Tuesday, March 10, 2009

Why A Crash Is Good For The Economy

Conventional economics and finance have always told us that a Crash is bad. Even politicians and a large part of the media send out a lot of negative signals every time there is a crash. The reality is very different though. 

A crash is a major economic blessing for billions of people. I’m sure many people will not believe and accept what I am saying – but that is how it always is. In the beginning most people oppose a new idea, because they are uncomfortable with change. Especially if the change is totally against what they have learnt over their lifetime. For instance 600 years ago, if someone had told me that the earth is not flat, I would be shocked and would definitely oppose the idea. But today we very willingly accept that the earth is not flat. 

I remember how even people in my own family didn’t believe me around two years ago, when I told them how I believed real estate prices could easily crash by 50%. I even shared this idea with all of you in Invest The Happionaire Way. Today almost everybody agrees with that. In fact compared to peak prices of 2008, real estate can correct by as much as 70% in the coming years and even after that correction a lot of properties will be lying vacant as there is a huge oversupply – not just in India, but all over the world. 

But once again a 70% crash is real estate prices is excellent – not just for home buyers and businesses, but also for the entire economy. Even though builders and brokers will not agree with what I am saying, a crash in real estate prices is excellent for them too. Unfortunately most builders and real estate brokers are members of the old economy and these businesses are mainly family run. Their mind is closed to new ideas and new ways of doing things and they might take some time in understanding this concept. But I am sure that will change soon and they too will benefit from this changed outlook. In fact they will create much more wealth too and be able to tap a large market. 

Let us see how a property crash is good for the larger economy. Let us say earlier a property you wanted to buy was being quoted for Rs. 1 crore. Now most probably in order to buy that property you wouldn’t just have to wipe out your entire life’s savings but also take additional loans. Those loans would have made you work like a slave for the next twenty years of your life. In several cases both husband and wife have to work out of compulsion as they have to pay expensive EMIs to bank. People would become slaves of the “EMI Raj.” 

The impact of such high property prices on the economy is that a lot of people’s savings get sucked into unproductive assets like real estate. A very small minority of builders got a lot of money - instead of this money being used for more productive purposes. In real estate more labourers get measly salaries and the profit margins are extremely high. Today cost of construction per square foot is only around Rs. 600. Based on this a 1000 sq. ft. apartment should cost not more than Rs. 6 lakhs to construct. Just imagine a flat that cost barely 6 lakhs to construct is being sold for Rs. 1 crore. A few might argue – that we need to consider land costs. 

But land cost is artificially inflated across the country – India has an abundance of land all across. Just move out of the major cities and you will realize what I am saying – thousands of acres of vacant land. 

Now imagine if that same property is available for Rs. 20 lakhs – which is the fare value for such a property. Now there is an additional Rs. 80 lakhs available in the economy for more productive uses. This Rs. 80 lakhs can be invested and can also boost consumption. Roads, factories and new service industries can boom if each family uses this Rs. 80 lakhs more productively. Electricity, roads, water, health care and education will get a huge boost from this money. 

No amount of interest reduction or artificial stimulus package can have the same effect of this. What I am saying here is not something a lot of politicians and policy makers would like to hear – simply because there is a very big builder, politician nexus. They would rather want to reduce interest rates so that people become slaves of the “EMI Raj.” But fortunately most people have realized the risks of taking loans and how miserable life becomes. 

When prices of property go down, automatically the ‘black cash’ element would disappear. People would feel comfortable to pay Rs. 20 lakhs in white by simply signing a cheque. This also helps the country, because we all know that black money is used for several illegal activities and is also used for funding terrorists. No honest citizen would want to fund terrorist activities.  

Ask yourself honestly – what is one thing that sucks out most of your money and you will understand better why a real estate crash will be one of the best things to happen for the economy. 

A crash is property prices would mean a lot more cash for more productive activities in the economy and the end of an era when people need to take loans and become slaves of EMI to buy homes. Today a place like Dubai has sunk billions of dollars into unproductive real estate and is on the verge of collapse – had this money been used better the economy would be much better today. 
What I am saying here is just the tip of the iceberg and there is a lot more to a crash that is excellent for the economy. I have discussed more on this in Happionaire’s Cash The Crash and also told why such a happening is good for builders and people working in the real estate industry too. The real estate crash has not yet happened in India and is still to come and will probably surprise a lot of people. 

India has a bright future ahead and millions of new jobs are going to be created. A lot of new capital also is going to be used productively thanks to this global economic crash. I’ll once again stress that this is one of the best opportunities in history to create immense wealth for all those who are armed with knowledge and have a little bit of patience. 

One of the best things that can happen to our economy is if more people are informed and made financially literate. Right from children to corporate heads to politicians. As a fellow Happionaire, if you have liked what you have read here please feel free to share it with all your friends, family, boss, employees, loved ones and even your local politicians. 

I hope you have a very Happy Holi filled with colours, smiles, love, safety and happiness! 

Keep smiling and being a Happionaire!

Yogesh Chabria


Anonymous said...

i don't think property prices will correct that much as most i feel they will fall 5%-10% from today as most people want to live in prime areas. i'm myself a builder and what you say is harming to builders please don't say such things for us you creating unecessary panic. i respect you very much sir too.

Anonymous said...

I think Yogesh you explained the situation beautifully. A fall in real estate prices will benefit the entire economy because we save and block so much money without reason. Most of th time what you say makes so much common sense that i wonder why people didn't think of it before. Rohan i salute Yogesh for educating people and I guess you should read CTC too to find out more. I am getting more and more excited to read it.

I went to the near by Crossword but still they didn't have it. Have told the bookstore to make sure he keeps my copy because i'm sure it will be sold out. :-)

Anonymous said...

I have been saying the same thing for sometime now Yogesh. RBI should realize that lower interest rates will not boost people to buy homes only 50-70% reduction in price will make them buy. I am glad I read ITHW almost a year ago because it made me think about rent, EMI and why housing was overpriced.

I delayed my purchase thanks to you and today I have a big smile on my face. The importance of knowledge and financial education is something I have learnt from you.

Kannan said...

Right. Even if we consider a 1000sq ft living for the entire population (4 member family with 1 FSI); It will take only about 0.8% of available land.Its amusing right!!!

Gopinath Mavinkurve said...

Yogesh, you have so nicely said all that I believe myself but cannot say in so simple a manner! When I bought my flat in 1985, I was thrilled that my property was appreciating, but soon enough our family needed another one and this was proving to be impossible. The value of a flat occupied by you gives you only a false sense of riches. If the property market crashes, so many salary earners will benefit from it! Same goes with the stock market. Unfortunately individual investors only track the losses they already made by the stocks they have picked up and feel "trapped". A long term strategy can work, but middle class salaried employees may need the money for some or the other social reasons. This forces them to sulk from the bust in the bourses.

Anonymous said...

This blog has some of the most interesting writings as well as people. Very interesting to know your analysis Kannan and Gopi I share your views. I too felt artificially rich when my price went up, but now I understand how this is a wrong way of thinking. It is like feeling rich because car prices keep going up, just because we drive a car.

Also just like the others am waiting for Cash The Crash. Loved the free pdf read too, thanks a ton. Makes me want to read CTC even more.

Arbet said...

Yogesh, I don't think what you have said is true when you take the overall economy as one. What excess amount paid for the real estate by an individual will then go & lie with the builders but the funds will stay within the over all economy. So the theory that the saving in the prices of real estate can be used for infrastructure development may not be true since the funds are lying in the country and if the government wants, it can be deployed into whatever infrastructure projects it wants.

I agree with you that real estate prices are extremely high but this is ultimately the factor of demand & supply. Now that fear has set in the minds of investors, you find the demand is low but no sooner there is some positive news within the economy, investors again will start looking at real estate investment opportunites. Hence, it may be a good idea to invest in some premium real estate project now for good returns in the future.
Balakrishna Kamath

Unknown said...

Mr. Rohan.. This total mess and chaos is only because of you guys. The builders so far took the end users as granted and made huge money out of them and sad part is you people never bothered about the struggles and pains one middle class person has to take in this society. Now time has come you builders have to suffer and also collapse if the unfair practice continues. So no point in requesting people who are presenting the facts about real estate collapse. Yes, Real Estate prices are crashing very much and to confirm this I have to tell you that I am working for constructino company in Dubai. And we can see many projects shelved or suspended due to no buyers and no money to buy any property. So happy days and let out all your bank balance which was made in last few years so that the economy prevails. And Mr. Yogesh, You are real excellent in presenting the reality. Keep it up.

geekymusician said...

Yogesh, all you say is true. Do look at the situation from the builder/contructor's point of view. He does not want to make money benefit the whole economy, only himself (I'm not one, by the way).

In his case, it's desirable for property prices to stay at atrociously high levels and keep rising, if possible.

Your view is an excellent economists point of view.

Anonymous said...


The insights you provide are so powerful and yet so simple. It's funny how a lot of us never think about these things and continue to believe that property prices are just going to go one way - up, because God isn't making any more land...I have always believed that real estate prices are insanely high, esp in Mumbai. Most people can't afford to have a place of their own at the current prices, without becoming a slave to what you call the EMI raj. A correction in prices would be a boon for so many of us (and I do hope it happens soon).

Thanks for helping us make sense of what's going on and helping us stay calm & optimistic in such times.

Wishing you all the success for Happionaire's Cash the Crash & I'm sure it will become a huge bestseller :)

Take care & God bless.

Kannan said...

People should understand that real estate (particularly in India where no professional cos., data, regulation) can not be treated(speculated) like securities.Its just a redistribution of capital from one hand to another; essentially zero sum game.

If anyone who worked in the IT/Finance for the last 5 years and saved money conservatively like the old generation; they need not worry about any recession/lay off and would be able to survive for more than 10 years in any medium size town. Because of the delusion and madness; all the capital flowed from US/UK/Europe finally ended up on the hands of politicians(builders).

If you look at the way how politicians make money; they will identify a sector which is completely a block box(not under any regulatory/control) and milk money.We can see past examples like all industries before 90's which required license. Recently Cable TV which was not controlled; not taxed. Now it is real estate; public is holding the stupid apatments at very high price in exchange for hard earned money and all the black money got converted into white.

Anonymous said...

Excellent writing! Just another example where Greed took over. EMI was only the path followed by Greed. IT WAS ONLY GREED.

Real estate as well as land prices will correct considerably when all the foreign money circulation stops.

Yogesh, after reading your article I always have some questions ringing in my head. Please answer my questions:
1. What do you think about the time frame that will take for Indian real estate prices to correct around metro cities?

2. Wheather it is worth investing in real estate stocks after they have corrected?

3 We may see a March low now in sensex? would you advice to invest in Gold or some stocks that you had advised on your blog.


Anonymous said...

I am not much of a reader of finance but I loved the simplicity of the analysis. When will Happionaire's Cash The Crash be out, I'm really waiting and looking forward to it.

Anonymous said...

Unless corruption in public life is done away with, float of black money and its investment in landed property will continue. It is, therefore, necessary to strike at root of the evil.

Anonymous said...

Dear Chabria Sir,

I have been waiting very very very eagerly for your next book which i'm sure will be even a huger bestseller than the first one. I fully agree with you message and also feel this is the best time.

I am an aspiring MBA student and am a great follower of your views.

Best of luck for Cash The Crash and waiting for it!!! :-)