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A Bubble of Cash

Nobel winner Robert Shiller's work on home prices and the suitability of homes as assets talks directly to the Indian home buyer

Nobel prizes in economics come and go every year and there's normally little that would interest the ordinary saver and investor in what winners of the economics Nobel say and think. However, this years' joint winner Robert Shiller's work on home prices and the suitability of homes as assets seems to talk directly to the Indian home buyer, and perhaps even the real estate developer.

Early last decade, Shiller constructed an index of American housing prices going back more than a hundred years -- the first such study that had ever been done. He noticed something surprising. For the first 50 years, house prices declined in real terms. The next 45 years or so, they rose by about 10 per cent and for the last five years, they rose by about 80 per cent. To Shiller, it was obvious that the US was in the midst of an literally unprecedented real estate bubble. As it turned out, that was exactly the case and bursting of that bubble was what plunged the world into the biggest financial crisis in more than half a century.

Shiller made a convincing case that the earlier decline of home prices was the normal and while everyone might aspire to live in one kind of a home or another, it was not an investment where the invested amount and the rate of return should be the main concern. It's interesting to see how these ideas apply in India. The idea of having a house to pass on to one's descendants as a very desirable form of wealth that grows in value over years is deeply embedded in our heads. What is new is the idea of real estate as an asset type which competes with stocks, bonds and deposits, which is counter to Shiller's idea.

I think the major difference is in the colour of money. The cushion under property prices and their growth in India is the fact that this is actually a form of cash. Years, perhaps decades of accumulated unaccounted cash is deployed in real estate and can't go anywhere else easily. That's a twist that's hard to incorporate in any large theoretical understanding of real estate.