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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  • Originally Posted by Saurabh01
    Home market shrinks, again

    ]http://business.rediff.com/report/2010/feb/11/bcrisis-home-market-shrinks-again.htm

    Wow! Pune sold more apartments than Mumbai in Jul-Sep 09? That's something isn't it? And Pune has less than half of Mumbai's population?

    This really doesn't add up.

    Wow! Pune sold more apartments than Mumbai in Jul-Sep 09? That's something isn't it? And Pune has less than half of Mumbai's population?

    This really doesn't add up.

    Wow! Pune sold more apartments than Mumbai in Jul-Sep 09? That's something isn't it? And Pune has less than half of Mumbai's population?

    This really doesn't add up.

    Wow! Pune sold more apartments than Mumbai in Jul-Sep 09? That's something isn't it? And Pune has less than half of Mumbai's population?

    This really doesn't add up.
    CommentQuote
  • Jun-Sep 09 , maximum flat sold were in Pune within the mentioned cities. Even with a drop of 20% in Oct-Dec 09 , the figure stands tall (third highest sale among cities) . man Pune is hot.

    Jan-Man 10 data will provide further direction. As Pune builders have raised rates again to mid 07 levels, wonder if that is because they have seen increased bookings overall (as confirmed by Jitu Sir as well for Samrajya).
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  • Originally Posted by razer
    Wow! Pune sold more apartments than Mumbai in Jul-Sep 09? That's something isn't it? And Pune has less than half of Mumbai's population?

    This really doesn't add up.


    One more factor of Pune price increase is Mumbaikars (as MNS has dragged BigB into the SRK controversy let me pull in Mubaikars :D ). With the present rates of flats in Mumbai, no wonder the sales are low there. Those very investor (and some end users) who start to look at investment in Mumbai end up buying the Pune. After comapring rates in Mumbai they feel the rates in Pune as cakes and go for it.
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  • Hi Asli, very interesting perspective on per capita GDP of cities, which I have not come across before now.

    But your percapita figure of 11000$ per annum i.e. Rs 5.5 Lakhs per capita is really skewed by Ambani, Tata and Birla who operate out of Bombay. Majority living in the slums (and many posting here as well) are not really earning that much, are they?

    Statistically, you can drown in a river with average depth of 2 inches - which in reality is 1 inch deep everywhere except the center which is 12 feet deep!!!!:)

    National income of India per capita per annum is 1000$ and not 3000$ as you mention. Probably closer to 900-950$ after the dollar appreciated to 47.

    Still, concepts worth pondering over.

    Originally Posted by asliarun
    You, sir, are quite disillusioned with our country! :)

    Based on purchasing power parity, India has a per capita GDP of about $3000 USD. Yes, we are at the bottom of the pile, although China is only at about $6500.

    (Source: ]http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29_per_capita)

    Indonesia, Phillippines, and Pakistan are some of the other populous countries with similar GDP figures.

    Where things get really interesting is if you look at the GDP figures of world cities.
    Reference: ]http://en.wikipedia.org/wiki/List_of_cities_by_GDP#Asia.2C_Central_.26_South

    Mumbai and Delhi have GDP figures comparable to many other cities in developing AND developed countries.

    I'm not a financial analyst or economic expert, but it does look like our cities are hugely richer compared to our rural areas. Hence, the national level statistics and fundas that we apply are really not valid.

    Shanghai, as an example, produces $233 billion revenues vs $208 billion produced by Mumbai. Plus, we are only talking about white money. So, Mumbai may be dirty and crumbling but sure does know how to make money! Mumbai and Delhi's per capita income is almost $11000, which is way higher than the national average of $3000.

    Compare to Shanghai with a per capita income of $15500, Cairo at $12000, Manila at $13000, Bangkok at $17700. We are really not doing too bad!
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  • Originally Posted by Saurabh01
    Home market shrinks, again
    ]http://business.rediff.com/report/2010/feb/11/bcrisis-home-market-shrinks-again.htm

    I think this was the News reported in ZEE News yesterday.... the one i mentioned in my previouspost given below. Thanks for posting it.

    Originally Posted by veeemkay
    While watching Zee News yesterday there was this report on RE.

    The report said that since Builders have increased the prices again without thinking the inventory levels are rising again. I know Real has been saying that Pune has the highest inventory in India… but in that report they said Bangalore has the highest followed by Mumbai, Delhi and the Pune. (Maybe some other cities were menti0oned as well).

    They also mentioned that people once again are finding the rates too high and are shying off from buying RE. Although they did mention that affordable housing are finding buyers.



    Originally Posted by compuwalah
    Jun-Sep 09 , maximum flat sold were in Pune within the mentioned cities. Even with a drop of 20% in Oct-Dec 09 , the figure stands tall (third highest sale among cities) . man Pune is hot.


    I think that clearly hows that the inventory levels in Pune were high as Real used to mention. Not sure what is the state now. Also note that as the prices have risen again.. there has been a considerable drop in new bookings. Just shows the price sensitivity of the Pune Buyer.

    VK

    I think that clearly hows that the inventory levels in Pune were high as Real used to mention. Not sure what is the state now. Also note that as the prices have risen again.. there has been a considerable drop in new bookings. Just shows the price sensitivity of the Pune Buyer.

    VK

    I think that clearly hows that the inventory levels in Pune were high as Real used to mention. Not sure what is the state now. Also note that as the prices have risen again.. there has been a considerable drop in new bookings. Just shows the price sensitivity of the Pune Buyer.

    VK

    I think that clearly hows that the inventory levels in Pune were high as Real used to mention. Not sure what is the state now. Also note that as the prices have risen again.. there has been a considerable drop in new bookings. Just shows the price sensitivity of the Pune Buyer.

    VK
    CommentQuote
  • Originally Posted by veeemkay
    I think that clearly hows that the inventory levels in Pune were high as Real used to mention. Now sure what is the state now. Also note that as the prices have risen again.. there has been a considerable drop in new bookings. Just shows the price sensitivity of the Pune Buyer.

    VK


    In NOIDA, prices have dropped 10% in last 3 months due to heavy competition. From 2800 to 2550 psf levels.

    Cracks are beginning to show.

    If slowdown comes, expect another 2008 Sept like situation with builder crisis and delayed construction.
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  • Originally Posted by Venkytalks
    In NOIDA, prices have dropped 10% in last 3 months due to heavy competition. From 2800 to 2550 psf levels.

    Cracks are beginning to show.

    If slowdown comes, expect another 2008 Sept like situation with builder crisis and delayed construction.


    In Noida , Few raputed builder's psf rate includes everything (Parking, registration and etc).
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  • Actually the all inclusive charges are from less known builders.

    These prices of around 2500psf are for places with already existing expressway, metro and wide 45 feet sector roads and flyovers already built.

    I really pity Pune and Mumbai walas, you are being even more royally cheated by builders than us poor Delhi walas (also being screwed by builders, since 1500psf is all that these flats are worth)

    Originally Posted by Saurabh01
    In Noida , Few raputed builder's psf rate includes everything (Parking, registration and etc).
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  • Originally Posted by Venkytalks
    But your percapita figure of 11000$ per annum i.e. Rs 5.5 Lakhs per capita is really skewed by Ambani, Tata and Birla who operate out of Bombay. Majority living in the slums (and many posting here as well) are not really earning that much, are they?

    Statistically, you can drown in a river with average depth of 2 inches - which in reality is 1 inch deep everywhere except the center which is 12 feet deep!!!!:)

    National income of India per capita per annum is 1000$ and not 3000$ as you mention. Probably closer to 900-950$ after the dollar appreciated to 47.

    Still, concepts worth pondering over.


    Thanks. I pulled the GDP statistics from other websites. Perhaps, you are referring to the total per capita GDP whereas I am referring to PPP based per-capita GDP (adjusted for Purchasing Power Parity)?

    Another thing: Yes, I feel that the super-rich might be skewing these numbers a great deal. In such a case, it would be interesting to find out how much they are skewing the overall numbers. It would also be worthwhile to find out how much more the super-rich are skewing the numbers in Mumbai and Delhi vis a vis other Indian and international metros. I'm sure that other metro cities also have their overall numbers being distorted because of the super-rich.

    Plus, considering the huge population size of Delhi and Mumbai, just as the super-rich are causing the numbers to get inflated, the sheer numbers of the super-poor and poor will also be weighing down the numbers in a similar fashion. Hence, overall, we may even find that the overall numbers are largely unaffected! This is only my theory, however.
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  • Originally Posted by asliarun

    Another thing: Yes, I feel that the super-rich might be skewing these numbers a great deal. In such a case, it would be interesting to find out how much they are skewing the overall numbers. It would also be worthwhile to find out how much more the super-rich are skewing the numbers in Mumbai and Delhi vis a vis other Indian and international metros. I'm sure that other metro cities also have their overall numbers being distorted because of the super-rich.


    To understand the income mismatch in Mumbai, you have to look at the slumdwellers. 60% of Mumbai population lives in slums. Horrible statistics for "incredible" country of ours.
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  • Originally Posted by Venkytalks
    In NOIDA, prices have dropped 10% in last 3 months due to heavy competition. From 2800 to 2550 psf levels.

    Cracks are beginning to show.

    If slowdown comes, expect another 2008 Sept like situation with builder crisis and delayed construction.



    Wishful thinking....:) (though I feel the wish comes true)
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  • Thought it might sound better coming from him ...

    Folks,

    This is la newsletter from Ramesh Ramanathan of Janagraha. If you have met the guy and worked with him you will know that he is a very savvy guy. Also has been a fairly high-level banker in London (with Citi) and is not doing some very result-oriented work in the Social Sector ...

    An Unfair mortgage Market
    --------------------------
    In the ocean of disagreement about India’s economic indicators—gross domestic product growth, inflation, share prices—there is an island of consensus: the direction of interest rates. “Going up” are the words on everyone’s lips. The governor of the Reserve Bank of India pithily stated: “The direction of policy is clear—we had to ease at the time of the crisis, we have to tighten now.”
    While the average Indian will get indirectly affected in many ways by rising interest rates, there is one area where the impact will be direct. And severe. This is in home loans.

    I asked one of my senior colleagues, Francis D’souza (name changed), about the home loan that he had taken from a respected private sector institution (Francis is a chartered accountant, all the more surprising!).

    “What was the kind of home loan product that you took?” I asked.

    “Well, they only had one standard product, a floating-rate loan that was priced off their PLR (prime lending rate). The choice of tenor was flexible—I took a 10-year loan, since I am already 48 years old.”

    “So you got a your credit score, which resulted in a discount to their PLR, and this EMI (equated monthly instalment) was for 120 months?” I asked.

    “Yes, that’s right.”

    “And what happens now, if interest rates go up? How do you get to know, and what impact will it have on your EMI?”

    “The loan document said that the PLR gets adjusted every quarter, and it’s apparently on their website, but frankly, I don’t get any communication on it at all. But yes, if the rates go up, I will be affected—the EMI will remain the same, but I will have to pay more than 120 instalments, maybe 130 or so, depending on many factors that I don’t understand.”

    “When you took the loan, was there any discussion about this exposure? And also, did you have any alternative—say, a fixed-rate home loan—that was discussed with you?”

    “No, the floating-rate loan was their only product, and no, there was no discussion about the exposure that I had to moving interest rates.” He paused, and added, laughing nervously, “Frankly, I don’t look at the statements, we just hope that we will be done in 120 months!”

    Francis’ situation is similar to hundreds of thousands of Indians who have taken out floating-rate home loans over the past several years. The home mortgage business today is around Rs2 trillion, growing at 35-40% a year, according to data from the National Housing Bank. Precise data on fixed/floating mix is not available, but Adhil Shetty of BankBazaar.com tells me that “over 90% of it will be floating-rate-based. Banks don’t market fixed-rate products, and sales people are generally trained to sell floating-rate home loans”.

    A detailed check of the market suggests that most banks offer only floating-rate home loans, and a few offer hybrid fixed products. There are no pure fixed- rate loans—one large public sector bank offers a fixed-rate loan for 20 years, but it resets after five years.

    Many market observers have written about how India’s mortgage market is unfair to customers. But these debates have invariably been about one particular issue-that of the arbitrary and subjective nature of PLR setting by each individual bank.

    However, the fixed versus floating exposure issue has received little attention. Some argue that this is because there is no demand for fixed-rate mortgages-customers invariably choose to pay a few per cent less for floating-rate loans.

    But this issue cannot be dismissed as one of informed choice and caveat emptor. There are two critical aspects that need attention: One, the deeper systemic issue underlying the absence of fixed-rate home loans; and two, the issue of consumer rights and financial literacy.

    Current market practice clearly proves that banks have no incentive to sell fixed-rate home loans. But they don’t do this because there is no deep long-maturity debt market in India that allows banks to offset their duration exposure. Essentially, the banking system has no way to offset the risk of long-dated assets on their balance sheet.

    The solution? Pass on this risk to the customer. In essence, what a sophisticated banking industry cannot manage is now being handed off to the man on the street. There’s something wrong here. In the medium term, the answer will clearly come from a deepening capital market, one that can absorb longer dated assets such as home loans.

    This brings us to the second point—while deeper markets and so on will take time, banking practice needs to change right away: to educate customers about the implications of their choices, and the extent of the exposure. EMI calculators can easily have “what-if” scenarios going out over the life of the loan.

    In the meantime, my message to Francis was: “Please get in touch with your loan officer and understand your exposure. Don’t rest on the hope that ‘all is well’.”

    cheers
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  • What "exposure" are you talking of Wiseman? Please elucidate on that.
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  • Originally Posted by ttt43
    To understand the income mismatch in Mumbai, you have to look at the slumdwellers. 60% of Mumbai population lives in slums. Horrible statistics for "incredible" country of ours.


    Slum population in Pune is 40% as well!

    I tried to do some basic analysis of the population density vs per capita productivity for various cities. Delhi and Mumbai again seem to be in the same bracket.. in terms of similar population density, similar per capita GDP.

    Pune, Bangalore, Chennai, and Hyderabad however are very similar to each other.. but also different from Delhi and Mumbai. They have 1/3 the pop density of Mumbai and Delhi, and yet they all have similar productivity levels.
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  • Originally Posted by puser
    What "exposure" are you talking of Wiseman? Please elucidate on that.


    As per my understanding, exposure is financial jargon that means the total amount of money that the individual has committed to repay. I guess it would mean the loan amount plus interest amount plus other charges (basically, sum total).

    Interesting article, by the way. I too feel that the way the bank loan clauses are structured, it is completely lopsided and always favors the bank. On top of it, they charge exorbitant interest rates so that they can recover from the mistakes of their own inefficiencies and mistakes (bad loans to others etc).

    As customers, we are basically fools. The only realistic way we can play on a level playing field with others is if we put all our money in bonds, company FDs, and stocks; avoid all types of loans and insurances; and deal with everything in cash. Keep a cash buffer instead of a medical insurance. Pay for a flat/house in cash.
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