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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  • crash

    After seeing the RE and general economy for more than half a decade:

    METHINKS

    our RE is crash proof. Why am I veering towards a more neutral stances is -

    1. RE is the biggest avenue for masking and converting black monies. In the current weak regulatory scenario, the black monies are going to be generated on that much bigger scale and incessantly. These cushion any impact of economy on RE.

    2. Weak accountability measures ensures nobody goes to jail. so, if a builder is under distress, he just dupes his customers, slows down construction , starts another scheme with out any thought about his previous customer ??? Even if he overstretches himself, he has to just pass off some profit share to another builder in the pack and offload his worries.
    eg So an India Bull real estate folds up, but no promoter/director in the company suffers. but the consumers cry.

    3. The demographic realities provide a ready consumer if not at current level, at lower level. So a young employee from other part or village or aspiring slum dweller is always there to buy a house. So builder never folds up like in west.

    So Despite a house bubble, RE crash like the western economies seems highly unlikely. Though isolated opportunities at different locations / builders are present due to the stressa resulting in under the table sale at lower prices.

    I was offered row houses at 15-20 % discount, but now the row houses are back in mkt at higher prices. I don't think I will see RE crash in my life time. It will only happen along with the complete economic breakdown.

    :( There are 5000+ flats in Dhanori/ Lohegaon junction with out any infra decent hospital/ school or even a restaurant but the flat price seems to ethereally float up and up and up
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  • Sorry, but don't agree with you at all. Prices are too high for a middle class person to even think about buying for their need. And that is the only reason it will fall.
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  • Sansei,
    All these facts are well known
    What a genuine buyer can do is two things:
    One buy only RTM
    buy resales flat
    Both after all diligences.
    RE market cannot sustain only on investors.The need for genuine buyers is there and no investor will buy if he will not get a buyer later on.
    Dont invest in u/c projects.Wait and arrange for money to buy RTM and /or resale flats. Dont go by the feeling that u/c will mean lower outflow of money.
    It will be instalments and some instalments will come fast,but at the end of it delays,poor quality and problems arise when you see only a plan,brochure and buy.
    And as far as Lohegaon/Dhanori is concerned,people are buying in the hope that infra will have to come up.
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  • Notes in circulation is small part of the money supply. Check growth in Time Deposits (FDs) and Demand Deposits (current account) which has been better than notes in circulation over the last 6 yrs.

    As of 18th April money supply data (INR billion)

    Currency with the Public : 12913.6
    Demand Deposits with Banks : 8122.0
    Time Deposits with Banks : 75775.9

    The real estate sector may attract black money but the payments to steel, cement, paints, fittings, tiles, lifts, machinery etc are done mostly using 'white' money.

    Land transactions, bribes to govt officials, protection money to politicians and payment to workers may be done in cash but folks the figure of 12 lakh crores causing problems to the RBI is not real.

    RBI is hell bent on ignoring the simple fact the their rate increases have no effect on CPI. With the summer in swing expect veg and fruit prices to be very erratic and this will be reflected in the inflation data.

    Mr RBI governor is busy applying theoretical knowledge to a complex and dynamic economy like India. Best of luck. What do they say on those cap? India jaldi badelega? :)

    Originally Posted by realacres
    Notes in circulation is a statistic released by the RBI every week. The notes in circulation is nothing but the rupee held as cash by the general public (individuals and institutions). The cash held by the general public stands at Rs 13.276 lakh crore as of 18 April 2014. In other words, Rs 13.276 lakh is out of the banking system and held in the form of cash.

    The notes in circulation stood at Rs 7.04 lakh crore as of 17 April 2009 and this has gone up by Rs 6.236 lakh crore over the last five years. The leakage out of the banking system is Rs 6.236 lakh crore since April 2009.

    The Rs 6.236 lakh crore of leakage out of the banking system is a big headache for the RBI. The banking system has been short of liquidity for the last four years and has been borrowing from the RBI on a daily basis to fund its daily liquidity requirements. Banks have been borrowing anywhere between Rs 50,000 crore to Rs 2 lakh crore on a daily basis over the last four years.

    A liquidity deficit in the banking system hits credit growth as banks have less funds to lend to the economy. It also hits the government’s borrowing programme as banks have less funds to invest in government bonds. The funds crunch will also increase the interest rates.

    The RBI has been trying to ease the liquidity shortage by lowering CRR, buying bonds through open market operations (to infuse liquidity the RBI buys bonds through such OMOs) and by encouraging banks to garner FCNR B deposits. The RBI has reduced CRR by 2 percentage points from 6 percent to 4 percent, adding over Rs 1 lakh crore into the system. The RBI has bought bonds through OMOs for Rs 4.8 lakh crore over the last five years. The central bank also opened a swap window for FCNR B (foreign currency non-resident B) deposits for banks that garnered $34 billion, adding Rs 2 lakh crore into the system.

    The RBI has injected Rs 7.8 lakh crore into the banking system through CRR, OMO and FCNR B swaps, apart from the daily injection of funds through repos, term repos and marginal standing facility (MSF) of any where between Rs 50,000 crore to Rs 2 lakh crore.

    The MSF is the RBI window, where banks can access funds once they hit the limit from the daily repo window. The interest rate at the MSF window is 100 basis points higher than the repo rate. While daily repo is for one day, term repo auctions are conducted for seven and 14 days.

    The heavy liquidity injection by the RBI is inflationary in nature as it is addition of primary liquidity into the system. OMOs are also seen as back door deficit financing by the RBI, which is again inflationary in nature. The CPI (consumer price inflation or retail inflation) has been averaging over 9 percent levels over the last five years largely due to government borrowing and spending.

    The government’s stock of outstanding debt has gone by Rs 24 lakh crore over the last six years. The stock of debt has tripled since 2008-09.

    The RBI needs to curb the money going out of the system as it leads to actions that have long-term negative repercussions as mentioned above.

    Why is there such a high level of currency leakage?

    Inflation is one big cause of currency leakage as rising prices of goods and services in an economy that is still largely cash driven leads to higher demand for holding cash.

    The next big reason is the property bubble that has seen value of real estate rise multi-fold despite economic growth slowing down from levels of 8.4 percent seen in 2010-11 to below 5% levels as of 2013-14. The real estate sector is largely dominated by the politician-builder nexus that predominantly deal in black money. Money goes out of the banking system to the real estate sector and stays there as black money.

    The RBI needs to control inflation and also keep the real estate market in check to stem the currency leakage from the system. Hopefully both inflation and property prices will cool down going forward as the RBI keeps policy on hold and prevent banks from excessive lending to the real estate sector.

    How the banking system lost Rs 6,00,000 cr because of high real estate prices - Firstbiz
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  • Nice article on TOI on 'ONLY BUILDERS, BANKS GAIN WHEN YOU TAKE LOAN TO INVEST IN REALTY ' ONLY BUILDERS, BANKS GAIN WHEN YOU TAKE LOAN TO INVEST IN REALTY
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  • Originally Posted by Sansei
    After seeing the RE and general economy for more than half a decade:

    METHINKS

    our RE is crash proof. Why am I veering towards a more neutral stances is -


    A fellow member, has already replied to this :-

    http://www.indianrealestateforum.com/1141942-post3917.html

    Originally Posted by ThodiSiZamin
    half a decade aka 5 years is not enough for the RE business cycle to complete.

    RE did crash in India in 1997...

    Real estate business in India faces unprecedented crisis as prices plummets : ECONOMY - India Today

    nothing is crash proof!!! in fact the more people believe something is crash proof, the more the likelihood that it will crash as it leads to "irrational exuberance"
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  • Originally Posted by namrijig12
    Sorry, but don't agree with you at all. Prices are too high for a middle class person to even think about buying for their need. And that is the only reason it will fall.

    Precisely this the point we are trying to make.
    The avg income needs to be 16-17L to make buying flat in Pune possible. Now how many people earn 17L/yr & are looking to buy first flat ? We have discussed this before but RE bulls think that builder-investor-investor-investor....... chain can go on forever without the end user at the end. :D

    RE has become just like ponzi scheme. Now its upto the buyer to decide whether they want to be at the end of the chain or not.

    Construction being stalled, payments of vendors not paid, loans defaulted all show that money is not coming in RE. Just see the offers given by builders via back door channels & we clearly see that RE is heading for downfall even further.
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  • Rising bad loans threaten India's gradual economic recovery

    (Reuters) - India's economy will likely make a gradual recovery this year, helped by a rebound in capital investments as well as a pick-up in private consumption, but rising bad loans at its banks threaten to choke the recovery, the OECD said on Tuesday.

    In its latest economic outlook, the Paris-based think tank said growth in Asia's third-largest economy was expected to edge up to 4.9 percent in calendar year 2014 from 4.5 percent a year earlier and accelerate further to 5.9 percent in 2015.

    The estimates are predicated on hopes of an upturn in capital investments after an ongoing national election and a boost in consumption driven by slowing inflation.

    India is facing the worst economic slowdown since the 1980s as investment growth has hit an 11-year low. Capital investment contributes nearly 35 percent to India's economy, but it probably barely grew in the fiscal year that ended in March.

    To break the investment logjam, a prime minister-headed panel, known as the Cabinet Committee on Investment, has cleared projects worth about 6 percent of gross domestic product.

    "Investment is to rebound after the spring general elections and as large investment projects recently approved by the Cabinet Committee on Investment are gradually implemented," the OECD report said.

    The report urged New Delhi to rapidly carry out pending labour, fiscal and tax reforms for a faster economic revival. It also backed a Reserve Bank of India panel's proposal for moving to an inflation target of 4 percent in three years while setting monetary policy, sharply below current levels.

    "The proposed inflation targeting framework will help anchor price expectations and improve business sentiment and consumer confidence," it said.

    The report, however, flagged off rising bad banking assets at Indian lenders as a major risk to the country's economic recovery.

    The economic slowdown and higher interest rates are making it tougher for companies to repay loans, leading to a steady growth in non-performing assets, especially among state-run banks.

    Stressed loans in India - those categorised as bad and restructured - total $100 billion, or about 10 percent of all loans. Fitch Ratings expects stressed assets to reach 14 percent of loans by March 2015.

    This has made some lenders shift focus from corporate lending to consumer credit, which is mostly secured against borrowers' assets, contributing to a slump in capital investment.

    "On the negative side, failure to halt the rise in non-performing loans could derail the pick-up in investment," the report said.

    Rising bad loans threaten India's gradual economic recovery - OECD | Reuters
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  • Originally Posted by piyushpth
    Nice article on TOI on 'ONLY BUILDERS, BANKS GAIN WHEN YOU TAKE LOAN TO INVEST IN REALTY ' ONLY BUILDERS, BANKS GAIN WHEN YOU TAKE LOAN TO INVEST IN REALTY


    That is true. When you are renting, you are renting an apartment. When you are buying, you are renting money above 11% interest rate per annum. most people do not realize this and get caught in the trap!
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  • Sold loans worth Rs 5317cr in Q4: HDFC

    Vice Chairman & CEO Keki Mistry tells CNBC-TV18 in an interview that the company sold loans worth Rs 5,317 crore in Q4 and Rs 6,944 crore in FY14. He further adds that individual loans comprise 71 percent of its total loan book as on March 31.

    The individual business which has been really what has been driving growth over the last couple of years continues to grow at a very rapid pace. So, in the course of this quarter we have sold loans aggregating to Rs 5,317 crore. In the whole year – in the last 12 months we have sold loans aggregating to Rs 6944 crore.

    Feature number two is that in the second and the third quarter of the financial year, the non-individual segment particularly, developer segment has shown a rise in non-performing loans because of one particular account. Fortunately, in Q4 the property has been auctioned and we have got back our money.

    Sold loans worth Rs 5317cr in Q4: HDFC - Moneycontrol.com

    ^^ Earlier it was SBI who sold loans & now its HDFC, another big home finance bank. The flats of buyer/investors & builders being sold shows how bad RE is & builders-investors have already started to default, that too in large scale.
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  • Are these selling of credit notes (sub prime ) like that in US, or liquidation of properties to realise monies?
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  • Originally Posted by realacres
    the company sold loans worth Rs 5,317 crore in Q4 and Rs 6,944 crore in FY14. He further adds that individual loans comprise 71 percent of its total loan book as on March 31.

    Sold loans worth Rs 5317cr in Q4: HDFC - Moneycontrol.com

    ^^ Earlier it was SBI who sold loans & now its HDFC, another big home finance bank. The flats of buyer/investors & builders being sold shows how bad RE is & builders-investors have already started to default, that too in large scale.


    Dude you are mixing things up. The loans sold are not something dramatic or -ve. Its normal business practice with a bank like HDFC which does not have retail depositors like HDFC bank.

    HDFC and HDFC Bank are separate entities. HDFC bank accepts retail deposits whereas HDFC is a purely mortgage provide. HDFC is also a holding company of many HDFC branded businesses and hold a big stake in HDFC bank.

    HDFC is the one who own the house mortgage. HDFC banks facilitates the deal and takes in fees. A person who has taken a loan by filling up forms with HDFC bank is really taking a loan from HDFC. Check the logo on the hdfc bank website for home loans - Home Loan | Home Loans India | Housing Loan | Best Home Loans | Online Home Loans - HDFC Bank The loans are provided by HDFC and not by HDFC bank.

    Now how does HDFC finance these loans? Its does not have retail deposits. There are mainly 3 ways a) sell bonds backed by loans or FD from depositors or b) sell the home loans to bank or pension fund like LIC or c) borrow money from banks

    Check out the disclosure document from HDFC. It has all the details on the debentures/bonds and borrowing from banks- http://www.hdfc.com/pdf/SHELF_DISCLOSURE_DOCUMENT_2014.pdf

    Now the data you are referring to option b). This is not something new but thats the normal way of operation for a bank which does not have a retail arm. Here in this case the seller of the loans is HDFC and majority of the loans are picked up by HDFC bank. HDFC bank finances this purchase with the FDs that people keep in the HDFC bank.

    Do you see how the transaction is getting done here? Savers FD money in HDFC bank at x%. HDFC bank has to invest this money in assets which will provide them y% where y > x. HDFC offers loans are z% where z > y. HDFC sells loans to HDFC bank and keeps z-y%. HDFC bank gives customer x% and keeps y-x%.


    Here is the HDFC Home Loan Rate - Home Loans - Features | HDFC.com.

    and here is the HDFC FD rate - http://www.hdfc.com/pdf/_Interest_Rate_Slip.pdf

    Check out the difference
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  • Originally Posted by Sansei
    Are these selling of credit notes (sub prime ) like that in US, or liquidation of properties to realise monies?


    No atleast when it comes to HDFC and HDFC Bank. The best bank in India with the best asset quality. Highly valued by investors and those who were smart enough to invest in HDFC and HDFC bank early on have made awesome money.

    SBI on the other hand is a puppet in the hand of the Indian govt. it will lend money to any crap scheme.

    Indian regulators havent allowed lending schemes that were popular in the US before the bubble burst but that does not mean the bubble wont burst in India but at the moment home loans have the lowest NPA across all the sectors. Look at power, airlines, sugar, textiles, ship building, coal and agriculture NPA data on SBI website.
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  • Is there a correction yet? NO!

    Off to the experts..
    Mumbai real estate prices are down! Not. | Forbes India Blog
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  • Originally Posted by herohiralal
    Check out the difference

    Then what is the meaning of "developer segment has shown a rise in non-performing loans because of one particular account. Fortunately, in Q4 the property has been auctioned and we have got back our money" ??

    HDFC auctioned the property to its own subsidiary ??
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