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 puser
    May be our children will see some action on this recommendation by panel

    But the RE bubble would have already burst by then, though it is good on long term that such recommendations are implemented ASAP. This is good not only for buyers but professional builders as well.
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  • RBI Might Increase Loan Rates on Commercial Real Estate Projects Further

    The Reserve Bank Of India (RBI) might make scrounging more costly for builders by asking banks to set apart more funds for loans to commercial real estate projects.

    http://www.indianrealtynews.com/real-estate-india/rbi-might-increase-loan-rates-on-commercial-real-estate-projects-further.html
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  • Resale costs may shoot up in result of this...
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  • Read today that RBI is planning to further increase the ROIs by 0.5% as current steps have failed to curtail the rising inflation, which is now almost at 10% (WPI).
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  • Originally Posted by realacres
    Read today that RBI is planning to further increase the ROIs by 0.5% as current steps have failed to curtail the rising inflation, which is now almost at 10% (WPI).

    Yes this massive inflation will bring more upward rates revisions.
    Bye the way there is another news that HDFC is offering 8.5% loan rates for first 2 years and then rates will be reset. Sounds familiar? yes this is how sub prime mess was created, banks offered cheap mortgage loans and when interest rates were rising in 2007 immediately those loans were reset and people has to pay steep EMI. In many cases home owners could not afford so they opted for foreclosure by filing bankruptcy. Now why common man brought these houses when they knew they wont be able to pay EMI , because bankers and realtors have convinced them that if you buy house and in then 2-3 years house price will appreciate by 30%. You sell that house and one can earn ~30%(exclude transaction costs) profits on borrowed money. There are examples where countrywide has given loans to McDonald’s employees in California who earns mere 2000 monthly and they got loan near to 300k. After mortgage loan resets those EMI became 1500 per month so they just left houses. In US banks can offer 95% home loan so people didn’t have to loose much they just left houses saying their gamble did not work. In some cases house values depreciated so much that their loan amounts were more than actual current price.

    This is over simplification of complex subprime mess. My point is why in the world HDFC or for that matter any private bank in India wants to ride this lion again when they know consequences of same. This may be because they have given huge loans to large real estate companies (DLF/Pashavanat) or crook builders/developers and they don’t want to those loans to become NPA. So easy bakara's RE buyers. Just manufacture demand by giving paid news in TOI about how RE is becoming hot. Also advertise helps where kid is scrubbing on wall and father allows that as its their home.Now when everything is rosy offer cheap loans in rising interest era. And please don't worry India is shining again, so they will be able to get those loan money back.

    From ICICI’s loan recovery incidents we know how private banks will recover their loan money from retail loan consumers.

    I don’t know whether current RE prices are bubble or not as i am not expert. But seems its like when you are drunk u just keep on drinking coz u can not afford to come out of hangover as you don’t want to accept reality.

    I may be wrong about all this but individuals who are buying for end use will be causalities and obviously investor who are fueling this RE rally to multiply their money. As we have been taught that FD does not beat RE and stock market in long run. And so we are left with just RE investment as avenues to beat inflation.


    CommentQuote
  • Good Post

    Originally Posted by informsantosh
    Yes this massive inflation will bring more upward rates revisions.
    Bye the way there is another news that HDFC is offering 8.5% loan rates for first 2 years and then rates will be reset. Sounds familiar? yes this is how sub prime mess was created, banks offered cheap mortgage loans and when interest rates were rising in 2007 immediately those loans were reset and people has to pay steep EMI. In many cases home owners could not afford so they opted for foreclosure by filing bankruptcy. Now why common man brought these houses when they knew they wont be able to pay EMI , because bankers and realtors have convinced them that if you buy house and in then 2-3 years house price will appreciate by 30%. You sell that house and one can earn ~30%(exclude transaction costs) profits on borrowed money. There are examples where countrywide has given loans to McDonald’s employees in California who earns mere 2000 monthly and they got loan near to 300k. After mortgage loan resets those EMI became 1500 per month so they just left houses. In US banks can offer 95% home loan so people didn’t have to loose much they just left houses saying their gamble did not work. In some cases house values depreciated so much that their loan amounts were more than actual current price.

    This is over simplification of complex subprime mess. My point is why in the world HDFC or for that matter any private bank in India wants to ride this lion again when they know consequences of same. This may be because they have given huge loans to large real estate companies (DLF/Pashavanat) or crook builders/developers and they don’t want to those loans to become NPA. So easy bakara's RE buyers. Just manufacture demand by giving paid news in TOI about how RE is becoming hot. Also advertise helps where kid is scrubbing on wall and father allows that as its their home.Now when everything is rosy offer cheap loans in rising interest era. And please don't worry India is shining again, so they will be able to get those loan money back.

    From ICICI’s loan recovery incidents we know how private banks will recover their loan money from retail loan consumers.

    I don’t know whether current RE prices are bubble or not as i am not expert. But seems its like when you are drunk u just keep on drinking coz u can not afford to come out of hangover as you don’t want to accept reality.

    I may be wrong about all this but individuals who are buying for end use will be causalities and obviously investor who are fueling this RE rally to multiply their money. As we have been taught that FD does not beat RE and stock market in long run. And so we are left with just RE investment as avenues to beat inflation.




    Thanks for the informative post Santosh. I hope people read it carefully. It will help them only actually.:)
    CommentQuote
  • Originally Posted by informsantosh
    Yes this massive inflation will bring more upward rates revisions.
    Bye the way there is another news that HDFC is offering 8.5% loan rates for first 2 years and then rates will be reset. Sounds familiar? yes this is how sub prime mess was created, banks offered cheap mortgage loans and when interest rates were rising in 2007 immediately those loans were reset and people has to pay steep EMI. In many cases home owners could not afford so they opted for foreclosure by filing bankruptcy. Now why common man brought these houses when they knew they wont be able to pay EMI , because bankers and realtors have convinced them that if you buy house and in then 2-3 years house price will appreciate by 30%. You sell that house and one can earn ~30%(exclude transaction costs) profits on borrowed money. There are examples where countrywide has given loans to McDonald’s employees in California who earns mere 2000 monthly and they got loan near to 300k. After mortgage loan resets those EMI became 1500 per month so they just left houses. In US banks can offer 95% home loan so people didn’t have to loose much they just left houses saying their gamble did not work. In some cases house values depreciated so much that their loan amounts were more than actual current price.

    This is over simplification of complex subprime mess. My point is why in the world HDFC or for that matter any private bank in India wants to ride this lion again when they know consequences of same. This may be because they have given huge loans to large real estate companies (DLF/Pashavanat) or crook builders/developers and they don’t want to those loans to become NPA. So easy bakara's RE buyers. Just manufacture demand by giving paid news in TOI about how RE is becoming hot. Also advertise helps where kid is scrubbing on wall and father allows that as its their home.Now when everything is rosy offer cheap loans in rising interest era. And please don't worry India is shining again, so they will be able to get those loan money back.

    From ICICI’s loan recovery incidents we know how private banks will recover their loan money from retail loan consumers.

    I don’t know whether current RE prices are bubble or not as i am not expert. But seems its like when you are drunk u just keep on drinking coz u can not afford to come out of hangover as you don’t want to accept reality.

    I may be wrong about all this but individuals who are buying for end use will be causalities and obviously investor who are fueling this RE rally to multiply their money. As we have been taught that FD does not beat RE and stock market in long run. And so we are left with just RE investment as avenues to beat inflation.




    I dont think 8.5% interest rate is cheap. However, this is a good article and food for thought. Thanks!
    CommentQuote
  • Originally Posted by informsantosh
    Yes this massive inflation will bring more upward rates revisions.
    Bye the way there is another news that HDFC is offering 8.5% loan rates for first 2 years and then rates will be reset. Sounds familiar?



    Very good article. These teaser loans by SBI & HDFC is bad practice and should be banned by RBI. It has diluted concept of floating loan.
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  • Originally Posted by mahesh pune
    Very good article. These teaser loans by SBI & HDFC is bad practice and should be banned by RBI. It has diluted concept of floating loan.



    floating rates are still very much there.. after 2 years whatever is the floating rate would be applicable..

    Suppose the HDFC floating rate "floats" between 9% to 9.5% from 2010 to 2015

    One person, chintu, takes this existing floating rate scheme and pays EMI for 5 years..

    Another person, pintu, takes HDFC DUAL rate scheme (so called teaser loan) by paying "fixed" 8.25% for the first two years and from third year onwards , pintu pays whatever is the market's floating rate of HDFC, which, according to our assumption is 9% to 9.5%


    clearly the "teaser" home loan rates are better here .. Peace :)
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  • whole Ramayan is preached and if you ask some one "who was Sita?" How would you feel if that person says "Sita? who Sita?"

    We should learn from our and others experiences, to make our own life better.
    CommentQuote
  • Originally Posted by informsantosh
    .........I may be wrong about all this but individuals who are buying for end use will be causalities and obviously investor who are fueling this RE rally to multiply their money. As we have been taught that FD does not beat RE and stock market in long run. And so we are left with just RE investment as avenues to beat inflation.

    Very good post Santosh. I would like to inform that the cases of people defaulting has already started. Just yesterday, one fellow in RE told me that few buyers in Mittal projects have defaulted & builder is threating to cancel the agreement with 20% deduction in paid amount till date. Also, some buyers have not yet taken the possession of his ready poss flats at Sun Orbit as the last couple of installments have not been paid. Man, the figs which I have is only 65 people have come to stay here despite the fact that this project poss was given last year itself. Cancelations have taken place in Sun Universe as well.

    Similar issues are there in case of Kumar builders, Goel Ganga & Aditya builders as well. Severe defaults. Now the thing is buyers are stuck & builders too. I feel that if this no. of defaulters continues to rise, the NPAs will be huge, already it has risen by more than 3% YoY.

    These crook builders with greedy banks coupled with RE bakras are sitting in the bus which has no brakes & going downhill. So, many should thank god if they missed such bus;).
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  • Originally Posted by RAJESHP
    whole Ramayan is preached and if you ask some one "who was Sita?" How would you feel if that person says "Sita? who Sita?"

    We should learn from our and others experiences, to make our own life better.

    The problem is that many people feel that Ravan won't kidnap Sita at first place & even if he does, Ram & Hanuman will be least bothered to rescue her. In this assumptions, they then get crushed by Ravan:D.
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  • Originally Posted by realacres
    Cancelations have taken place in Sun Universe as well.

    many should thank god if they missed such bus;).


    Right realacres.
    When visited builder's office for cancellation of my flat 2 months back, I could see a bundle of canceled agreement appx 20-30 files in a project of 150 flats. These cancellations may be due to below reasons:
    1. Buyers/investors loosing hope and canceling as taking possession is loss-making preposition.
    2. Builders offering incentives to some buyers to move to a bigger flat from earlier registered flat.
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  • Real Acres, as per my interaction with Jitu sir, I learned that bank first make person to make his/her own contribution (i.e. self contribution) and then disburses a loan.

    So when does a person gets defaulter because he has made contribution and loan is disbursed by builder; now buyer and bank have to confront each other in case buyer is 'defaulter'

    Please correct if I have missed few niche cases of transaction.

    In addition, I am getting some calls for ready posession apartments by individual sellers, saying they want immediate sale; could they be defaulters and trying to get rid of loan burden because of reduce (or overrated) self's repaying capacity?

    Originally Posted by realacres
    Very good post Santosh. I would like to inform that the cases of people defaulting has already started. Just yesterday, one fellow in RE told me that few buyers in Mittal projects have defaulted & builder is threating to cancel the agreement with 20% deduction in paid amount till date. Also, some buyers have not yet taken the possession of his ready poss flats at Sun Orbit as the last couple of installments have not been paid. Man, the figs which I have is only 65 people have come to stay here despite the fact that this project poss was given last year itself. Cancelations have taken place in Sun Universe as well.

    Similar issues are there in case of Kumar builders, Goel Ganga & Aditya builders as well. Severe defaults. Now the thing is buyers are stuck & builders too. I feel that if this no. of defaulters continues to rise, the NPAs will be huge, already it has risen by more than 3% YoY.

    These crook builders with greedy banks coupled with RE bakras are sitting in the bus which has no brakes & going downhill. So, many should thank god if they missed such bus;).
    CommentQuote
  • Originally Posted by puser
    Real Acres, as per my interaction with Jitu sir, I learned that bank first make person to make his/her own contribution (i.e. self contribution) and then disburses a loan.

    So when does a person gets defaulter because he has made contribution and loan is disbursed by builder; now buyer and bank have to confront each other in case buyer is 'defaulter'


    hey the self contribution is limited to down payment, a person still pays EMI and defaults if he does not pay EMI for more than 3 months I think.

    Originally Posted by puser

    In addition, I am getting some calls for ready posession apartments by individual sellers, saying they want immediate sale; could they be defaulters and trying to get rid of loan burden because of reduce (or overrated) self's repaying capacity?


    Sellers chasing buyers for immediate sale, First sign of change from Sellers market to buyers market.
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