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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  • Does Black money and corruption really keep Indian economy afloat?!

    Folks,

    I hear a lot of people justifying hgih RE prices on the power of Black money and corruption (to a lesser extent). Let us see some other cases across the world, if you thought India was the benchmark on these parameters ...

    Take the case of Greece ...

    1. Last year only 15000 of the 11,000,000 population declared income above Euro 1,00,000. This is like India of the 1970s (when the whole of India had only 7000 lakhpatis!).

    2. Only last week did it become mandatory for shops to give receipts!!!

    3. Tax evasion is estimated to deprive the taxman of around Euro 15 Billion and is estimated to be 25% of the whole economy.

    Going a little wider an estimated 20% of the economies of Spain, Italy and Portugal are suspected to be in the shadow economy (Black).

    None of this has helped any of these countries from being on track to declaring Debt Default and be taken to the cleaners.

    So, are these the reral reasons? Or is it better Financial Management of the countries (the realm of RBI and Ministry) the more important reason for countries being safe or going down?

    Your opinions?

    cheers
    CommentQuote
  • Originally Posted by realacres


    Stocks in current times? No man, I won't enter, & RE is big no-no. Even Rakesh Jhunjhunwala doesn't have RE in his portfolio;).


    You have to invest in something.

    If stocks are a no-no (overvalued), RE is a no-no (overvalued), bonds are a no-no (interest rates going up), gold also a no-no (since dollar is strengthening), that leaves just one year FD yielding a measely 6.5% interest with tax liability (since 3 year FD is also a no-no, interest rates going up).

    I am currently into 30% stock (metals, hotels, cement, Pharma, FMCG, small/mid cap selection portfolio), 30% RE (booking) and 30% bonds (Liquid MF, PPF and 1 year FD only). A small bit of gold ETF~1% only.

    I hope I get by. Inflation is being scary - rents are going up where I live, food costs are up, children's school fee is astronomical at 1,40,000 per annum for 2 kids (That was my salary per annum 10 years ago). Movies, travel, clothes, fruits, parking, eating out - you name it - prices are up.

    Where prices havent gone up, services have deteriorated (crowded roads, no electricity, no water, no clear air, crowds everywhere, ticket not available, mall like a mela with full parking) - these are indirect ways of being expensive.

    India is a middle class nightmare
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  • I keep it very simple ...

    Originally Posted by Venkytalks
    You have to invest in something.

    If stock is no-no (overvalued), RE is no-no (overvalued), bonds are no-no (interest rates going up), gold also a no-no (since dollar is strengthening).that leaves just one year FD yiending a measely 6.5% interest with tax liability (since 3 year FD is also no-no, interest rates going up).

    I am currently into 30% stock (metals, hotels, cement, Pharma, FMCG, small/mid cap selection portfolio), 30% RE (booking) and 30% bonds (Liquid MF, PPF and FD only). A small bit of gold ETF~1% only -
    I hope I get by. Inflation is being scary - rents are going up where I live, food costs are up, children's school fee is astronomical at 1,40,000 per annum for 2 kids (That was my salary per annum 10 years ago)



    Venky,

    The world is a very dangerous place today. And punters are mainly rotating their money from sector to sector and skimming whatever little money is there to be squeezed from each, because rersults are in general patchy and not steady, leave alone rising steadily.

    So, realising that this market is NOT currently favoring the long-term investor (I have some reasons for that conclusion), I concentrate solely on the Nifty. And further on speing in its quirky behavior so that I can take advantage. It seems to be working very well for me!:D

    Another point. We really are in a deflationary situation. If you set aside the agricultural sector, in most other sectors you will find that prices are on a gradual long-term inflation-adjusted decline. Just go down main street and look at the discount (and going-out-of-business-firesale) signs. Almost every shop has signs from 30% off to 80% off.

    And if prices are holding up, volumes are significantly lower - which is also a sign of deflation (after all you can always try to sell an Alto at 10 lakhs; only your volume will be zero).

    Does this look like an inflationary sign?

    cheers
    CommentQuote
  • I agree to venkytalks .
    Burden for buyer always remain same .....
    since 2004-5 ..asault on poor RE buyers has increased ..

    but still many pune builders are holding the prices in lean period ...they will put project on hold when outlook is bad and hype rates as and when home loan rates goes down ....

    I know case of Bhujbal brothers .. in their upcoming townshipin kothrud... they has one ready building ready for possession ..... we went to see some flat for my friend ... but looks at the increaed home loan rates ( at that time it was aroun 14 % ) .. builder shown no interest in selling .. hoing that we would press him for negotiations ... he told us that presently we are not opening bookings for this building .... very strange reply but true ...

    So looking at the arrogance of these cash reach buliders .. for me it looks we should not see any downturn in pune RE prices in short term .. atleast for next six months ...may be RE rate may go down if home loan rate increases after march budget ..:)
    CommentQuote
  • no deflationary sign in RE

    at least for for pune RE there are no "deflationary" signs.... if you visit any builders office ....
    hope still its not like main street ... :D
    CommentQuote
  • Originally Posted by wiseman
    Folks,

    I hear a lot of people justifying hgih RE prices on the power of Black money and corruption (to a lesser extent). Let us see some other cases across the world, if you thought India was the benchmark on these parameters ...

    Take the case of Greece ...

    Your opinions?

    cheers


    Wisey, take the case of USA. Their business men go all over the world, do local business/corruption, park funds in offshore accounts and pay no tax.

    This is also black money.

    Same with every European country. The entire economy of Switzeeland, Luxembourg, Channel isslands and various islands around the world is based on black money. Indian black money contribution to this stack of offshore funds is also substantial.

    This is the same money which comes in and goes out of countries in a flash as FII. This is the same money sloshing around in the system which elevates prices of whichever asset class finds its favour.

    In my estimate, total world wealth is around 420 Trillion (including yearly GDP addition and depreciation of assets). Of this, around 70 trillion is in liquid assets moving around. The assets being chased by this amount are much less than 70 trillion.

    The question is, how much value erosion of this 70 trillion will take place?

    Who will be left holding the baby?

    How much of this 70 trillion will be extinguished by actual haircut and how much will be extinguished by erosion in purchasing power of various currencies?

    Which countries citizens will lose more?

    Which class of a countrie's citizen will lose more?

    This 70 trillion is being kicked around by the whole world like a football. At some point the bladder will puncture and all the air will come out.

    70 trillion is like 5 years GDP for USA, 1 and a half times the entire world's GDP.

    Assuming there is still 20 trillion of value left in the underlying assets, it is as if the whole world worked for 1 full year without any effect/return - total waste of 50 trillion dollars.

    Of course, this 50 trillion never really existed. This amount was created on paper and will burn out like a piece of paper.

    But somebody will suffer - or maybe everybody will suffer.
    CommentQuote
  • Originally Posted by amolk09
    at least for for pune RE there are no "deflationary" signs.... if you visit any builders office ....
    hope still its not like main street ... :D


    NOIDA RE has deflated like crazy. From 3000 psf rates, they are now 2500 psf and still going down.

    Some 50 new projects have been launched in NOIDA. Competition has reduced the prices. This is being currently discussed in the NOIDA forum.

    Unfortunately, many of these projects will not progress for long periods of time or will get abandoned.

    So in reality as discussed earlier with realacres, lowering price is also another way of pushing prices up (!!!!!!)
    CommentQuote
  • Originally Posted by wiseman
    Venky,

    And if prices are holding up, volumes are significantly lower - which is also a sign of deflation (after all you can always try to sell an Alto at 10 lakhs; only your volume will be zero).

    Does this look like an inflationary sign?

    cheers


    Wisey, as I have discussed many times with you before, I believe that in a deflation, prices of essentials go up and prices of non-essentials go down. At some point shortages take over and every deflation is followed by an inflation.

    Given the kind of crazy currency printing witnessed in the recent past, hyperinflation some time in the next 10 years also cannot be ruled out.

    Signs are not good.

    I cannot speculate on Nifty futures trading - even if a spread is guaranteed - I have a salary to earn.:)
    CommentQuote
  • What happens in Noida may not have effect in Pune...From 3000 psft (Pune outskirts)...how much do you expect the drop - 2000psft?

    Or rather putting it in a proper what is win(consumer)-win(builder) rate according to you (and predictors of deflation) in different areas of Pune; keeping in mind builder bought land for construction at over priced rates too

    Originally Posted by Venkytalks
    NOIDA RE has deflated like crazy. From 3000 psf rates, they are now 2500 psf and still going down.

    Some 50 new projects have been launched in NOIDA. Competition has reduced the prices. This is being currently discussed in the NOIDA forum.

    Unfortunately, many of these projects will not progress for long periods of time or will get abandoned.

    So in reality as discussed earlier with realacres, lowering price is also another way of pushing prices up (!!!!!!)
    CommentQuote
  • Originally Posted by puser
    What happens in Noida may not have effect in Pune...From 3000 psft (Pune outskirts)...how much do you expect the drop - 2000psft?

    Or rather putting it in a proper what is win(consumer)-win(builder) rate according to you (and predictors of deflation) in different areas of Pune; keeping in mind builder bought land for construction at over priced rates too


    Well, how much HAVE they bought the land for?

    Just about 4-5 years ago, my friends bought apartments in Bangalore outskirts (with much better infrastructure than Pune) for about 1100-1500. I'm talking about a time when we were in the middle of the price rise, not before.

    What is so special about the magic figure 3000, that prices cannot go below it?? Considering the crapola construction, do you really think it costs them 1500 or 2000 a sq ft to build your apartment floor??

    Best part of all, if you actually calculate the real rate per sq ft you end up paying, based on the actual carpet area (and not some number pulled out of someone's backside), and factor in all the "misc" charges, it is closer to 4000 than 3000!

    Edit: I tried this in Park Island once, and found out I was paying 6000 a sq ft when the builder was claiming less than 4000.

    The builders have just got used to 200% and 300% markups, that's all.
    CommentQuote
  • Originally Posted by puser
    What happens in Noida may not have effect in Pune...From 3000 psft (Pune outskirts)...how much do you expect the drop - 2000psft?



    Sorry Puser, in Pune there is a builder cartel i.e. organised gang. No chance of price dropping whatsoever.

    Just like Bombay has organised crime, being an organised city, Delhi has disorganised criminals, due to general north Indian tendency of being disorganised and chaotic in everything, even in crime. In Delhi you have crimes of passion which is not there to the same extent in Bombay - in Bombay crime is also business.

    So in NOIDA, the builder gangs are small time and disorganised.

    Pune has a big time gang, well organised by your politicians.

    They will never ever drop price. If a builder drops price, he will be killed - business is business.
    CommentQuote
  • Land rates have nothing to do with RE prices

    Originally Posted by puser
    .....keeping in mind builder bought land for construction at over priced rates too

    Samrajya:- Got it free,
    Sun Orbit/Satellite:- Deal was done in 2003,
    Nanded City:- Land cost less than INR 80/sq ft,
    Amanora:- Same as above,
    Lavasa:- Almost free, forcefully grabbed,
    Blueridge:- Less than INR 65/sq ft,
    Megapolis:- Same as above,
    Camellia, Magnoli, Crystal garden, Kumar Shantiniketan, Ornage County; Baner-Pashan link road:- Land deals done in 2000-02,
    Crosswinds, Balewadi:- Land deal done in 2002-03,
    Gold Coast, Baner:- Land deal done in 2002-03,
    Man, the list can go on.........

    Even today,the land at Pashan-Balewadi-Baner (pancard club) is available for 800-900/sq ft, if you buy in acres, the prices drop. The land near BR is going for INR 130/sq ft, buy in acres & price falls below INR 100/sq ft!!

    Fact remains that land rates are just an excuse. Real fact is builders want 200-300% profit margins, else how does the logic of builder that land rates went up & hence ready poss are expensive than bookings by whopping 250% during boom times?
    CommentQuote
  • Manipulation

    Originally Posted by Venkytalks
    Wisey, take the case of USA. Their business men go all over the world, do local business/corruption, park funds in offshore accounts and pay no tax.

    This is also black money.

    Same with every European country. The entire economy of Switzeeland, Luxembourg, Channel isslands and various islands around the world is based on black money. Indian black money contribution to this stack of offshore funds is also substantial.

    This is the same money which comes in and goes out of countries in a flash as FII. This is the same money sloshing around in the system which elevates prices of whichever asset class finds its favour.

    In my estimate, total world wealth is around 420 Trillion (including yearly GDP addition and depreciation of assets). Of this, around 70 trillion is in liquid assets moving around. The assets being chased by this amount are much less than 70 trillion.

    The question is, how much value erosion of this 70 trillion will take place?

    Who will be left holding the baby?

    How much of this 70 trillion will be extinguished by actual haircut and how much will be extinguished by erosion in purchasing power of various currencies?

    Which countries citizens will lose more?

    Which class of a countrie's citizen will lose more?

    This 70 trillion is being kicked around by the whole world like a football. At some point the bladder will puncture and all the air will come out.

    70 trillion is like 5 years GDP for USA, 1 and a half times the entire world's GDP.

    Assuming there is still 20 trillion of value left in the underlying assets, it is as if the whole world worked for 1 full year without any effect/return - total waste of 50 trillion dollars.

    Of course, this 50 trillion never really existed. This amount was created on paper and will burn out like a piece of paper.

    But somebody will suffer - or maybe everybody will suffer.

    Man, I have a firm opinion that global economics is driven by handful of people who can manipulate rather than theoretical analysis. Just have one war & see how calculations change:D.

    Economy is the art of manipulating & not logic.
    CommentQuote
  • Originally Posted by realacres
    Samrajya:- Got it free,
    Sun Orbit/Satellite:- Deal was done in 2003,
    Nanded City:- Land cost less than INR 80/sq ft,
    Amanora:- Same as above,
    Lavasa:- Almost free, forcefully grabbed,
    Blueridge:- Less than INR 65/sq ft,
    Megapolis:- Same as above,
    Camellia, Magnoli, Crystal garden, Kumar Shantiniketan, Ornage County; Baner-Pashan link road:- Land deals done in 2000-02,
    Crosswinds, Balewadi:- Land deal done in 2002-03,
    Gold Coast, Baner:- Land deal done in 2002-03,
    Man, the list can go on.........

    Even today,the land at Pashan-Balewadi-Baner (pancard club) is available for 800-900/sq ft, if you buy in acres, the prices drop. The land near BR is going for INR 130/sq ft, buy in acres & price falls below INR 100/sq ft!!

    Fact remains that land rates are just an excuse. Real fact is builders want 200-300% profit margins, else how does the logic of builder that land rates went up & hence ready poss are expensive than bookings by whopping 250% during boom times?


    Is land available anyway ? Why people are not buying LAND but buying flat in stalled projects of colorful brochures
    CommentQuote
  • Originally Posted by puser
    What happens in Noida may not have effect in Pune...From 3000 psft (Pune outskirts)...how much do you expect the drop - 2000psft?
    Or rather putting it in a proper what is win(consumer)-win(builder) rate according to you (and predictors of deflation) in different areas of Pune; keeping in mind builder bought land for construction at over priced rates too


    Price in longterm is always decided by Demand VS Supply. Right now, because of our politicos and PBAP, price rise is artifical even when there is no such big demand at this prices.

    Actually demand comming in because of these regular price hikes by PBAP. Still out in the market are stupid(or extra smart!) buyers/investors, who see price rising from recent dip and believe bull are back in market and prices can double in 5 yrs, so perfect investment for them. They dont seem or do not want to understand (completely blind folded by greed, I would say) who would buy from them, if people cannot afford todays price, how can they afford double the prices after 5 yrs??

    Rate would be what majority people can afford, whatever that translate into. I am sure its well below the current rate. Regarding "keeping in mind builder bought land for construction at over priced rates too", that does not matter at all. This will result in what is called distress sale by the builder. All these stupid decision make people/corporates bankrupt.

    If price stagnation with respect to 2008 peaks continue for this year, I expect bearish mood in the market by the end if this year. All the buyers magically disappear when markets become bearish.
    CommentQuote