Bubbling Property Towering Inflation

If the current property bubble across India doesn’t burst soon the country should be prepared to face towering inflation going ahead.

Seven years back, the chairman of one of the largest real estate companies of India said in the company’s general meeting that he was worried with the speed with which the property price was moving up. He also said that that was not a good sign. And everybody knows what had happened afterwards. Property price across India has risen manifold since then.

The bubble defined

Asset-bubble is an economic term and in simple language it is a situation where the price of an asset class is much above its real economic value. The price of the asset moves beyond its actual value because of many factors, one of them is herd mentality resulting into too much money chasing limited assets. Due to the herd mentality people tend to feel left out (missing the bus) as the asset price continues gyrating and more and more people join the herd till the time no more people left to pay a higher price.

A very relevant question here could be, ‘who knows, what the real value of an asset is’. Since assets are sold at higher price in every other day, buyers of the asset think that the market price is the real value of the asset. And the buyer or investor finds out enough logic to support their view.

The economy and financial world runs through some logical equations. Imbalance in equations is very common and frequent though it cannot sustain for long. Economists say that it is ‘Invisible Hand’ that balances the equation. The equations, in fact, are as simple and logical as how much water you take with your dinner. But these simple equations are vital for your existence and similarly vital for the sustenance of the economy.

Interesting phenomenon is that even for the analysts it becomes very difficult to accept that the asset price may come down to a level, where economic equation matches. Rather analysts try to find out some subjective reasons to justify the higher price – which is nothing but herd mentality. And in stock market we have seen it happening every time.

However, it is not necessary that always asset price comes down to balance the equation. Sometimes, rare though, other factors in the economy adjust. If you are taking too much water in dinner, to remain alive you should either reduce water intake to accommodate enough food in your stomach or you should somehow increase food intake proportionately.