rickyofsnow

Will constant hyper inflation of Indian economy and long term Indian currency devaluation keep Indian property value high?

History has proved Indian Inflation is a major factor in the rise of property price in India.

Property has proved to be the best hedge to beat inflation and INR devaluation.

See the price basic needs, what do you guys think?

Srinidhi

I am also waiting for the prices to come down , But people are expecting inflation / hyper inflation in coming years.But donno what will happen to my hard earned FD deposit and RE

vijai5

dear wiseman

what happens to RE during hyperinflation or high inflation?

Economist

Traditionally India has been a high inflationary economy.

Very high population growth.

Large migration to urban cities like Chennai.

Concentration of Chennai population in small area ( Chennai is geographically a small city for the size of its population when compared with foreign cities with similar population)

Industrial investment and growth concentrating mainly in Cennai (For TN)

You know what will be impact of all the above on RE.

REUser

In the next 5 years Chennai will be one of the costliest place in th world but without any infrastructure

nabishek

Very interesting question, its a paradoxical one actually.

When more money chases less goods, it leads to rise in inflation and inrease in price.

The government can choose to arrest the rise by adopting one of the following methods

1.Increase the cash reserve ratio,alter repo and reverse-repo rates thereby increasing the interest rates encouraging people to deposit money with the banks for better rerurns and refrain from borrowing to spend.

2.Import from other countries and provide subsidies to increase production to bridge the demand-supply gap.

The Hon'ble Finance minister has made it clear that the stimulus is to stay till the budget and they would decide whether to continue or withdraw based on the then economic situation.They are preparing to deal with inflation based on point (2).So, increase in interest rates may not be much till the budget.

If we analyse whether there is really a supply crisis, it will be evident that production has not come down because people have absorbed all instantly.Rather it is due to the fact that it was not viable for the producers to add more inventory and sell at lower prices so they are delaying production and witholding supply.This scenario where industry production is reducing in terms of volumes and inventory thereby resulting in increase in price is known as stagflation.Its not healthy for any economy.

The government knows it well.They are only delaying withdrawal of stimulus hoping that the producer-consumer balance restores quickly with people buying into the "all izz well" talk everywhere and start spending again in the hope of rising salaries and growth.I personally feel cost of living is very high and things wont return to normalcy unless price comes down considerably so that people can stop digging into their savings and spend of their salary.

The symbiotic relationship of demand-supply deciding price has not been restored yet in our economy.They are still dependant on external sources of money through stimulus, FDI, NRI inflows etc.

So far things have been looking to get back on track showing a promising future of steady lower rate of growth.Opinion in the industry is still divided regarding the sustainability and the debate is still wide open as to where we are heading towards.

We are now in a situation which we witnessed couple of years earlier when the interest rates had bottomed out and people had confidence to invest in India and Real estate to beat inflation and were prepared to borrow and leverage.

Huge roadblock now is that properties in good locations still remains unaffordable to many.Real Estate being a long term investment depends more on the affordability and location than market timing.

People who have confidence in Real Estate, The only questions to ask themselves before going ahead is whether RE is affordable?Does it make sense to buy instead of rent?does it provide value for money?Is there scope for further capital appreciation in the location you have selected?Does your job provide enough security and confidence to service your loan for 15-20 years?

The capacity to answer the above questions is subjective to each individual and their financial position.It wont be right to generalise and say one has to buy now or not.If answer is affirmative for the above questions,its the right time for oneself.

wiseman

Abishek,

Since this is a fairly exhaustive response, I will jump directly to the only points of contention I have.

First, I am of the opinion that a significant part of the high-price economy is due to the substantial amounts of money which has "temporarily" parked itself from abroad within our economy. Like the US, our people think that this is a permanent fixture and so this money can be treated like income and thus spent like "expenditure", instead of looking at it like "capital" and investing it.

Secondly, out Govt has gotten into a corner by borrowing so much that our Fiscal Deficit (which was declining in the early 2000s mainly because it was being substituted by imported hot-money) has become nearly 12% overall is clear that it cannot borrow and provide bailouts to kissans and continue to start gigantic projects to keep this GDP growth going forever. The Private Sector is busy making money out of the Govt spending and is not itself increasing its investments or output by any meaningful measure.

Thus, minus this substantial hot-money, price inflation of all things should rightfully be much lower and thereby our GDP and its growth rate should also be much lower than the 9 being bandied about. In other words, the sustainable, long term growth by our country is (in my opinion) not going to be 9% and if it happens to b so (like China) for any length of time, we will face a huge bust somewhere along the line, like China is expected to in the near future.

So, even land, like all other assets may see a jump in prices in the near future, but taking inflation into account, there would not be any rapid rise in value. If stagflation is indeed in our immediate future, the pain it will bring may even see prices for land flatten or go down due to the sheer unaffordability of it as most people will see declining disposable incomes while interest rates and EMIs rise rapidly.

Recent years has seen a big jump in demand and kept prices higher than necessary because of the new sources of inflow of money has been chasing things to buy. How long this will last in a global scenario of sustained deflation and contraction needs to be seen. When India's GDP "growth" rate declines to sustainable levels for any reason, naturally there will be a decline in hot-money inflows, giving rise to a downward spiral of declining inflows driving lower consumption, which drives the economy downwards.

Internally, I do not think this country has the ability (As America has discovered) to sustain such high levels of consumption to keep GDP growth ticking at 9%. In course of time, this unsustainable levels of RE price rise will definitely see a tapering off till disposable incomes rise to make it sustainable again.

Whether this will happen tomorrow or after 4-5 years is the question.

cheers

Economist

No surprise if that happens, I live in a global city (which has conducted Olympics, In fact the country I live in has hosted 2 Olympics).

You all know to host Olympics a city has to have top class infrastructure, transport etc,etc.

My city RE prices are cheaper than Chennai and has always been cheaper than Mumabi & Delhi (at least since 96, that when I went out of India).

Now Chennai, Mumbai or Delhi does not have infrastructure close to the country I live in and Chennai, Mumbai or Delhi will not be hosting a Olympic in next 50 years (Due to town planning and Infra issues)

BUT HOW COME MUMBAI AND DELHI HAS ALWAYS BEEN EXPENSIVE?

No surprise there.

I have lived and visited 3 continents and lived & Visited some world class cities BTW Mumbai & Delhi had been expensive than all of them at least since 1996 (When I went out of India and compared prices)

blogger

And I want the name of my city and country to be a top secret

wiseman

Google produces results in microseconds - LA.

But Economist, LA is in the midst of the greatest RE bubble burst in its history. Along with that is the $21 Billion Deficit Arnie is wrestling with (even his physique can't handle that ), and there is not officially an exodus of people out of California.

Can't blame anyone if RE prices are a little soft now!

cheers