Why Too Much Speculation On Housing Prices May Cost Everyone Dear

Economists predict housing markets of China are likely to have “their day of reckoning” in 2018, when the bubble would burst even if the country's central bank slashed interest rates to avoid “hard landing”.

According to a Bloomberg report: "Speculative buyers have eschewed Chinese stocks in favour of property, prompting even the chief economist at the central bank of the world's second-largest economy to declare that housing was in a 'bubble'." The report cites the “willingness of people to buy something because they assume they'll soon be able to sell” as the key reason behind a fall that awaits property markets of China. The report quotes University of Chicago Professor Greg Kaplan's views on the US housing bubble to bring home the point.

According to Kaplan, the chief cause of the US housing boom was that people invested "simply because people thought they would increase" in value. This started with housing and ended with the outburst of the financial crisis of 2008. The situation in India is quite similar. Fortunately, we are not yet hit by issues of epic proportions that might lead to crumbling of the financial system. Caution would be the key to avoid a scenario like that.

How is that?

Over the past decade and a half, property prices in major Indian cities shot up so high that the word affordability lost its true meaning. While the affordability factor lasted, people like you and I bought homes not only because we needed one; we invested in second and third homes thinking a sale in future would give us grand sums. The value of our homes soared, indeed. As it stands today, even for those earning six-figure monthly salaries, buying property in, say, a decent area of Mumbai or Gurgaon is not affordable. But that has become a problem for you, too.

Here is a perfect example. My landlord, who had bought a DDA (Delhi Development Authority) flat at Mayur Vihar in the 1980s when the locality was yet to see any development, is desperate to sell his house. The worth of the unit—the dilapidated structure is no beauty to the eye, mind you — stands at Rs 1.5 crore, precisely the reason why he has not been able to find any taker. Interestingly, he wants to use the money he would earn from selling this unit to buy a bigger house in Noida. National capital Delhi and its expensive real estate seem to have lost its charm for this retired government clerk.

Now, the point is what good is having an expensive property the value of which is entirely notional and which is not able to help you in the time of your need? Too much speculation in the housing market is not just a problem for authorities or developers, as a matter of fact. You and I will feel similar pains on a personal level.