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Thursday, 21 August 2008

What is a bubble ?

Posted on 18:36 by Unknown
There are many definitions of the term bubble and bubbling prices of real estate are known to everyone in India. We need to define what is considered a good price for buying property in India. There is the obvious "sour grapes" syndrome which people succumb to when they discuss property prices so an objective analysis is needed on what constitutes fair price for a given property. The guidance value is of some relevance but in Mumbai and other urban cities it has lost its meaning due to the high component of black money. Given the growth of money supply by rising incomes and accessibility of loans we have seen the steep rise in property prices. Some 15 years ago when I joined an IT company in Bangalore I used to get 5,500 rupees a month. That was considered a princely amount and it was more then 2,000 rupees then what my mother earned a school teacher after spending 25+ years. At about the same time in 1993 someone I knew bought a 4000 sq ft plot in Jayanagar for 4 Lakhs which is 100 rs sq/ft. In 2008, Infosys should be paying 25000 to a fresher, A teacher of the same experience will probably at 10k (my guess) but the plot in Jayanagar is now 8000 rs per sq/ft. The point of the story is that land appreciation is something which cannot be predicted, however apartments have a finite value and will not show the same stellar returns.
If an investment is to be made it has to done at a low entry point for maximum return. For those who had the money to buy land in 1993, they can safely plan for their grand kids retirement. For those like me who didn't we can debate.

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