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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  • Many of our businessmen are like this-use money taken for "X" for "Y".
    Then neither X nor Y gets delivered properly.
    They are fully aware that 99.99% of clients will not go to court.
    Our industry has run several lakh crores NPA,taken several lakh tax concessions over the years.
    Giving industry free hand should be possible if they were socially conscious and had the integrity to deliver like TVS group,Quantum MF,Tatas.
    These organisations have delivered under the same confusing and misapplied laws.
    There used to be a builder in Chennai-Alacrity builders- who stood like a rock following to the last comma properly all the myriad laws of Chennai corporation.
    When they used to refuse bribes,delay in sanctions were the result,but the company would never bend and pay buyers market rent for delayed period.
    Unfortunately they wound up after few years,but their buildings are still in good condition and speak of quality construction.
    There are too many bad eggs in the business environment.
    These good companies(example mentioned above) have delivered under the present conditions-rules,bylaws,inspector raaj etc.
    Changes in industrial regulations may be necessary but change should be with caution.
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  • Originally Posted by ThodiSiZamin
    Instagram was never a business forget good or bad. A company that is piling on losses upon losses with no visible business model is sight can hardly be classified as a business. Call it the silicon valley roulette.



    Which business makes money from the get go?? Unless its some govt backed business or some business which needs special license to operate its very difficult to make accounting profit from day 1.

    Most of these startups have to handle stock option handouts as expense. So on a cash flow basis these companies might be cash +ve at a very small level but at the P&L level they will show massive losses. Here is one table from Yelp. The company has account $30 million as expense on stock compensation when the cash outflow would be zero. So the cash flow of Yelp will be much healthier than the P&L and that is what allows it to expand.
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  • Originally Posted by ThodiSiZamin
    What you are concluding is infact the "survivorship bias" as well as "selection bias". Of all the startups, you only picked the one which was really successful in scaling up and being really popular. Even in that small set, you picked a company which was acquired by a big company.

    In fact if you look at a lot of such companies all most of them end up doing is selling ads in one way or the other. Its a tragedy that the best brains in the world are working on how to increase the click through rate on ads instead of curing the proverbial cancer.

    Because of lack of critical scale in India, such startups are not exactly going to fly in India. we can come up with some gaadha-majuri justdial types startups



    I didnt pick WhatsApp and Instagram. It was picked up by someone else to show that very few IT jobs are getting created and that these companies are able to operate with very few employees.

    I am saying for every 1 Instagram there are 100s of failed startups and these startups dont fail cause they dont have good software developer (VCs have billions to burn on startups to paying 150K to a software engg + stock options is nothing extraordinary) but cause they lack execution of business acumen.. The story about why facebook won but Friendster lost will explain why companies in a good business can also fail.
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  • Just to make the point more clear about stock compensation and P&L losses. Yelp has a P&L loss of $10 million in 2013 but its operation cash flow was +ve $21 million. This $21 million is what allows Yelp to spend money on new equipment - mostly more capaacity on AWS cloud - and in capitalizing product development cost.

    The $26 million spent on stock compensation is not actual money leaving Yelp. It will dilute Yelp stock when the options are exercised but they do not impact the cash position of the company right now. So when folks look at just the P/E ratio of young companies they usually miss out the cashflow that such asset light companies can create
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  • Originally Posted by herohiralal
    Just to make the point more clear about stock compensation and P&L losses. Yelp has a P&L loss of $10 million in 2013 but its operation cash flow was +ve $21 million. This $21 million is what allows Yelp to spend money on new equipment - mostly more capaacity on AWS cloud - and in capitalizing product development cost.

    The $26 million spent on stock compensation is not actual money leaving Yelp. It will dilute Yelp stock when the options are exercised but they do not impact the cash position of the company right now. So when folks look at just the P/E ratio of young companies they usually miss out the cashflow that such asset light companies can create


    Yelp is selling advertising and placement. Instagram had no plans whatsoever of revenue generation. It was a classic case of "build it and they will come" and we will figure out the revenue part later.

    And yes its true that a lot of jobs in the IT infrastructure space have already been lost. Now thanks to services like AWS even a 5 member team can scale their startup to millions of users. Another firm uses AI for Level 1 and Level 2 support.

    The more abstract your job is, the less likely chance that it will ever be automated. Hence creative or analytical jobs will always be there. Process orientied or mechnical jobs will definitely be automated.
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  • Originally Posted by Sj2013
    It is not good to compare MMR data with Pune data, because Mumbai region is fully packed and cost is not affordable to people working in Mumbai. Pune area (excluding main city) has many project expensive but affordable at least to people working in IT companies if not all.

    Will you expect growth in registration for sale of properties on Pune's prim city area? No right, So why to look at fall in registration in those area and comment on Pune RE?


    So why is inventory over-hang in Pune increasing QoQ ?? Please see the following :-



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  • Originally Posted by herohiralal
    Real Estate is project driven. Once a project is completed and handed over the future for the builder from the builder is quite small so auto and FMCG are not comparable with real estate.


    Real estate is project driven ?? :D If this is the case, why DLF is unable to pay even the 580 Cr penalty slapped on it ??
    Can’t pay Rs 580 crore due to financial crunch: DLF to SC

    Can’t pay Rs 580 crore due to financial crunch: DLF to SC - The Times of India


    Now DLF is going to pay this money in installments mostly by selling of lands.
    Also, KUL has completed many projects, yet it is broke, why ??

    And the top 6 listed builders have collective debt of over 20,000 Cr. Add to it all listed + non-listed builders & then see the fig. !! :D

    It's not without a reason that banks are not lending to RE & RBI has put RE commercial loans in high risk category.

    Originally Posted by ThodiSiZamin
    This is where escrow accounts come into picture. The builders have been using up people's money to come up with other launches rather than completing their previous launches.

    RE with a 40-50% margin, I don't think the builders would be short on cash if it hadn't been for their own greed.

    +1. Spot on man.
    So many builders who were capable of executing merely 1 projects started multiple projects & got goofed up. It was more of greed to make as much money as possible when money was chasing RE.

    What else one can call selling flats to buyers without even EC in place ?? Many projects started even without NA in place. Isn't this greed ??
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  • Originally Posted by vaibav123
    Many of our businessmen are like this-use money taken for "X" for "Y".
    Then neither X nor Y gets delivered properly.
    They are fully aware that 99.99% of clients will not go to court.
    Our industry has run several lakh crores NPA,taken several lakh tax concessions over the years.
    Giving industry free hand should be possible if they were socially conscious and had the integrity to deliver like TVS group,Quantum MF,Tatas.
    These organisations have delivered under the same confusing and misapplied laws.
    There used to be a builder in Chennai-Alacrity builders- who stood like a rock following to the last comma properly all the myriad laws of Chennai corporation.
    When they used to refuse bribes,delay in sanctions were the result,but the company would never bend and pay buyers market rent for delayed period.
    Unfortunately they wound up after few years,but their buildings are still in good condition and speak of quality construction.
    There are too many bad eggs in the business environment.
    These good companies(example mentioned above) have delivered under the present conditions-rules,bylaws,inspector raaj etc.
    Changes in industrial regulations may be necessary but change should be with caution.


    NCP is going to now get kicked left, right & centre. Real entertainment will start in next few months. Already Nashikkar Bhujya is having sleepless nights. :D

    The biggest fund raisers for builder in & around Pune are themselves running for cover. :D
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  • Originally Posted by realacres
    Real estate is project driven ?? :D If this is the case, why DLF is unable to pay even the 580 Cr penalty slapped on it ??
    Can’t pay Rs 580 crore due to financial crunch: DLF to SC

    Can’t pay Rs 580 crore due to financial crunch: DLF to SC - The Times of India


    Now DLF is going to pay this money in installments mostly by selling of lands.
    Also, KUL has completed many projects, yet it is broke, why ??

    And the top 6 listed builders have collective debt of over 20,000 Cr. Add to it all listed + non-listed builders & then see the fig. !! :D

    It's not without a reason that banks are not lending to RE & RBI has put RE commercial loans in high risk category.



    Which part of project driven did u not understand to link it to the penalty? Revenue for RE companies is lumpy and not regular as say a FMCG or IT services company.

    What is it that is confusing you about the way real estate business operates and that it is different that putting a factory for manufacturing soaps and selling it to the consumers.

    Who is saying lending to RE has come down or banks are not lending to RE??

    "n the period between April and September 2014, it rose by Rs 39,600 crore — from Rs 5,40,800 crore in March 2014 to Rs 5,80,400 crore in September 2014."
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  • Originally Posted by ThodiSiZamin
    Yelp is selling advertising and placement. Instagram had no plans whatsoever of revenue generation. It was a classic case of "build it and they will come" and we will figure out the revenue part later.

    And yes its true that a lot of jobs in the IT infrastructure space have already been lost. Now thanks to services like AWS even a 5 member team can scale their startup to millions of users. Another firm uses AI for Level 1 and Level 2 support.

    The more abstract your job is, the less likely chance that it will ever be automated. Hence creative or analytical jobs will always be there. Process orientied or mechnical jobs will definitely be automated.


    So what?? Instragram has tons of money from VCs to survive. It is not that Instragram could not monotize its huge user base its just that it choose to stay away from it till it build significant mass. Facebook followed the same strategy and today is raking in more than 9 billion $$ in revenue.

    AWS has surely made it a lot easier to start and scale a business but the jobs in the tech sector have grown tremendously. More companies are innovating and hiring people and are able to launch their services across the global in a matter of hrs thanks to the cloud. I have already shared the data on jobs growth in the tech sector in previous posts.
    CommentQuote
  • Builders & Real Estate Bulls Theory Proved Wrong

    Originally Posted by realacres
    So why is inventory over-hang in Pune increasing QoQ ?? Please see the following :-






    What is the use of increase in inventory if the "increase in inventory is not translating into reduction of prices"?

    Note - I am talking about Pune RE only and believe in final sell price as mentioned in index - II.
    CommentQuote
  • Empty malls echo India's sorry retail story

    Retailers have been hit hard by rising rentals, lower sales and now e-commerce.

    The once-buzzing Atria Mall, a premium shopping destination in South Mumbai, barely has visitors - despite it being a relaxed Sunday evening. While the escalators run up and down, store assistants wait for customers to show up. Perhaps they know it is a futile wait. A third of the shops at the mall have already shut down, and the echoing expanse has a sombre mood, like that of a dying institution. Over the past year, the owners have put the mall on the block and then taken it off several times.


    In other parts of Mumbai too, malls are in similar decline. In Navi Mumbai, in the east, the Gold Souk, which was meant to be a glittering ode to India's insatiable demand for gold, silver and diamond jewellery, and the Wedding Mall, designed to be a one-stop shop for all wedding-related needs, have been converted into commercial offices. Another mall nearby, the Palm Beach Galleria, is also being refashioned into a residential complex with car and jewellery showrooms.


    In the National Capital Region, things are no better. At least four malls in Rohini, Vasant Kunj, Pitampura and Gurgaon are lying vacant and looking for buyers, say property consultants. In others, the footfall has decreased, forcing developers to tweak their business plans. Prozone, a joint venture of apparel retailer Provogue and Capital Shopping Centres, which was looking to build six malls in the country, has scaled down its plans to three malls. Its malls in Nagpur, Aurangabad and Coimbatore will be developed as a mixed-use complex with commercial and residential properties in equal measure. In Indore, the company has decided to build a residential complex instead of a mall and has kept its plans open-ended for Mysore. "Four malls were coming up in Indore, whereas the opportunity that existed was for one or two malls at the most," says Provogue Managing Director Nikhil Chaturvedi. "It made no sense. The same is the case with Mysore."


    Empty malls echo India's sorry retail story
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  • Originally Posted by Sj2013
    What is the use of increase in inventory if the "increase in inventory is not translating into reduction of prices"?

    Note - I am talking about Pune RE only and believe in final sell price as mentioned in index - II.


    Please see the 2nd graph. It shows price fall of 7.3% in 3 months.

    And if index 2 is only what you say, then why believe when builder says sold out ?? :D
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  • I have already shared the data on jobs growth in the tech sector in previous posts.
    To me this projection is too short term. I assume folks in late 1970s-early1980s Detroit were making similar projections about the growth of the manufacturing/auto-industry.

    The standardization and commoditisation of most of the software stack will hurt eventually. The upswing in tech employment is short-term at best. Anyway, this debate will not be settled here. We can catch up in 2020 and compare notes :)
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  • Festive season fails to cheer banks this year

    The festival season this year has failed to bring in good news for banks. Bankers believe consumers' reluctance to buy has made this season worse than even the previous two years, when lenders had witnessed tepid demand.

    Jairam Sridharan, head of consumer lending & payments at Axis Bank, says this festival season has been one of the worst for the banking sector.

    Also, real estate inventory shot up and continued to rise despite a slew of offers being given by builders and banks. According to a survey by Liases Foras, a property consultancy firm, inventory in the Mumbai Metropolitan Region has shot up to 50 months, and that in the National Capital Region has hit 83 months.

    Other bankers also agree that growth this festival season has been lower than the previous two years. "Credit offtake has been poor and we have not seen any significant demand during this festival season. The growth this year has been lower than last year, in the retail segment across industry," said A Surendran, head of retail banking at Federal Bank.


    MUTED DEMAND


    Dry spell:
    Lenders have seen tepid demand this season, as consumers have been reluctant to make purchases.

    Real estate: Inventory has risen despite a slew of offers from builders and banks.

    http://www.business-standard.com/article/finance/festive-season-fails-to-cheer-banks-this-year-114120100042_1.html
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