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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  • Thanks for an informative post sridhar.
    It illuminates why the US economy is struggling to raise its head and Obama is pushing for the immigration bill.
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  • Bad loans mount for PSBs as corporates default on payments

    The banking system’s asset quality deteriorated during 2013-14, mainly reflecting the performance of public sector banks (PSBs), Reserve Bank of India (RBI) said on Thursday.

    The ratio of gross non-performing assets (NPAs)to gross advances stood at 4.1% in FY14, up 70 basis points (bps) from 3.4% in the previous fiscal. Net NPAs, on the other hand, were up 50 bps to 2.2%, RBI data showed.

    The RBI said most bad loans were in the books of public sector banks, who also constitute the majority of advances in the banking system. According to RBI data, gross NPA ratio of public sector banks at the end of March 2014 stood at 4.7%, up 90 bps from the previous financial year and net NPAs were higher by 70 bps in FY14 at 2.7%. “Not only were the gross and net NPA ratios of PSBs more than the industry averages, but they also accounted for 92% of the restructured standard advances,” RBI said in its annual report.



    Bad loans mount for PSBs as corporates default on payments - Financial Express
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  • Indian real estate overpriced: Robert Shiller

    One of the greatest economic forecasters, Nobel laureate Robert Shiller, who also predicted the 2008 financial crisis, tells NDTV's Namrata Brar that real estate including in India is in bubble territory but the stock markets bull run is likely continue into 2015. He also says another crisis is likely in the next few years.

    Indian real estate overpriced: Robert Shiller Video - NDTVProfit.com

    ^^ We have already now seen bull run on stock market, so is severe RE downfall next, especially when it has already started ??
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  • U have to spoil it didnt you???

    I was nicely getting brain washed by all the -ve posts and "facts" about Indian RE but then you had to post this drivel and wake me up!!!

    Cant you just let the bears do their job!! :)
    CommentQuote


  • My actual experience in looking for a Premium / High End Property (for self-use) in the last couple of years has been rather different. I have looked at projects in areas like Prabhat rd, Model Colony, Bhosale Ngr, etc. & found that - (1) Yes, builders initially quote prices which are 30-40% higher than 2012. (2) One can negotiate a fair bit & the negotiations are in the range of 1 to 2 Cr. (3) The final price (compared to 2012 price) is up by max 10-15%. This is even when 100% payment is by cheque. I am sure people with high cash component are in a stronger position to negotiate.
    My conclusion regards High-End properties for last couple of years is (Purely on my experience) - There is no "crash" in prices like lots of people talk about. There is a modest 10-15% appreciation in prices. There is no "boom" with appreciation of 30-40% like the article talks about.
    AJ
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  • @Baruch - "Pune beats Mumbai, sees highest rise in property prices - Rediff.com Business"

    It is interesting how these things are reported. In the boom years, it was almost Qtr on Qtr price rises that were reported. Now it is 2011-2014.
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  • Originally Posted by rambler
    I agree with your figure of 30000 expense but don't understand why people with 70000-80000 struggle to make both the ends meet ???
    Such figures don't vary even in Banglore or pune or Mumbai .
    By the way I remember you posting similar info about your business last year when you forecast the doom of such businesses.Am I right??

    Rambler,

    Rs 30,000 expense for 2 people is fine and we can definitely manage with 70K or 80K income. But a family of 2 adults and 2 kids definitely could not save much with 70k or 80k, end of the day it's not what you earn, it is what you save matters.

    Yes, I did post a similar info about my business last year. It's been nearly 3 years we have raised prices for our service and the expenses have improved by nearly 80%. We are now in the process of setting up a team of online freelancers where they will be working from home and on project basis. This way we are cutting down on office rent and salary.

    The current situation is even a hot trend like mobile app development is so commoditized that it is really hard make the kind of profit we use to make earlier.

    Now I'm venturing into livestock farming :)

    Thanks,
    Sridhar

    Rambler,

    Rs 30,000 expense for 2 people is fine and we can definitely manage with 70K or 80K income. But a family of 2 adults and 2 kids definitely could not save much with 70k or 80k, end of the day it's not what you earn, it is what you save matters.

    Yes, I did post a similar info about my business last year. It's been nearly 3 years we have raised prices for our service and the expenses have improved by nearly 80%. We are now in the process of setting up a team of online freelancers where they will be working from home and on project basis. This way we are cutting down on office rent and salary.

    The current situation is even a hot trend like mobile app development is so commoditized that it is really hard make the kind of profit we use to make earlier.

    Now I'm venturing into livestock farming :)

    Thanks,
    Sridhar

    Rambler,

    Rs 30,000 expense for 2 people is fine and we can definitely manage with 70K or 80K income. But a family of 2 adults and 2 kids definitely could not save much with 70k or 80k, end of the day it's not what you earn, it is what you save matters.

    Yes, I did post a similar info about my business last year. It's been nearly 3 years we have raised prices for our service and the expenses have improved by nearly 80%. We are now in the process of setting up a team of online freelancers where they will be working from home and on project basis. This way we are cutting down on office rent and salary.

    The current situation is even a hot trend like mobile app development is so commoditized that it is really hard make the kind of profit we use to make earlier.

    Now I'm venturing into livestock farming :)

    Thanks,
    Sridhar

    Rambler,

    Rs 30,000 expense for 2 people is fine and we can definitely manage with 70K or 80K income. But a family of 2 adults and 2 kids definitely could not save much with 70k or 80k, end of the day it's not what you earn, it is what you save matters.

    Yes, I did post a similar info about my business last year. It's been nearly 3 years we have raised prices for our service and the expenses have improved by nearly 80%. We are now in the process of setting up a team of online freelancers where they will be working from home and on project basis. This way we are cutting down on office rent and salary.

    The current situation is even a hot trend like mobile app development is so commoditized that it is really hard make the kind of profit we use to make earlier.

    Now I'm venturing into livestock farming :)

    Thanks,
    Sridhar
    CommentQuote
  • My landlord after trying to sell off his flat for more than a year is now frustrated and now wants to jack up the rentals by 20% (This after 12% the previous year).
    This is in the midst of IT belt in Bangalore, Sarjapur Road.
    Same was the case with another flat in my apt. Wanted to sale, couldn't find a buyer, putting it back on rent.
    The only problem for me is pressure from wife will go up significantly if we have to shift to another place. (She believes if we move into our own 3 BHK then it will be a dream come true for her and she will be very happy in life :bab (59):)
    I have a house in Pune (rent > EMI) but consciously delaying buying another one as I don't see much value in it. I could afford buying a 80-90L house but I like the fact that I am living debt-free and can take decisions regarding job, travel etc without any sword hanging over my head.

    And BTW, this is the appreciation in my apt over the last 5 years.
    2 BHK: 50L (2009) -> 65-70L (2014)
    3 BHK: 75L (2009) -> 90-95L (2014)

    Facts.
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  • And BTW, my wife who was very keen on buying a flat in the same apartment till 2 years back, now feels there is no point in buying here and we should buy it in a new apartment scheme instead.. :)
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  • Originally Posted by aamehra
    U have to spoil it didnt you???

    I was nicely getting brain washed by all the -ve posts and "facts" about Indian RE but then you had to post this drivel and wake me up!!!

    Cant you just let the bears do their job!! :)


    LOL :D . ajoshi565 further spoils the party by quoting more ground facts. :)
    CommentQuote
  • Originally Posted by FenceSitter
    My landlord after trying to sell off his flat for more than a year is now frustrated and now wants to jack up the rentals by 20% (This after 12% the previous year).
    This is in the midst of IT belt in Bangalore, Sarjapur Road.
    Same was the case with another flat in my apt. Wanted to sale, couldn't find a buyer, putting it back on rent.
    The only problem for me is pressure from wife will go up significantly if we have to shift to another place. (She believes if we move into our own 3 BHK then it will be a dream come true for her and she will be very happy in life :bab (59):)
    I have a house in Pune (rent > EMI) but consciously delaying buying another one as I don't see much value in it. I could afford buying a 80-90L house but I like the fact that I am living debt-free and can take decisions regarding job, travel etc without any sword hanging over my head.

    And BTW, this is the appreciation in my apt over the last 5 years.
    2 BHK: 50L (2009) -> 65-70L (2014)
    3 BHK: 75L (2009) -> 90-95L (2014)

    Facts.


    Right decision FenceSitter. Why after all people enter into RE ? For peace of mind. But if RE itself gonna tie you inti bindings (of jobs etc due to EMI worries), better not to enter into it. Suhc anxiety better be dealt with once with first purchase. Rest time is to enjoy it.
    btw what stops you from relocating to Pune ?
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  • Originally Posted by compuwalah
    Right decision FenceSitter. Why after all people enter into RE ? For peace of mind. But if RE itself gonna tie you inti bindings (of jobs etc due to EMI worries), better not to enter into it. Suhc anxiety better be dealt with once with first purchase. Rest time is to enjoy it.
    btw what stops you from relocating to Pune ?


    Little bit of peace of mind is taken away due to nagging. :(
    Not that I have completely stayed away. Purchased a plot in Bangalore outskirts but without taking any loan.

    Although I would love to relocate to Pune for personal reasons but opportunity wise Pune is nowhere close to Bangalore. I prefer startups and not many options for my domain. :(
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  • Originally Posted by FenceSitter

    ...

    And BTW, this is the appreciation in my apt over the last 5 years.
    2 BHK: 50L (2009) -> 65-70L (2014)
    3 BHK: 75L (2009) -> 90-95L (2014)

    Facts.


    2 BHK appreciation from 50L to 70L --> CAGR of 7%
    3 BHK appreciation from 75L to 95L --> CAGR of 5%
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