Why the property market shot up

Hello and welcome to yet another blog that will make many disagree and hate me! Hopefully some will agree.

The property market had gone up dramatically in the past 15 years or so (been slow past 3 years now), and there’s various theories why this happened. There is a demand and supply theory. Increasing population, easy loans, rising middle class, better infrastructure etc. All valid. Then there is the theory that India is becoming a “super power” in the long run and so the amount of money flowing in from all around the world is making it go up. That may make some sense too. High inflation has also led to increase in prices. Surely.

But I think 2 things hold the most importance and are not talked about often:

1. Total amount of money in circulation.

source: tradingeconomics.com

If you see the rise became dramatic somewhere 2002-2004. A large amount of money got added into the circulation and it showed up a little later in the increase in prices of real estate.

When there’s extra bucks lying around, the general tendency is to invest it and not keep it because we may waste it (I would). And what else than real estate. Also since most of this surplus is in cash aka black money, where else to stash it than real estate. Its real (physically there) and usually holds its value and gives appreciation in long run and rentals in the short run. Here’s the graph for increase in money supply in India.

2. Total black money in the market. The surplus cash traders, businessmen, industrialists had, had to go somewhere. Real Estate it is! Also the black money of the politicians (their money is blacker actually) had no other option than buying big chunks of land or other properties and usually in someone else’s name to not be in the net of scrutinies from Income Tax and other govt agencies. Builders jumped on to it and so did financiers, short term investors and traders of flats, lands, farms etc. That led to huge profits and markets going up crazily.

For anything in this world (and maybe others) one would see the worth of buying something based on the kind of returns one can get. Whether capital prices will increase or not is a different thing since no one knows for sure. One sees the rental returns from the investment. Initially the rental returns were very high when this uptrend started. The EMI for an apartment was close to the amount of rent one would pay so it made a lot of sense buying. And then shortly after, it wasn’t a great option anymore from that viewpoint but the increase in prices that people saw made that equation fade away from their minds and people kept on buying to a totally irrational point.

school facing properties

At this time the prices haven’t gone up for about 3-5 years or so and in many markets the prices are lower than their all time highs reached 3-5 years back. South Delhi has been holding stably as compared to other markets but the prices aren’t increasing really. I have my own ideas about what would be a rational market price to buy a home, but then who knows that never happens, as people follow the herd and aren’t really quite educated on the topic. So I don’t expect complete rationalization, but rather look forward to enjoy the ride and play the game! Just get the best deals possible and if it doesn’t seem your cup of tea to buy a home, just rent one until you get to a wealth point that it doesn’t bother you much (it will always bother a bit I guess).

I would love to hear your views on this subject and welcome you to connect with me about it.

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