Don't finance demand. Finance supply. Keep prices low economics. World housing bubble burst of 2020.

2009/09/28.

You would think that the housing bubbles of the past or of other countries like USA will make people cautious about speculating in property purchase, but it doesn't. People in my country India are purchasing property like mad, fuelled especially by govts incentive of allowing all property loan payments as income tax deductible. The way people are buying houses and flats/condos, you would think that there is no economic recession going on at all.

Consider what happens when govt gives incentives to take loans to buy property. At first this will seem a wonderful thing. More people would be able to take loans to buy their dream houses. After the first blush, the dreams turn into a nightmare like this. Because you increase the demand for houses the prices will go up, making the next buyer to take a bigger loan, this inturn increases the prices even further, making the next buyer take an even bigger loan the end point of this vicious circle is a housing bubble burst, failure of a lot of greedy banks, loss of OUR life savings with the said banks etc etc.

The word economics comes from the word economical that is to spend as little as possible. But in this modern world the word economics has come to mean spend as much as possible. How? We keep wishing for economic growth. An economy that grows at 4% is considered better than an economy that grows at 2%. An economy that grows at 8% is considered better than an economy that grows at 4% etc. This is tail forwards thinking. Under such a thought process the people who spend the most are considered the best because they produce the most economic growth. This may be good in the short term but will result in a disaster in the long term. Measuring splurging and expenditure and wasteful consumerism is not a measure of economy. It is a measure of the uneconomic. Measure how little as possible a person or country spends and then and only then you get a measure of economy. Under this (true meaning of economy) economic theory the country with the lowest percapita expenditure and the highest savings rate will be the most economic.

Economic slow down is GOOD. Sky rocketing prices is BAD. Falling prices is GOOD. Inflation is BAD. People who slow down the economy by being economical are GOOD. People who drive economic growth by spending like mad are BAD.

I am a great disbeliever in loans. Loans damage the economics of a person or a country. But if you must support loans to stimulate economic "growth", finance supply, don't finance demand. By financing supply you make prices FALL. By financing demand you make prices go up. How to finance supply and not demand in the housing industry? a) Finance builders but not flat buyers. b) If you must fincance flat/condo buyers finance ONLY new property NEVER finance purchase of OLD property this will keep prices of old houses somewhat reasonable. It will also discourage speculative purchases and purchase of property as an inflation gain investment because resale prices of a property will fall way below the price of a new one. Only people who are going to live in a house will take a loan to buy it, not people who expect to make a fat resale profit.

One man's supply is another man's demand. By financing supply/construction of new condos, you may make prices of condos fall but it will make the prices of building materials like cement and bricks go up so we are back at square zero.

Economic growth should come through better ideas, better technology, better management of resources and better/ more intelligent economic policies not through financing demand. Keep prices low. Clamp on demand. Facilitate supply and new ideas and better technology.


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