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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  • Inflation is killing real estate: Why property is a poor investment choice

    The argument that real estate is a good hedge against inflation does not hold true at all. In fact, it is the other way around. High inflation is the worst condition for real estate prices to rise. Let us examine why inflation is a real estate killer.

    Inflation in India at the consumer level is running at around 9.5%, taking a five-year average. High inflation has pulled down economic growth to 10-year lows of 5% while interest rates as measured by government bond yields are running at around 9% levels. Mortgage rates are over 10% levels.

    The Indian economy is not creating jobs given the economic slowdown. Hence household incomes barely manage to keep pace with inflation.

    In these conditions, real estate makes a poor investment choice given that rental yields in India are at around 2.5% levels well below inflation. A family investing savings in real estate will be earning a negative 7% every year given rental yields at well below inflation levels.

    Real estate is largely mortgage driven, as the cost of buying a house is too high for individuals. In the current environment, an individual taking a loan to purchase a house is paying 10% as interest. Inflation is running at 9.5% levels. The individual’s income has to rise 9.5% every year just to keep pace with inflation. If income does not rise 9.5% every year, the individuals borrowing cost in real terms goes up as his income has fallen due to inflation but his loan costs remain the same or even rises as interest rates rise.

    Taking a hypothetical example, an individual is earning Rs 10,00,000 a year. He borrows Rs 10,00,000 to purchase a house. His borrowing cost is 10%. Inflation is running at 9.5%. If the individual’s income does not rise for one year, his real income adjusted for inflation is Rs 9,05,000. Assuming his interest costs remain the same at 10%, the individual ends up paying Rs 100,000 as interest on a lower inflation adjusted income of Rs 905,000. His real interest cost has actually gone up by 1.05% to 11.05%.

    House prices have to rise by a minimum of 9.5% plus 1.05% every year if an individual’s income does not rise to compensate for inflation.

    The reason real estate transactions have fallen by 50% to 60% over the last one year is that affordability at the ground is just not there. Households are finding it difficult to make ends meet given stagnant income and rising prices. Borrowing costs are high as well as real estate prices are way above income levels.

    Banks are tightening lending norms given that household incomes adjusted for inflation is coming down every year. Banks are taking high collateral, 25% to 30% of property value, which an average household does not have. In fact looking at it from a lender's point of view, if interest rates are not raised to compensate for falling inflation adjusted income, banks are suffering credit risk erosion. Banks should increase collateral to protect themselves against weak economy and inflation.



    Where does the case for real estate as a hedge against inflation come from? The practical realities do not suggest as given in the example above. People find many reasons to back an investment, and these reasons include black money, politicians, speculation etc. Such reasons are hard to back given the lack of transparency in data and it goes more in the realm of hearsay. It’s too big a risk for an individual investing life savings in real estate to go by hearsay rather than hard facts.

    Inflation is killing real estate: Why property is a poor investment choice | Firstpost

    ^^ Hope above news act as eye opener for over bullish RE theory.
    CommentQuote
  • Originally Posted by realacres
    The argument that real estate is a good hedge against inflation does not hold true at all. In fact, it is the other way around. High inflation is the worst condition for real estate prices to rise. Let us examine why inflation is a real estate killer.

    Inflation in India at the consumer level is running at around 9.5%, taking a five-year average. High inflation has pulled down economic growth to 10-year lows of 5% while interest rates as measured by government bond yields are running at around 9% levels. Mortgage rates are over 10% levels.

    The Indian economy is not creating jobs given the economic slowdown. Hence household incomes barely manage to keep pace with inflation.

    In these conditions, real estate makes a poor investment choice given that rental yields in India are at around 2.5% levels well below inflation. A family investing savings in real estate will be earning a negative 7% every year given rental yields at well below inflation levels.

    Real estate is largely mortgage driven, as the cost of buying a house is too high for individuals. In the current environment, an individual taking a loan to purchase a house is paying 10% as interest. Inflation is running at 9.5% levels. The individual’s income has to rise 9.5% every year just to keep pace with inflation. If income does not rise 9.5% every year, the individuals borrowing cost in real terms goes up as his income has fallen due to inflation but his loan costs remain the same or even rises as interest rates rise.

    Taking a hypothetical example, an individual is earning Rs 10,00,000 a year. He borrows Rs 10,00,000 to purchase a house. His borrowing cost is 10%. Inflation is running at 9.5%. If the individual’s income does not rise for one year, his real income adjusted for inflation is Rs 9,05,000. Assuming his interest costs remain the same at 10%, the individual ends up paying Rs 100,000 as interest on a lower inflation adjusted income of Rs 905,000. His real interest cost has actually gone up by 1.05% to 11.05%.

    House prices have to rise by a minimum of 9.5% plus 1.05% every year if an individual’s income does not rise to compensate for inflation.

    The reason real estate transactions have fallen by 50% to 60% over the last one year is that affordability at the ground is just not there. Households are finding it difficult to make ends meet given stagnant income and rising prices. Borrowing costs are high as well as real estate prices are way above income levels.

    Banks are tightening lending norms given that household incomes adjusted for inflation is coming down every year. Banks are taking high collateral, 25% to 30% of property value, which an average household does not have. In fact looking at it from a lender's point of view, if interest rates are not raised to compensate for falling inflation adjusted income, banks are suffering credit risk erosion. Banks should increase collateral to protect themselves against weak economy and inflation.



    Where does the case for real estate as a hedge against inflation come from? The practical realities do not suggest as given in the example above. People find many reasons to back an investment, and these reasons include black money, politicians, speculation etc. Such reasons are hard to back given the lack of transparency in data and it goes more in the realm of hearsay. It’s too big a risk for an individual investing life savings in real estate to go by hearsay rather than hard facts.

    Inflation is killing real estate: Why property is a poor investment choice | Firstpost

    ^^ Hope above news act as eye opener for over bullish RE theory.


    This is bad advice.

    Refuted here

    https://www.indianrealestateforum.com/forum/city-forums/ncr-real-estate/gurgaon-real-estate/13876-real-estate-bubble-set-to-burst-again-in-india/page1295?t=16152&page=1295
    CommentQuote
  • Seriously,

    It's baffling that so many experts think that RE is bad because rentals are much lower than inflation. As if the property price is going to remain same forever!
    I never find anyone saying that Gold is bad investment because it gives zero rent!
    CommentQuote
  • ""I never find anyone saying that Gold is bad investment because it gives zero rent!""
    Gold does not give rental value.Gold can be even unsafe,due to value and someone may try and relive you of your gold holdings.
    RE remains a good investment if held for 3+ years.(provided all due diligence and legal clearances are done)
    Runaway profits may no longer be there,it will beat inflation easily and give returns.
    CommentQuote
  • """I'm sure RA does not bad mouth anyone. He generally ignores. So cheer up! :)""
    RA definitely never bad mouths anybody,though he has been targeted for his view,pretty rudely.
    I guess a confident person generally behaves in this mature manner.
    I disagree on certain views of RA but do understand that different people have different views.
    Opinion/views are to be countered by facts and not by rude posts.The posts in Blueridege thread do go on to personal level.
    CommentQuote
  • Originally Posted by fatichar
    Seriously,

    It's baffling that so many experts think that RE is bad because rentals are much lower than inflation. As if the property price is going to remain same forever!
    I never find anyone saying that Gold is bad investment because it gives zero rent!


    Gold us a very good investment asset for Indians who dont want to invest outside India. INR is going to lose value if the govt policies do not improve.

    A person investing in US stocks should not need to look at gold. A very run company will always beat gold.
    CommentQuote
  • ""Gold us a very good investment asset ""
    I agree but only some hesitation comes up at present high rates.
    Will it go up still?
    CommentQuote
  • Originally Posted by vaibav123
    ""Gold us a very good investment asset ""
    I agree but only some hesitation comes up at present high rates.
    Will it go up still?


    In INR gold will stay steady or go up as the govt make a big mess of the INR with its crazy policies. Folks in India should either go into Gold, RE or start a SIP. Keeping money in FD is like gifting it to the govt.

    In USD gold is going down (in the short term it may bounce back cause it has really taken a hit but the medium term trend is downwards)

    In Bitcoin it will be very hard to predict :)
    CommentQuote
  • Originally Posted by vaibav123
    ""Gold us a very good investment asset ""
    I agree but only some hesitation comes up at present high rates.
    Will it go up still?


    Present rates of gold are definitely not "high". I can agree that gold at $1900 was high simply because of the rapid climb to that level. Remember that, when gold was $1900, it was Rs26000 and today, when gold is $1225 in rupees its Rs 30000 nearly.

    But considering that everyone thought the Indian Govt was mad to buy 200 tons when it was $1045 (and rupee rate was much lower than today), it is not high.

    As Hero said (and I've maintained for long) gold seldom goes down and remains down for long over the last 100 years at least! :)

    Its been in a range (25000-32000) for over 2 years and most analysts think gold is at or near its bottom in $$$ ($1200 or $1000).

    Unlike RE, which is bought mostly through high debt, which means that for anyone to show positive returns as an investment (and we are discussing RE Vs gold as investment here), it has to keep on rising every year to compensate for interest paid on debt. Gold doesn't have that problem.

    If you remove the multiplier effect of debt (and tax relief) from RE, I suspect it will be only as good or even worse than the long term ROI on gold. Thus, under the current scheme of things they are not really comparable. Apart from this, there are at least 5 types of other major risks with RE that you don't see in gold (only fake gold is the risk).

    And if someone thinks that gold can be taken away from you, land and property can be taken away even more easily (litigation - especially when prices go up - Govt fiat, etc, etc). Gold is easier to hide and more as its very high value in very small sizes (5kg gold will buy you a 1.5Cr home - compare the sizes! :D

    cheers
    CommentQuote
  • ""In Bitcoin it will be very hard to predict ""
    Many people may not be knowledgeable about bitcoins.
    I have no clue of how to invest etc in this new item and therefore no interest in investing there.
    I would always advise understand the instrument well before investing.
    NSEL scam is a warning for investors.
    CommentQuote
  • Originally Posted by vaibav123
    ""In Bitcoin it will be very hard to predict ""
    Many people may not be knowledgeable about bitcoins.
    I have no clue of how to invest etc in this new item and therefore no interest in investing there.
    I would always advise understand the instrument well before investing.
    NSEL scam is a warning for investors.


    Absolutely correct. And therefore there is very little chance currently of Bitcoins becoming a currency anytime soon.

    Just think! When Bitcoin went from $500 to $1050 recently, majority of payment through bitcoin was to buy gold. So gold got bought at $1050 one day. Next day the gold vendors saw bitcoin drop to $500!!! 50% drop in a single day. Next day, again to $1000.

    A currency is as solid as it is stable!

    Then there are other reason why bitcoin will never be a currency or even mainstream.

    - Lack of control by Govt
    - Difficult to obtain
    - Low general holding (over 50% of bitcoin is held only by 914 people)
    - etc, etc.

    There is a lot of stuff on Net about how it came about, the technical explanations, etc are all available for you to understand what it is.

    There are a lot of competitors coming up and thats another problem with it becoming a currency.

    Interesting to see where it goes.

    cheers
    CommentQuote
  • Chinese ban weighs on Bitcoin’s global fight for acceptance.
    Chinese ban weighs on Bitcoin
    CommentQuote
  • Golden story

    Price of gold around 50 dollars in 1833 and fell to 25 sometime later.From 1833 to 1968 it hovered between 25 and 50 dollars per ounce.
    1983 to 1999--600 .
    1999---below 300--even 250 dollars.
    2000--280 .
    2001--250 to 275.
    2002--350--average.
    2003--between 320 and 420.
    2004--between 420 and 440.
    2005--between 420 and 520.
    2006--between 500 and 600.
    2007--between 600 and 850.
    2008--between 1000 and 900 .
    2009--between 800 and 1200.
    2010--between 1050 and 1400.
    2011-- 1300 and 1600.
    2012--1600 and 1650.
    2013--1700 and 1250 .
    There have been wild variations in between every year.
    Imagine that you had bought at 25 in 1850 you will have multiplied your wealth by 50 times.
    At the same rate your wealth would have been 10 times in 2001..
    There have been wild variations in between every year.
    Imagine that you had bought at 25 in 1850 you will have multiplied your wealth by 50 times.
    At the same rate your wealth would have been 10 times in 2001..
    There have been wild variations in between every year.
    Imagine that you had bought at 25 in 1850 you will have multiplied your wealth by 50 times.
    At the same rate your wealth would have been 10 times in 2001..
    There have been wild variations in between every year.
    Imagine that you had bought at 25 in 1850 you will have multiplied your wealth by 50 times.
    At the same rate your wealth would have been 10 times in 2001..
    There have been wild variations in between every year.
    Imagine that you had bought at 25 in 1850 you will have multiplied your wealth by 50 times.
    At the same rate your wealth would have been 10 times in 2001..
    There have been wild variations in between every year.
    Imagine that you had bought at 25 in 1850 you will have multiplied your wealth by 50 times.
    At the same rate your wealth would have been 10 times in 2001.
    CommentQuote
  • Golden story --II

    Gold in rupees---1950 onwards per 10 grams.
    1950--99
    1953--73
    1960---111
    1964--63
    1969--176
    1970--184
    1979--890
    1989--3100
    1994--4500
    1999--4200
    2001--4300.
    All of you know the present prices.
    CommentQuote
  • Golden story--III

    Some time back when I got out of gold I did so out of gut feeling.
    Then began to wonder whether I had made a mistake.
    So I went through the data for solace.
    Now not worried or happy.
    CommentQuote