The path to a self-fulfilling economy and the existing scenario

A self-fulfilling economy is a fairly basic concept in economics. Demand generates production- which generates employment and therefore wages – and wages generate consumption – which again generates demand. Lets keep this aside for a minute.

Secular Stagnation has been the phenomenon since 2008, and the only solution seems to be in the root of this cycle – Demand. Increasing the level of aggregate demand and therefore providing an inducement to the system, may be a solution for the short-term and medium-term. Then, what about the actual part where the economy must become self-fulfilling at some point?

The starting point to the explanation is probably in a paper by Krugman (1979, 1996)[i]. The paper talks of models (and changes in models) describing the then existing currency crisis – essentially from two perspectives; the need to monetize and maintain a fixed exchange (to run away from the then existing crisis, to be exact), and the need to contemplate the crisis from solutions to it and thereby maintenance of objectives (for the long run).

When just one fundamental factor like interest rate is considered, rising interest rates were predicted to create major credit crunch starting in economies like China, Brazil, Chile and others, seemed inevitable, back in September 2015. There is bound to be some spillover effect, particularly in the emerging markets like India, China (yet again) and some more countries that are particularly labour-intensive. More on this kind of effect is detailed in this study.

[i] Krugman’s paper: http://www.nber.org/chapters/c11032.pdf

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Will India ever have a Housing Index?

The Housing Index in India is perhaps the most debated issue till date. While there are two indices in India, that cover house prices – The National Housing Bank’s Residex and the RBI’s House Price Index (HPI) index, both are updated quite infrequently. The Residex is updated on a quarterly basis, the latest index values being available up till January-March 2015, for 26 cities.  RBI’s house price index is also updated on a quarterly basis, the latest values being available up till the last quarter of 2014, for 10 cities. The index values of both these indices are different.

A house price index can possibly eliminate price risk, and give an insight into future prices. When Indian house prices and house price indices are compared to those of other economies like the UK, Australia and US, several aspects are to be considered even before deciding on constructing a housing index for India. The first of them is the source of volatile house prices. The source of  volatile prices seems to be constant shortage of supply of land that has been zoned and/or approved. One may wonder why this shortage exists; there is something called ‘hoarding’ of land that has been happening in India. Either zoned land has been rationed, or ‘approval’ of lands has been delayed. But remember, there is no shortage of demand whatsoever, considering ever increasing urbanization, population and literacy levels in India. People desperately want to own a home but are afraid of two factors – prices of homes, and the illiquidity in the market.

Will house prices ever shrink? Will the supply ever match the rising demand for houses? The answer is perhaps a blatant “no”, the reason being that real estate has been the source of political money. Selling hoarded land pieces, and making huge return on them, and in turn investing them in other land and expecting an even greater return has artificially hiked real estate prices. The circle of transactions continues with other investors with black money looking to reap from the opportunity costs, speculators who want to take advantage of arbitrage of land prices, and brokers and developers. Therefore, the prices of residential properties will tend to rise in the near future, no matter how much the demand rises.

So, in this scenario, does India qualify for a housing index at all?