Sunday, December 11, 2011

We get what we deserve - Part 2 (Real Estate Bubble and Interest Rate)

When I say Indian government fanned, patronised and encouraged the bubble in Real Estate sector in India I mean it.

The intention of the government may be good that they want everybody to have own home, comfort living etc. So exactly for this reason, they encouraged everybody to go for housing loan and pressed banks to give housing loans. Government is also giving tax sops for those who service housing loans. Sounds good until this point. But what the governments forgot to do is some sort of regulation in this sector. Due to this reason, the rates climbed up hugely and the greedy builders/developers lobby made a killing and still trying to do that by looking bakras in Aam Aadmi log.

As written in previous article, government has successfully avoided problems during last down trend by giving sops to builders/developers. Even then that down trend gave much needed reality check to large builders. But still they managed quite efficiently and even now they maintain there is nothing wrong in real estate in India and they claim prices are going to go up only for ever.

Many of us forgot the fact that, interest rates are high now and there is no reason why it cannot continue to stay at this level for quite a period? Inflation is not relenting. Government is shamelessly waiting for the base effect to take over to show some moderation in inflation instead of seeing the real reason.

RBI has raised rate for 13 times without any meaningful outcome. RBI has to be candid in their observation. They should have come out openly and said that they wanted to drain out the liquidity in the market to bring down the inflation. Instead of that, they said they wanted to keep the growth and at the same time they also wanted to control the inflation. I wonder whether they forgot their lessons learned in degree classes:)

The system has learnt to live with their 0.25 percent REPO/REVERSE REPO increase and it has not done anything to the liquidity and the bubble continues to grow. Had they rised interest rates at the rate of 0.5% for three consecutive months that would have been a stern message and that would have give us a much needed relief in the inflation front.

However, now it seems RBI has woken up and trying to tighten the screws after seeing the slump. Still I think Bankers lack the backbone to tell their political bosses the truth. The truth is that Real Estate has to soften if you want inflation has to soften.

( In the next article, we will see Corporate Broker's influence)

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