Saturday, February 09, 2008

Housing Bubble in India?

I am trying to study the parallels between the housing bubble in Japan and the one that I believe is on in India.

In Japan, housing prices in the major metropolitan regions nearly tripled from 1985 to 1991, then proceeded to lose two-thirds of their value over the next 14 years. Japanese house prices in 2007 were only slightly higher than the level before the boom, more than two decades ago.

In India too, prices have risen from 2004 to 2007 by about 300% in some cities. Comparatively, United States metropolitan region house prices rose 82 percent from the end of the last recession in November 2001 to their peak in June 2006, according to the Standard & Poor’s Case-Shiller home price index. Since the peak, house prices have declined about 10 percent, and most economists expect a further decline of 10 to 15 percent.

So, why was the Japanese housing price bubble not contained? Government officials in Japan were fearful that a strengthening yen would hurt Japanese exporters, so they not only tolerated the housing price bubble, but actively encouraged it. Funding was diverted to real estate so that a building boom would fuel consumer spending and drive up the economy.

Japan’s post-bubble recession should have lasted from 1992 to 1994, according to Adam S. Posen, a senior fellow at the Peterson Institute for International Economics in Washington. But Japanese officials were too conservative and too protective of failing banks, he said, and thus prone to policy steps that were counterproductive, like the decision in 1997 to raise Japan’s sales tax to 5 percent, from 3 percent.

Excerpted from the New York Times. You could read the original article here.





Consider how the crisis has unfolded over the past eighteen months. The proximate cause is to be found in the housing bubble or more exactly in the excesses of the subprime mortgage market. The longer a double-digit rise in house prices lasted, the more lax the lending practices became. In the end, people could borrow 100 percent of inflated house prices with no money down. Insiders referred to subprime loans as ninja loans—no income, no job, no questions asked. - George Soros in latest book

everything’s going up, there’s a feelgood factor and people tell each other how much their houses are going up at dinner parties,” says Professor Mark Stephens of York University’s Centre for Housing Policy. “Then the music stops, as it always does.”

year, Japan was a more attractive market to put money in. If you look at the US, we can now get an internal rate of return of 25% there, so why would anyone want to come to India?” - a senior executive at an international financial services group, who did not wish to be named.

people told us house prices never go down on a national level, and that there had never been a default of an investment-grade-rated mortgage bond, "Mortgage experts were too caught up." - John Paulson, trader, who bet against subprime market and made $15 billion.

most puzzling are the real-estate projects of Parsvnath. Just have a look at the Pride Asia project near Chandigarh. They are asking almost US $300K-$350 K dollars for 2 bed room apartments. They have Villas in this project that costs more than US $1.5 million dollars. It is true that some people in India have that kind of money in India. However most of their wealth is black money and that can not be used to buy these properties. Obviously, these projects have been launched keeping NRIs in mind. - Sanjeev, comment from another site

Desai, aka Bani, the star of Balalji Telefilms's soap, Kasam Se, has been house hunting for over a year. She had almost closed a 2-BHK deal last year for Rs 1.5 crore in a Oberoi Constructions' building located at Andheri, Mumbai, but when she went back to confirm it, she was asked to cough up Rs 2.61 crore. Since then, she is still house hunting. - Mumbai Mirror


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