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 punerebuyer


    RE buying is India is still purely, sentimental/vintage decision. RE sells and breeds on emotions.

    Unitech, DLF announcing big plans is nothing new as it feed fear-psychosis.
    These co's can announce big plans and sit on it for 4-5 year coz they have land and our loan-money to bank on.
    But what has happen to your intelligent middle-class It is obivious who is greater-fool
    CommentQuote
  • Originally Posted by hitmady
    But what has happen to your intelligent middle-class

    Emotions have killed IntelligenceD. People need to think from 1ft higher!!
    CommentQuote
  • Originally Posted by RAJESHP
    This is because, these investors, in general, are very optimistic people and they take hell of time to convince themselves that price can actually fall.

    Also another reason is still the mood in the market is flat(neutral) to bullish, and for investors its only bullish, so they keep convincing themselves that they are going to get their target price.

    Same people when the mood in the market changes to bearish(and they are convinced about this), panic and buyers too disappear from the market like anything.

    Yes this person is not in need of money and hence not selling. However i doubt if he will get the expected even if market goes up. Though the quality is good, its a little old and will only get older. People generally want to buy something new. I have also seen a lot of other properties (both new and old). They are all of poor/average quality. I dint even consider proceeding further to negotiate on rent. I wonder why they bought these flats in first place. All these would have cost a minimum of 35 lacs. and surely most of them must have bought on loan. I can think of 3 reasons
    1)During boom time, people thought price will go up forever and feared they might not be able to buy in future if they didn't buy. They just bought whatever that was in their budget
    2)Easy credit. Since bank gives upto 85% of the total price.
    3)Following the crowd. I think most of the people bought just because someone else bought. (relatives/friends etc). They think living in a so called own house ( and leveraging about 85%) is a status symbol.
    CommentQuote
  • When can we say RE is reached to rock bottom

    All, I have read most of the recent posts of this topic..so many interesting views and discussions..one question that always strikes to my mind is..when can we say that now this is rock bottom price and go ahead and buy the flat...I guess here everyone will have different figures (also opinions based on locations) but for the sake of discussion..let's say at balewadi..what price we call it as rock bottom price?

    If I think about it..I guess different people will have different figure in their mind mostly driven by their finalcial capacity to afford..and if this is true...that means there is no thumb rule for bottom price and whenever the figure in one's mind touches...he/she will go ahead and book the flat..which in tern means delay in reaching ACTUAL bottom price as builders are getting enough bakaras as they reduce the price by say Rs50 psqft...Now during this slow transition..if even small hype comes in the market..say IT gets in boom again (hard to believe but lets take this as an example)....psqft prices will shoot faster than they were falling...and once hype goes..it takes longer to recover to original price...

    So coming back to original point..when can we say that this is the ACTUAL bottom price...and what would be the criterion to decide that?
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  • Originally Posted by kaatesha
    They are all of poor/average quality.

    They think living in a so called own house ( and leveraging about 85%) is a status symbol.


    Very noticeable in Delhi's DDA flats - by the time the price appreciates significantly from purchase price, it is ready for demolition
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  • Originally Posted by realacres
    Emotions have killed IntelligenceD. People need to think from 1ft higher!!


    real,
    buyers are burried meters deep, they need to rise-up meters highD
    CommentQuote
  • The state at which Pune RE is currently in, it would be useful for us to read about the dutch tulip mania: ]http://en.wikipedia.org/wiki/Tulip_mania

    Some interesting excerpts:

    "Many individuals grew suddenly rich. A en bait hung temptingly out before the people, and, one after the other, they rushed to the tulip marts, like flies around a honey-pot."

    "People were purchasing bulbs at higher and higher prices, intending to re-sell them for a profit. However, such a scheme could not last unless someone was ultimately willing to pay such high prices and take possession of the bulbs. In February 1637, tulip traders could no longer find new buyers willing to pay increasingly inflated prices for their bulbs. As this realization set in, the demand for tulips collapsed, and prices plummeted—speculative bubbleburst

    http://en.wikipedia.org/wiki/Stock_market_bubble
    CommentQuote
  • In long run as it is very well said by experience people " the day you buy property you will always find expensive "
    CommentQuote
  • The greater fool theory ...

    Originally Posted by asliarun
    The state at which Pune RE is currently in, it would be useful for us to read about the dutch tulip mania: ]http://en.wikipedia.org/wiki/Tulip_mania

    Some interesting excerpts:

    "Many individuals grew suddenly rich. A en bait hung temptingly out before the people, and, one after the other, they rushed to the tulip marts, like flies around a honey-pot."

    "People were purchasing bulbs at higher and higher prices, intending to re-sell them for a profit. However, such a scheme could not last unless someone was ultimately willing to pay such high prices and take possession of the bulbs. In February 1637, tulip traders could no longer find new buyers willing to pay increasingly inflated prices for their bulbs. As this realization set in, the demand for tulips collapsed, and prices plummeted—speculative bubbleburst

    ]http://en.wikipedia.org/wiki/Stock_market_bubble


    This is the popular greater fool theory followed up every bubble ...

    But Indian RE is not yet a bubble as in how stocks have gone up. Here is how the tulip mania played out ... check the image ...

    cheers


    This is the popular greater fool theory followed up every bubble ...

    But Indian RE is not yet a bubble as in how stocks have gone up. Here is how the tulip mania played out ... check the image ...

    cheers


    This is the popular greater fool theory followed up every bubble ...

    But Indian RE is not yet a bubble as in how stocks have gone up. Here is how the tulip mania played out ... check the image ...

    cheers


    This is the popular greater fool theory followed up every bubble ...

    But Indian RE is not yet a bubble as in how stocks have gone up. Here is how the tulip mania played out ... check the image ...

    cheers


    This is the popular greater fool theory followed up every bubble ...

    But Indian RE is not yet a bubble as in how stocks have gone up. Here is how the tulip mania played out ... check the image ...

    cheers


    This is the popular greater fool theory followed up every bubble ...

    But Indian RE is not yet a bubble as in how stocks have gone up. Here is how the tulip mania played out ... check the image ...

    cheers
    Attachments:
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  • The real woes of investing in realty

    very nice article in ET

    here is an excerpt:

    "This is fine as long as you are working, but post retirement, it could prove fatal. Recently, I came across an old couple, who own six properties between themselves and their son, but can’t afford a medical surgery and the postsurgery expenses, despite the fact that one of them earns a decent pension.

    They are now caught in a bind — they can’t rent their vacant houses for fear of losing its control; but neither are they able to sell it despite their best efforts. Instead, if they had invested in fewer properties and had diversified portfolio, including equities, bank FDs, post-office deposits coupled with a medical insurance, their old age would have been much happier.

    The lesson is clear: the life is uncertain, so spreads your bets and never fall in love with an asset just because it is in circulation."

    and here is the link

    ]http://economictimes.indiatimes.com/quickiearticleshow/5603045.cms
    CommentQuote
  • Very True...I dont know why ppls are so mad abt RE...if you see some good MFs, they have also given almost equal or better return than RE...and the main advantage of MF is very liquid & you can sell in parts like, if you have 50 lacs in MF then you can sell say like 10 lacs for any requirement & keep rest in the MF, but in case of RE this is not the case, either you have to sell or not sell..

    So, I think nobody should buy more than 1 house...this is not only good for them but its great service to society as well, as this will reduce the demand for RE in RE mkt:)

    Originally Posted by ziblu
    very nice article in ET

    here is an excerpt:

    "This is fine as long as you are working, but post retirement, it could prove fatal. Recently, I came across an old couple, who own six properties between themselves and their son, but can’t afford a medical surgery and the postsurgery expenses, despite the fact that one of them earns a decent pension.

    They are now caught in a bind — they can’t rent their vacant houses for fear of losing its control; but neither are they able to sell it despite their best efforts. Instead, if they had invested in fewer properties and had diversified portfolio, including equities, bank FDs, post-office deposits coupled with a medical insurance, their old age would have been much happier.

    The lesson is clear: the life is uncertain, so spreads your bets and never fall in love with an asset just because it is in circulation."

    and here is the link

    ]http://economictimes.indiatimes.com/quickiearticleshow/5603045.cms
    CommentQuote
  • Originally Posted by ziblu
    very nice article in ET


    ]http://economictimes.indiatimes.com/quickiearticleshow/5603045.cms

    Great article. Thanks Ziblu

    Great article. Thanks Ziblu

    Great article. Thanks Ziblu

    Great article. Thanks Ziblu
    CommentQuote
  • Originally Posted by wiseman
    This is the popular greater fool theory followed up every bubble ...

    But Indian RE is not yet a bubble as in how stocks have gone up. Here is how the tulip mania played out ... check the image ...

    cheers


    Wiseman, you are quite knowledgeable in finance.. but I feel I should ask:

    Do you think that 300%-400% price rise in the last few years is not a bubble? I ask this question especially because the price rise was driven not because of any intrinsic value addition in our cities (like better roads, Metro, electricity, etc.). The price rise was instead mainly mainly driven by increased liquidity in the form of easy to obtain home loans.

    Did the exact same thing not happen recently in our stock market, when the stock prices went through the roof because of foreign money from FIIs?
    Then, when the FIIs withdrew their money, the stock market collapsed. Then, they put in some money again, and the stock market inflated again!

    Isn't our real estate market following the exact same pattern? Only difference, instead of FIIs, it is the banks and financial institutions providing this burst of money to anybody and everybody.

    At least the Indian companies are adding a lot of value to their stakeholders by growing their profits, markets, margins, etc. The real estate in Pune for example has done zilch in the last 10 years. Apart from a few roads that were cemented for the Commonwealth games, what value addition has really happened to merit this kind of hyper price rise?
    CommentQuote
  • Nice article. I have seen such examples myself.
    A few weeks ago I came to know about an ITG, staying around where I stay.
    He Owns one 2BHK and one 1BHK. Now earning handsome salary, he bought both of these houses on speculations. But now is unable to spare money for expenses after paying EMI. so he decided to rent out both the houses and he himself lives in another cheaper and smaller 1BHK that saves him extra 2K per month. little surprise that this kind of people are around in society.


    Originally Posted by ziblu

    ......
    "....Recently, I came across an old couple, who own six properties between themselves and their son, but can’t afford a medical surgery and the postsurgery expenses, despite the fact that one of them earns a decent pension.
    ........

    CommentQuote
  • Originally Posted by aditi sharma
    Nice article. I have seen such examples myself.
    A few weeks ago I came to know about an ITG, staying around where I stay.
    He Owns one 2BHK and one 1BHK. Now earning handsome salary, he bought both of these houses on speculations. But now is unable to spare money for expenses after paying EMI. so he decided to rent out both the houses and he himself lives in another cheaper and smaller 1BHK that saves him extra 2K per month. little surprise that this kind of people are around in society.


    Now this is what i call a Rich Pauperly Miser :p
    CommentQuote