Now to put it in terms of Indian real estate bubble – here is the scenario –
1) IT professionals (or allied industries) started earning money in US$
(1500 US$ pm is a good pay in India). Note that this is Outsourced
money [platinum coins in Gold Coin economy]
2) Newly joined IT workers – start purchasing property (Bubble not
built yet) by taking reasonably priced Bank loans in Gold coins.
3) Builders build and sell houses and make some 10-15% standard profit
4) IT worker pays off the loan to bank – converting the .
– Enter the speculator/”investor” – whose purpose is to make profit in this demand supply system
In an ideal greedless economy, the builder would have been happy with
his/her profit of 15% and would continue the system. But looking at the
high demand for buying (as IT companies are hiring year after year),
and inflation the prices are cranked up and a hype is created saying
that only X number of units remain (although more are available).
Builder says his profit will increase, speculative buyers want to buy
cheap and sell off at a profit.
1) Fearing losing a good deal, many IT workers take loans (remember
as long as they are are not fired they can pay back the loan) and buy
houses at increasing prices.
2) Speculative buyers buy homes to sell them off at a profit – they say worst case they can rent it out
3) Banks report robust growth – and ease lending. Builder still needs
to deliver the house, so they also borrow money from same bank/ from
stock market – IPO and build for the consumer. – Builder is confident
that sale of the homes will get him his profit even after he pays off
the loan to bank.
The bubble grows by such speed that the land that once cost 10 pieces of gold will be priced at 10 pieces of platinum.
The net asset value of the land is in fact 10 coins + inflation –
the price the buyer must pay must be 10 coins + inflation adjustment +
builders profit + interest to the bank.
All this “Growth” keeps on inflating the bubble – the Workers and
builders lend money from the bank and pay each other. If the worker
thinks – hold on a second, why am I paying 10 platinum coins for a
house worth 10 gold coins then he should have avoided the deal after
all. But he followed the crowd and took a loan of 5 platinum coins.
(his payments/EMI now soar). Then alas the reality strikes. Demand
stops as the companies halt hiring or shrink pay packages – as the
platinum coins are drying up. If the worker has enough to bail
himself/herself out – its fine. (They still think their house is worth
10 platinum coins). If not – Houston we have a problem.
The land value will not appreciate beyond 10 platinum coins, as that
would mean no one would buy it in hard times. Workers with loans who
are laid off/ have lowered salaries are in deep trouble – their homes
value is come to a standstill/reduced and their loans ares still the
This bubble has a bad story for any non platinum worker who was
earning in gold – and got a loan for 10 platinum coins. thinking that
his investment will yield enough to repay it.
Now what about the winners or losers in this game? Builders or
buyers if they default on their loans will lose property to the
bank/lender. If they do that – banks will collapse as they will have a
worthless 10 gold coin house for which they lent 10 platinum coins. (As
it happened in USA).
But in India the story is different –
For Workers/buyers there is a shame in not repaying your loan back so
the workers will have to toil their way to repay a loan – cutting down
on other expenses – slowing down other sectors. If they lose jobs and
cant get another one – they are screwed and so are the banks who will
repossess the houses.
Builders cannot start new projects and will unwind slowly hoping for
a revival – they will try to repay the loans if possible by cutting
down their margins. Builders who aren’t in a position to do this are
screwed and so are the banks who lent money to them.
So there will be deflation of the bubble than a bursting (US it
completely burst taking down the banks – who had invested this “asset
value” in other countries – hence destroying those countries as well).
In India I dont see a burst but a phussss. If jobs dry up n IT there is
no real growth possible. This is a classic case of torturing the hen
that lays golden eggs until it one day starts laying normal eggs. If
the bubble was exposed earlier (learning from the 1997 bubble), smart
people would not be in debt now. Those who are in debt are going to be
the biggest losers in this game.
Basically this is what happened in 1996-97 collapse – that time
there was a speculative bubble led by the Gulf money – this time it was