Wednesday, May 30, 2012

It comforts you :)

Guys! hope you all would agree when I say  we feel happy if somebody shares your views on important such view is pasted here...I took it from the blog India housing bubble the url is shared below..


RE is in a clear bubble and the govt. should have allowed it to go bust in 2008 but they did not. Instead, they let it blow even bigger. And that is how bubbles operate - when everyone thinks its bust time, they grow even bigger and suck in even more number of people. The resulting clean up takes even longer and is even more painful.

Look at equity markets. If they rally 25% in the next 6 months even then they will be at the same level as they were 5 years backk in Jan 2008. So no returns for 5 years even in nominal terms.

The same things is coming for RE

eal estate is in a bubble by design, not by co-incidence.

The thing is, if you are the government of any nation on this planet today, you have to show literally crazed growth rates as a part and parcel of "globalism", and the usual way to do that is to emit as much money as you can from your central banks.

Unfortunately, this money, if uncontrolled, causes a rather unpleasant effect called price inflation, which governments understandably are scared of, given that unleashing inflation on the poverty stricken masses is a certain recipe for regime change at best, and the guillotine at worst.

Diverting this newly minted money to avenues like real estate is the only way that countries may print up wads of cash without causing significant inflation in prices of day to day goods.

Thus, governments create artificial incentives, such as tax breaks and so on for people buying houses to prop up and sustain real estate.

It is no wonder then that real estate bubbles are so resilient, and when they burst, they usually take down the entire national economy with them. And so, governments must protect real estate prices at all cost.

This is like riding a tiger - once you hop on, there is no way for you to hop off because the moment you do, you will become the tiger's dinner. The ride continues to get wilder, but you hang on for dear life.

But then an external event happens - the tiger slows down, or stumbles, or speeds up, or takes a turn, or whatever, and you lose your balance and fall. You get eaten, but you can then blame it on the external event.

Thus, the fundamentally flawed idea of the Euro can be safely blamed on Greece; or the fundamentally flawed idea of inflation of the money supply can blamed on the subprime crisis.

With this background, I trust you realize that the situation is this: If you want to get your real estate prices under control, you will have to reduce your rate of inflating the money supply.

If you do that, you will kill the general economy - real estate loans will die, taking many banks to the grave with them, exports will plunge because of a stronger currency; NRIs will find it harder to invest in India and so on.

But you will save the rupee.

Or continue on the same path, real estate in nominal terms will go up; exports will boom, NRI money will flow in again and so on.

But you will kill the rupee.

Governments rarely choose the first option; they continue to destroy the currency till real estate prices reach levels that are so high that they naturally correct; and at that time it becomes too late to save real estate or the currency.

Then they drag their feet, hoping for either a scapegoat to lay the blame on, or a miracle to save their asses.

If the populace is especially docile, like in Japan, you get lost decades, wherein everything stagnates for extended periods of time and people generally experience creeping reductions in their purchasing power.

In India, you can bet that the government will not let real estate prices come down in nominal (i.e., Rupee) terms. They will weaken the currency till they can get away with it, i.e., till foreign governments refuse to lend or till the rise in import prices threatens to destabilize the coalitions.

Then they'll try to hop off the tiger by reducing the rate of money printing, but that very action will be the trigger for a massive real estate crash.

The message will go out to the marginal real estate speculator that real estate prices will stagnate or fall; and that will coerce him not to buy; causing a real fall; causing others to not buy, causing a steeper fall... and so on.

Engineers know this as a positive feedback loop, and once this happens, there is no way to avoid instability or complete failure of the system.

This is the simplest explanation that I can come up with for what will happen. Bubble deniers will no doubt bring in many counter arguments - such as demographics, such as corruption, black money, and so on; but this is the mechanism of a bubble burst, and every one bubbles past has burst this exact way, regardless of all other variables.

The question is what are you going to do.

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