Nov 30, 2013

Asset Bubbles ,Kerala Real Estate & Advertising

Robert Shiller, one of the winners of Economics Nobel 2013 defines speculative bubbles as “a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increase.” This attracts “a larger and larger class of investors, who, despite doubts about the real value of the investment, are drawn to it partly through envy of others’ successes and partly through a gambler’s excitement.”

Few years back, from about year 2000 onwards, this trend has been in focus in Kerala. Practically nowhere in the state, you can buy small plots of land at less than a lakh INR per cent. Aided by the easy availability of credit, people have been gobbling up land, villas & flats in every nook and corner.  Lot of people, especially middle class have been clinging on to the moto " Real Estate prices never go down " or " As long as there is black money, real estate cannot go down ".. I find both these arguments really stupid.. If  asset bublbles can form and crash in US, Japan, practically every South East Asian country , & China, there is nothing unique about India or Kerala.

More than that, it is important to understand the market forces to understand the real estate sector. Housing is a primary need. A primary need based demand on real estate cannot easily go down, unless there are structural problems in the society or economy.. However, lot of people bet on real estate as an investment ( after they have a primary unit to stay ). This demand is the root cause of bubble. The problem with this kind of demand is that investors expect it to appreciate. And when the primary demand dries up ( because of the level of prices ), investors tend to lose value..or it ceases to appreciate. This situation is highly unstable when this secondary demand is backed up by easy credit.

So, when does this bubble burst - Here also, I'm a big fan of Shiller . Quoting from his essay "Bubbles  Forever " - One problem with the word bubble is that it creates a mental picture of an expanding soap bubble, which is destined to pop suddenly and irrevocably. But speculative bubbles are not so easily ended; indeed, they may deflate somewhat, as the story changes, and then reflate.

I think the bubble is deflating, the signals are pretty much evident in the advertisements that are coming in the media . If one reads the schemes correctly - Ready to move in flats often means that builder is finding it difficult to sell the units , and he has a huge mortgage to repay - you can  make out these facts himself.  Increased advertisements of villas often mean that they are not selling themselves. Besides this, Kerala has one of the lowest rent to value ratio when it comes to apartments even in Kochi, Trivandrum or Calicut.. Meaning, it is better to rent an apartment than buy it in these places.

So where will the demand shift to ? I think there is a huge pent up demand for afforable housing at entry level.. As well as high end homes with top quality features. The time of fly by night builders and those who construct substandard flats are long gone by. And, no longer should one expect the value of land to appreciate substantially. We are in a high interest rate regime for the foreseeable future. Unless rates come down substantially, the bubble is going to stay in a deflated, not yet burst condition

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