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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  • Hi wiseman. good to see you are still active. well. i got bored of seeing the usual external links in most of the active threads like bubble bursting, theory wrong etc. hence stopped visiting the forum. in the meantime, spent time building a solid long term equity portfolio. been enjoying it :)
    Originally Posted by wiseman
    Where have you been for such a long time friend. I recall your name as one of the frequent posters long ago! :)

    cheers
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  • @anandwalu - Conclusion - Buying a house has been profitable in India.
    Can you also do the loan math for the so called 'IT city' of Bangalore where people are seemingly swimming in IT salaries ?
    2007 - Price - 100.
    2014 - Price - 107.
    I suspect some other cities which have seen rampant price rises will also follow this pattern over the next few years.
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  • Originally Posted by anandwalu
    This is hilarious. Rediff doesnt take into account the amount of money borrowed from bank.

    For eg, Imagine if in 2007, you had 20 and borrowed 80 frm bank to buy a property worth 100 in Pune, then in 2014, you end up with a property worth 235 according to NHB data. Subtracting the money which you have repaid in this period to bank assuming 10% interest on loan will amount to 80*1.1^7 = 156, hence overall you end up with net profit of 235-156 = 79
    Even if you take the all India index of 178, your profit is 178-156 = 22

    On other hand if you had just invested your initial 20 in a FD, you would end up 20*1.07^7 = 32, giving you a net profit of only 12. Plus in this scenario, you also have to pay the rent for 7 years which is not taken into account.

    Conclusion - Buying a house has been profitable in India.

    Pls let me know if there are any corrections in my amature calculations.

    Leverage and own funds make 2% difference in cost of acquisition.

    If u have 1 crore in bank but take 1 crore loan your cost is just 2 lakhs more i.e. the spread between bank interest and loan.

    For lower amounts tax on FD and tax breaks on loan cancel out and can be disregarded by middle class.

    For own use it does makes sense to buy. EMI -rent will give you added benefit.

    But own use is expenditure. Not investment.

    As investment, long term RE buy and hold with rental yield gives about 12 to 15% returns in India depending on location assuming buy and sell in similar points on real estate cycle.

    Buting in bear market and selling in end of bull phase should give 20% long term return.

    It has been the best long term investment from 1970 onwards when i have seen it.

    But right now is a bad time to buy.

    2013 was selling time.

    2014 is sell and get out early to preserve gains time.

    Selling time means bad time to buy.

    These relationships hold as long as natire of market remains same.

    Building roads changing regulations and zoning rules or reducing taxation can change the market.

    It is possible that Modi govt might change the market. Since it is anyway not biying time better to observe these changes
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  • hi venky, i couldn't quite get it. if one is looking to buy ( for living. not for investment), is this a good/bad time to buy? whats your view?. i know that people say its always a good time if its for self use. :-). but i don't buy that theory.

    anyways, i started my search last week. let me share my experience so far. (i am looking for individual house only. not flats. this is in bangalore). i found the internet real estate web sites of no use. (even the newer sites with fancy gui). its all the same filled with agent ads. so went to a broker. two observations. a) i found a lot of options, even though my search area is as small as may be half a kilo meter. (i am very particular about the location). i wasn't expecting that many on sale . b) there is no sign of price correction/stagnation. it seems to have gone up substantially over the past 2 yrs or so. while i was looking in the range of 10,000 per sq ft, the broker quoted 13,000 per sq ft for all the houses/sites. of course this is without negotiation. of course we dont know if there are transactions happening at that price.
    Originally Posted by Venkytalks

    2013 was selling time.

    2014 is sell and get out early to preserve gains time.

    Selling time means bad time to buy.

    CommentQuote
  • Originally Posted by kaatesha
    hi venky, i couldn't quite get it. if one is looking to buy ( for living. not for investment), is this a good/bad time to buy? whats your view?. i know that people say its always a good time if its for self use. :-). but i don't buy that theory.

    anyways, i started my search last week. let me share my experience so far. (i am looking for individual house only. not flats. this is in bangalore). i found the internet real estate web sites of no use. (even the newer sites with fancy gui). its all the same filled with agent ads. so went to a broker. two observations. a) i found a lot of options, even though my search area is as small as may be half a kilo meter. (i am very particular about the location). i wasn't expecting that many on sale . b) there is no sign of price correction/stagnation. it seems to have gone up substantially over the past 2 yrs or so. while i was looking in the range of 10,000 per sq ft, the broker quoted 13,000 per sq ft for all the houses/sites. of course this is without negotiation. of course we dont know if there are transactions happening at that price.


    Lets look at History and other situations ... Rough timing

    Boom started - 1992
    Boom Peaked - 1995 (best time to sell like in 2013 as per Venky)
    Bust started 1995
    Bust ended 1998 (when most of price decline was completed)
    Bottom formed 1998 ... ended 2002 (market scraping along bottom with little sales and almost no interest in RE)

    Best bargains got in this period, but best time to buy would have been in 2002 as market took off soon after. Buyer in 1998 would have seen 3-4 years of no price increase and paying interest in loan for all those years, while he could have collected interest on down payment for those years and taken a smaller loan.

    So, since we may be in the 1996 period, there is still some time to go for the bottom to be reached and then some more time for the start of the next up cycle.

    Notice that the RE boom started as soon as the Stock Market crash of 2000 completed and importantly because the next boom was created by bubble blowing in RE itself.

    This time around we don't know how long it will take for bottom to be reached, how much longer for the bottom to end and then next up cycle to start.

    So, Venky is probably saying that its STILL good to sell (more decline in some form coming) but NOT YET a good time to buy (which could be YEARS away! :)

    cheers
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  • Originally Posted by kaatesha
    hi venky, i couldn't quite get it. if one is looking to buy ( for living. not for investment), is this a good/bad time to buy? whats your view?. i know that people say its always a good time if its for self use. :-). but i don't buy that theory.

    anyways, i started my search last week. let me share my experience so far. (i am looking for individual house only. not flats. this is in bangalore). i found the internet real estate web sites of no use. (even the newer sites with fancy gui). its all the same filled with agent ads. so went to a broker. two observations. a) i found a lot of options, even though my search area is as small as may be half a kilo meter. (i am very particular about the location). i wasn't expecting that many on sale . b) there is no sign of price correction/stagnation. it seems to have gone up substantially over the past 2 yrs or so. while i was looking in the range of 10,000 per sq ft, the broker quoted 13,000 per sq ft for all the houses/sites. of course this is without negotiation. of course we dont know if there are transactions happening at that price.


    If you dont mind can you please tell me the micro market you are looking for in Bangalore.
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  • Can someone explain how does Residex index calculated in detail.
    It is based on land or apartments(Primary or secondary etc).
    Is it based on actual transactions
    Is it based on some sample size etc.
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  • i have seen atleast 15-18 transactions in good societies ...so although market has softened getting in good society is diffcult have seen transactions at list price .. so location ,builder and socety matters a lot
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  • Originally Posted by Tangent
    i have seen atleast 15-18 transactions in good societies ...so although market has softened getting in good society is diffcult have seen transactions at list price .. so location ,builder and socety matters a lot


    Thats the beauty of bulls. whatever happens, prices are not going down. I don't know your profession, but i know of big brokers and builders who have been able to sell only 1-3 deals in last 3 months.
    15-18 transaction in good societies ? can you name those good societies please ? hope you are not talking of 1 WTC.


    just to quote one of the top most builders of NCR region.
    "This would be a double whammy and could force builders to shut shop," said Getamber Anand, managing director of ATS Infrastructure. "Most builders cannot hold stock because they have to service their debt but market forces today are such that sales are slow. It is not out of choice. Even reducing price cannot guarantee sales," he said.

    Another builder is saying -
    "But in the current market, most developers hold back the apartments not to hoard but because they are unable to sell. If the market conditions are not good and I cannot sell, why should I be taxed?" asked one south India-based builder, who did not want to be identified.

    One big lawyer i saying about the builders -
    "Some of them facing extreme liquidity issues could even have to sell their ready inventory at a discount to get out of the situation,"

    Read more at:
    Income Tax Department proposes to tax realtors, developers on unsold inventory - The Economic Times
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  • Despite an increase in the interest exemption limit on residential loans in the budget, a little-known provision in the Income Tax Act could mar the calculations of lakhs of buyers whose homes won't be delivered by their builders on time.

    The I-T Act says if a house to be used by the buyer is not handed over the by the builder "within three years from the end of the financial year in which capital was borrowed", the exemption on the interest amount will only be Rs 30,000 and not Rs 2 ..

    Read more at :-
    Home not delivered in 3 years after loan? You will now lose out on tax breaks - The Economic Times
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  • i am neither bull nor bear i am here to look for a good flat for self use .... i am not interested in naming the societies ... the info is based on my friend circle whohave bought and not from any site or newspaper , and also from my experience while selling my flat recently (while looking for larger resale flat) ... on the contrary can you name any soceties where rates have decreased so that i can visit them for my own purchase .... and please dont compare NCR to pune ..... expecting 30-40% decrease is too ambitious there is too much latent demand at that price point
    BTW i maintain my view that investing in RE right now is loss making proposition ....
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  • Originally Posted by Tangent
    i am neither bull nor bear i am here to look for a good flat for self use .... i am not interested in naming the societies ... the info is based on my friend circle whohave bought and not from any site or newspaper , and also from my experience while selling my flat recently (while looking for larger resale flat) ... on the contrary can you name any soceties where rates have decreased so that i can visit them for my own purchase .... and please dont compare NCR to pune ..... expecting 30-40% decrease is too ambitious there is too much latent demand at that price point
    BTW i maintain my view that investing in RE right now is loss making proposition ....


    I agree, location, society/project and overall build quality matters a lot.
    One cannot claim that if prices are falling they'll fall for everything and in same proportion.
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  • Hi guys.

    I published a children's book I had written some time ago on Amazon Kindle Direct yesterday.

    You can preview it here

    The Adventures of Prince Lazy Bones - Kindle edition by Venkat Iyer. Children Kindle eBooks Amazon.com.
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  • Originally Posted by aamehra
    Really???? Here is the NHB data for Delhi + NCR. Where can you see that prices have dropped by 20-25%.

    NHB

    Ek limit hoti hai....

    For that you need to rely on ground reports, the deals which are on table. Please check NCR thread man.
    Rest has been put up well by Venky.
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