Florida Real Estate Craze
From Investopedia
In the 1920s, the United States of America was chugging along like the British Empire of the 1700s, and it was only natural that people were beginning to believe such prosperity was infinite. But it wasn't the stock market that was the recipient of a bubble. It was the real estate market.
In 1920, Florida became the popular US destination/residence for people who don't like the cold. The population was growing steadily and housing couldn't match the demand, causing prices to double and triple in some cases, which was not exactly unjustified at this point. But, news of anything doubling and tripling in price always attracts speculators. So, once people began pumping huge amounts of money into the real estate market it took off. Soon everyone in Florida was either a real estate investor or a real estate agent.
Unfortunately, the rules are the same whether you pay too much for a stock or for a piece of land: you have to make that much more to claim a profit. This did happen for awhile, and land prices quadrupled in less than a year. Eventually, however, there were no “greater fools” to buy the disgustingly overpriced land, and prices began to adjust ever so subtly. Speculators realized there was a limit to the boom, and began to sell their properties to solidify their profits while they could.
Then everybody simultaneously saw the writing on the wall, and panic selling ensued. With thousands of sellers and very few buyers, prices came down with a sickening thud, twitched a bit, and then crawled down even lower.
What does this have to teach us?
As the popular saying goes, those who don't know history are condemned to repeat it. This is not unlike what is happening now in Indian cities, fueled by the software boom. The common refrain I hear when I tell my friends and relatives to be cautious about real estate is that they never had seen a bust in real estate in their life times. They are confident that real estate prices will be stagnant in the worst scenario. Of course, they never heard about the Japanese real estate bubble of the 90s. Their experiences are from their immediate neighbourhood.
Does that mean that India is exempt from these busts? Of course not. The problem might be, not having enough documentation about the real real estate prices. Indian real estate market is notorious for being a safe haven for black money. The values quoted to the government are way below the real prices at which transactions take place. Nobody knows for sure what the real price is, except for those involved. This might be one of the reasons for not having studies like Bombay Bust or Chennai Crash to educate the people. The crashes I know about are mainly based on anecdotal evidence.
Also, I would like to argue that things have changed much in India in the recent past to create an unprecedented bust when it happens. Retail mortgage is a fairly new phenomenon in India. Taking a loan to buy a home was almost nonexistent sometime back. This mortgage phenomenon creates a feedback to the prices. That means, if the prices crash more than the amount already paid by the buyer, many buyers are likely to walk away from their loans. This creates further pressure on the prices as the financial institutions try to liquidate their bad loans and this in turn makes some more people to walk away from their loans. So the bust if it comes this time will be unlike the past. So, better be early than never.
(P.S: Reliable data might be available for commercial real estate. I was talking here about residential market. There might be organized studies on real estate in India, I'm unaware of them)
In the 1920s, the United States of America was chugging along like the British Empire of the 1700s, and it was only natural that people were beginning to believe such prosperity was infinite. But it wasn't the stock market that was the recipient of a bubble. It was the real estate market.
In 1920, Florida became the popular US destination/residence for people who don't like the cold. The population was growing steadily and housing couldn't match the demand, causing prices to double and triple in some cases, which was not exactly unjustified at this point. But, news of anything doubling and tripling in price always attracts speculators. So, once people began pumping huge amounts of money into the real estate market it took off. Soon everyone in Florida was either a real estate investor or a real estate agent.
Unfortunately, the rules are the same whether you pay too much for a stock or for a piece of land: you have to make that much more to claim a profit. This did happen for awhile, and land prices quadrupled in less than a year. Eventually, however, there were no “greater fools” to buy the disgustingly overpriced land, and prices began to adjust ever so subtly. Speculators realized there was a limit to the boom, and began to sell their properties to solidify their profits while they could.
Then everybody simultaneously saw the writing on the wall, and panic selling ensued. With thousands of sellers and very few buyers, prices came down with a sickening thud, twitched a bit, and then crawled down even lower.
What does this have to teach us?
As the popular saying goes, those who don't know history are condemned to repeat it. This is not unlike what is happening now in Indian cities, fueled by the software boom. The common refrain I hear when I tell my friends and relatives to be cautious about real estate is that they never had seen a bust in real estate in their life times. They are confident that real estate prices will be stagnant in the worst scenario. Of course, they never heard about the Japanese real estate bubble of the 90s. Their experiences are from their immediate neighbourhood.
Does that mean that India is exempt from these busts? Of course not. The problem might be, not having enough documentation about the real real estate prices. Indian real estate market is notorious for being a safe haven for black money. The values quoted to the government are way below the real prices at which transactions take place. Nobody knows for sure what the real price is, except for those involved. This might be one of the reasons for not having studies like Bombay Bust or Chennai Crash to educate the people. The crashes I know about are mainly based on anecdotal evidence.
Also, I would like to argue that things have changed much in India in the recent past to create an unprecedented bust when it happens. Retail mortgage is a fairly new phenomenon in India. Taking a loan to buy a home was almost nonexistent sometime back. This mortgage phenomenon creates a feedback to the prices. That means, if the prices crash more than the amount already paid by the buyer, many buyers are likely to walk away from their loans. This creates further pressure on the prices as the financial institutions try to liquidate their bad loans and this in turn makes some more people to walk away from their loans. So the bust if it comes this time will be unlike the past. So, better be early than never.
(P.S: Reliable data might be available for commercial real estate. I was talking here about residential market. There might be organized studies on real estate in India, I'm unaware of them)
