Sunday, May 20, 2012

The Indian Real Estate Bubble: Signs from Surat City

Indian central bank RBI is fueling the real estate bubble since many years by keeping the rate of interest artificially below the natural rate of interest, which is determined by the societal time preference. When RBI keeps the rate of interest artificially lower, it induces or encourages entrepreneurs to borrow huge amount of money from banks to start lengthy projects which uses more roundabout methods of production. They are fooled by RBI in thinking that the supply of real savings is increasing which is lowering the rate of interest. In reality it is just RBI's money printing and creating money out of thin air process that is keeping the rate of interest lower. This results into mal-investment in those lengthy projects which are unsustainable in the long-run because the real saving is not forthcoming. RBI money printing finally results into inflation which forces the authorities to increase the rate of interest and this is the beginning of the bust of the prior artificial unsustainable boom. We call this bust, recession. The projects which were started by entrepreneurs are no longer feasible and so they are stopped totally or plans are changed to make them shorter. Economy starts to liquidate prior mal-investments which results into unemployment for those people who were employed in those lengthy projects. If the central bank and government don't interfere in this correcting recessionary process, then, economy soon recovers and healthy sustainable progress resumes. But, if they do intervene - as it always happens - via their monetary and fiscal policy, then, it exacerbates the problem and the mild recession turns into deep depression.

As I said above, RBI and the Indian government is fueling a real estate bubble which will soon bust. The artificial high prices of apartment homes are unsustainable and the correction finally will arrive. Recently I shot a short film capturing the evidences of this real estate bubble in Surat city, my home town. Below is that film. You will see the North West (Athwa) zone of Surat city in this film. The housing boom is clearly visible. This boom is not limited to Surat; it is visible in all major urban areas of India. Recent news are suggesting that the real estate bubble in Ahmadabad has already started to pop (see here). As I said, the Indian real estate bubble is heading for a crash. 


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  3. This comment has been removed by the author.

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