Out of Money Experience!

What will an investor in Indian Real Estate say if you ask him for money, “I’m having an out of money experience.”

Liquidity has dried up.

Maybe real estate prices are unlikely to fall to pre-boom levels because the fundamental change in perceptions concerning capitalism’s triumph will be longstanding. Changes in people’s fundamental ways of thinking are not easily reversed. Nor, therefore, is their interest in housing as a major speculative investment asset likely to change. High and rapidly rising home prices tend to stimulate new housing supply, which in turn tends to undermine prices.

But there is a view which states that over a period of years, as people see how much new supply there is, they may begin to revise their view that homes are such a terrific investment, causing a gradual, but eventually significant, drop in home prices. All that is required is that growth in housing supply eventually outstrips investors’ faith in capitalism to sustain faster growth in demand. But in India this is unlikely to happen as the demand is exponentially higher than even the super supply. The question is affordability: What Price and How many can afford?

Behavioral finance has repeatedly proved that whenever asset prices start escalating, the initial interpretation has been of a ‘bubble’. In-depth analysis of price appreciation in real estate and the reasons thereof would help in comprehending these fears. Price appreciation in real estate is backed by the following fundamentals: With land always being a scarce resource, property prices would follow basic economics of demand-supply and pricing.

GDP is measure of the total value of production of all residents producing units of a country or territory in a specified period, before deducting allowance for consumption of fixed capital. GDP takes into it’s fold both population size and how much they earn (produce). However, it seems reasonable to suggest that the level of speculative demand (or supply) is related to the general level of confidence in the short to medium term performance of the economy. More so when second assumption is consistent with the idea that there are forces which pull prices towards the “fundamental value”, counteracting forces that pull them apart.