having less margin and give house on less"

    the developers will have to do this certainly, but the buyers need to put constant pressure on them. Negotiate hard, and tell them that if you don't reduce the rate to the reasonable levels (which might be around 200x-220x the rentals) we won't even turn up for any negotiation. I did this, and decided not to buy now. Can at least 50% of such potential buyers around make such a decision which can help everyone of us?

    It was a easy decision for me, but spreading the word across is hard, the reasons are complex.

    - Significant portion of the problem is with buyers mindset. In India especially the new generation buys things even if they are not fully satisfied with the product or the price point. If they go for shopping they will never return back home saying "it does not fit my purse", or "it does not have the quality i wish". This is true across the range of utility product to even investment products. This is not true with our previous generation, nor is this true in most of the western world.

    - not even 5% of the buyers read such forums or blogs. The reach for the masses is the media like TOI print media, CNBC tv etc which makes people fall in the trap.

    - the cultural baggage that we carry in terms of our thinking like social status/ego, peer pressure, family pressure etc plays a big role in jumping into decisions of buying homes

    - folks who have earned the money do not know of many other areas for investment, they consider RE as a safe and tangible investment. Many who missed the last rally think they would be missing another rally in RE.
  • #78, Very good analysis. Most people I know are waiting even when they have money to buy.

    I think it will be a good time to buy when prices reach 2004 levels. Even the rents will reduce a bit since half the flats in the recent schemes are empty.
  • Originally Posted by tsongt

    - not even 5% of the buyers read such forums or blogs. The reach for the masses is the media like TOI print media, CNBC tv etc which makes people fall in the trap.

    Even amongst the readers of such blogs, I think more than 50% are in buiying mode and not ready to wait, Otherwise we would not see the other threads about seriously enquiring about blah blah projects.

    These are the people who spend their weekends abt builders offices and are the reason behind builders survival.