Should we buy flat today in Pune or NOT ??? Reality Expert say NO ..we shouldn’t !!!!!!!!!
Spend your time by reading following article.
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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,
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?
22.) Drop in interest rates would make people jump into market again which will increase the prices or atleast won't let RE prices crash.
WRONG. The RE prices reflect the median income of the area. RE market in Pune was largely driven by IT, NRIs & investors. IT industry is slashing jobs or cutting the pays & perks. Due to global economic crunch, NRIs lack funds today. Several investors have burnt their fingers in stock market & they see no appreciation but a RE correction today (some may call it as rates are ‘Softening’). Hence, all these elements that were the main drivers for RE boom are absent today. At the end of the day what matters is whether one can afford EMIs or not. To what extent is priciple amount & interest component is altogether diferent issue. Try to see to it that what is fixed (RE rates) are low so that interest rates fluctuation won't bother you much. The RBI figs. posted by fellow blogger clearly shows how loan dibersement has decrerased despite hike in RE prices. This only means that people aren't simply taking loans. Home loan NPAs are increasing every day passing by. Hence, banks are in no mood to lend further for a highly depreciating asset.
23.) Demand is there hence, drop won't take place.
WRONG. Demand is there but definately not at current levels. Current market is dictated by end users & end users alone. Hence, builders can't today enjoy on investors money & neglect the end users.
24.) No new projects are being announced. This will lead to low supply hence pushing up the rates.
WRONG. Even if 58% of the projects are abandoned, there simply aren't any buyers for the rest 42%. Add to it the investors 40% additional supply which will flood the market this year.
25.) Small correction here & there doesn't amount to crash.
WRONG. The correction of 20% & more, if is small, then another 'Small correction' is sufficient for crash. Consider this as a 'Whirlpool'. Once you are in, you are not out unless you sink to the bottom.
26.) I just want to own my own house.
CORRECT. Most people do and that's fine. Buyers will get their chance when housing costs half as much and they have saved a fortune by renting. House ownership is great - unless you ruin your life paying for it. If you can save even just 10% on the price of a house, you can retire several years earlier than you would otherwise. If you can save 50%, then you can easily take a ten year vacation and still come out ahead.
Conclusion:-
1.) People are simply not spending due to current RE & economic scenario.
2.) Investors aren't there, ending the speculation.
3.) Current market is end user dictated. End user doesn't find rates affordable/logical.
4.) Builder>> End User or
Builder>> Investor/speculator>> End user.
The chain ends with end user. End user is the king. Hence, expect distress sales from investors too.
5.) Result is visible on ground. Builders slashing prices, thus defying PBAP diktat. One builder reduces rates & now it is catching steam that will set off chain reaction for RE crash.
6.) Most importantly, the buyers are not homeless. They have a house even if it means rented one. Those who want to upgrade from 2BHK to 3/4BHK have put their plans on hold, as they too are not desperate. Due to several layoffs, people are going back to their native place, thus increasing the number of flats on rent.
7.) Several news posted earlier, clearly indicate that bankers, economic analysts as well as realty observers state that the RE prices will come down by 50-60% from their peak value, irrespective of place, location. These people are neither bears nor bulls, but analysts with neutral perspective.
8.) Most importantly, the holding capacity of buyers is greater than builders. Builders have taken loans from various finance sources with interest rates as high as 20-35%. These are turning defaulters & if they want the finance institutions not to put an attachment to their properties, they will have no other option but to sell off current inventory a very low rates.
Who blinks first was the question late last year. Today we have the answer:- Builders.
Like it or not, the current Pune RE scenario is similar to that of a ship heading inside the ‘
To conclude, the builders require your money. So, whom should you believe? Facts or theories put forth by boomers? Think for yourself.
I would be very glad if you can share your thoughts on my article.
Comments most welcome & I would be happy to hear from you.
