I wrote this article for a friend Jesse Colombo. Jesse is an economic analyst and activist who was called one of the “Ten People Who Predicted the Financial Meltdown” in 2008 by the London Times. He maintains a popular bubble analysis and news site called The Bubble Bubble. My original article is available here http://www.thebubblebubble.com/indian-housing-bubble/. Have reproduced this article on my blog.  

There is a common myth which goes like this: “property prices do not fall”. Myths lead to misconceptions, and a common misconception is that real estate investments are supposed to be “as safe as houses”. This is a misnomer that the US housing crash of 2008 should have altered… but unfortunately it takes much more than a catastrophe to get rid of such calcified ideas.

A data point that hasn’t got a great deal of coverage internationally is that of the decade-long gravity defying rise of the Indian real estate sector. To put it into perspective Indian real estate prices have increased by 5x–6x in most regions, and the speed of the price rise in India outstrips that of economies that had a housing bubble (such as Spain, Ireland and the US). This realty boom has all the makings of what could be a spectacular collapse… but the trouble is that most people are unwilling to see it.

I first started warning of a housing bubble in India about a year back – in December 2011. That was when I had finished work on my book, Spot the Next Economic Bubble, which utilized the Austrian Business Cycle Theory (ABCT) as the cornerstone for
analysis. There were next to no takers for my advice then. There are also very few takers today.

So does a real estate bubble really exist in India? And do my warnings about the impending disaster hold any water? Before examining this point in more detail, let’s first recap what the ABCT tells us about bubbles.

What is a Bubble?

Before attempting to examine a bubble it is important to have a good definition for the phenomena so as to be able identify it clearly. According to Wikipedia, a bubble is defined as “trade in high volumes at prices that are considerably at variance with intrinsic values”. However this definition is difficult to work with, given that it is difficult to identify and observe the intrinsic value of an asset without the benefit of hindsight. Therefore most individuals attempt look at other tell-tale signs besides trade volumes and prices while analyzing bubbles, including factors such as manias, herd behavior, comparing extrapolation of future asset prices with historic data, moral hazard, etc. However, none of these approaches allow us to clearly define a bubble or attribute it to real and observable factors – and unless one is able to do that it would be always difficult to clearly identify a bubble.
The biggest advantage that the Austrian view offers is that it enables us to clearly define a bubble. According to Austrian economists, a bubble is a term used to define an activity that has sprung up on the back of loose monetary policies. The main factor behind bubbles is the fuel for speculation – which is low real interest rates. The fuel for speculation comes when the Central Bank
expands credit by creating “mickey mouse” money out of thin air. “Mickey mouse” money has to go somewhere… and it fuels a speculative bubble where it does. 

Given that money is non-neutral, the early recipients of new money (or the first movers) always have an advantage since they are able to out-bit late recipients for goods and services. Additionally, these monetary injections act like a steroid given it turbo-charges activity in interest rate–sensitive sectors such as housing construction. Moreover, easy access to credit (enabled in part by monetary injections) also have a role to play in inflating bubbles, given that with the aid of leverages asset prices can be inflated beyond the wildest imagination. Therefore if you want to spot a bubble, you must first examine if asset prices are rising on account of increases in the money supply (and thus credit) or on account of genuine savings.

With this background let’s have a look at the conclusive evidence that suggests the existence of an Indian housing bubble. Towards this I reproduce the analysis I have included in my book Spot the Next Economic Bubble (in Chapter 9) in the following section.

Bubble Spotting in the Indian Real Estate Sector

In the Indian context, there is strong evidence of an unprecedented growth in money supply where one has witnessed a double-digit year-on-year growth rate of broad money supply or M3 (see chart).
Liquidity has to go somewhere. In the case of India, this liquidity seems to have gone into the real estate market creating a false boom. A closer look at India’s real estate price data makes this more evident. India has a housing price index in the form of the Residex (maintained by National Housing Bank). Unlike the Case-Shiller Index in the US, the Residex does not provide consolidated data for the country as a whole. The National Housing Bank, on their website, reports data from 2007 onwards for a cross-section of 15 cities. Data from 2001 is available for only five Indian cities [Check Note 1]. Of the five cities covered since 2001 (including Delhi, Kolkata, Bangalore, Bhopal and Mumbai) by the Residex, real estate rates have been ‘soft’ at Bangalore. All other cities have shown and stellar growth in terms of house prices. The following graph shows the Residex data with the year 2001 as the base for four Indian cities – New Delhi, Mumbai, Bhopal and Kolkata (we will come back to Bangalore a little later). The primary Y-axis shows the percentage increase in the Residex, while the secondary Y-axis shows the broad money supply (or M3) in INR Billions as reported by the RBI for the same period:
A 5x–6x increase in housing prices in under a dozen years is nothing short of spectacular when compared to other cities across the world. What is more astounding is that the actual price rise in Indian cities is likely to be higher than the reported figures suggest given that it is widely acknowledged that the official housing prices are under-reported for computation of tax gains - and this is something that the government is attempting to remediate by reforming the stamp duty transactions in states.
Contrast housing prices for these four cities with the M3 for the same period to observe the similarity in price movements. This is not merely coincidental. This is a common pattern one would observe with any other asset bubbles.

What is actually driving the entire real estate party in India is the ever-increasing monetary injections into the economy by the RBI. Money created out of thin air is like a steroid which turbo-charges what is going on within an economy. Additionally, credit is like heroin where a little is never enough and more and more is needed to sustain the artificial high. Without monetary inflation, prices wouldn’t (or couldn’t) have increased at this pace. There is only one way to test if this theory does hold any water. 

From the point of view of Austrian theories, the only thing in the world that preserves its value in the face of monetary infusion is gold [Check Note 2]. Towards this, let us attempt to adjust property prices with gold prices as the base (see below).
One cannot help notice that in inflation (or gold-adjusted terms), the property prices in India have remained flat for the most part of the previous decade. Mumbai, Bhopal and Kolkata have shown an approximate rise of 1%, 7% and 4% respectively, while Delhi has shown a dip of 3%.

The evidence available almost irrefutably points towards the fact that India is in a speculative bubble. While data does suggest and point towards a real estate boom in cities of New Delhi, Mumbai, Bhopal and Kolkata – the outlier Bangalore has had modest price increases during this period. But Bangalore did not miss the Indian real estate boom. Bangalore did have a real estate boom – but a boom of a different nature i.e. where supply increased enormously and consequently real estate prices didn’t.

Deconstructing Argulements against a Bubble

There is something about human nature that resists bad news. Most people exhibit the ostrich mentality (of running away and avoid the topic) or turn to denial. This is true for most folks living in bubble economies where they attribute spectacular returns on assets to “strong fundamentals”. The most common response I have received is something like this: “There might be a slowdown in the Indian real estate sector… but a collapse in India is unlikely”. This is a flawed argument. In this section I present the various arguments that I have come across regarding my view, and show why these arguments are flawed.

Ostrich Argument #1: Cannot happen in India. We have a densely populated country with scarcity of land and growing demands for housing.
While both these arguments appear to be logical, this fails to take into account historical evidence. The most spectacular real estate collapse in history occurred in Japan… and the scarcity and population density arguments were the same.

Ostrich Argument #2: India’s fundamentals are intact – and we needn’t fear a bust. Unfortunately this is also an argument that doesn’t seem to be grounded in reality. Closer examination of the ‘fundamentals’ of the Indian economy show Austrian boom patterns and paint a worrisome picture, specifically:
  • Faltering GDP growth rate (expected to be sub-5% in 2012 fiscal – the lowest in a decade)
  • High budget deficits. Increasing public debt. These would get worse in future owing to welfare (such as Direct Benefit Transfer based on the Aadhar card) and public works schemes (such as MGNREGA).
  • Slowdown in industrial production as reflected by IIP data. Weak corporate performance by heavy industries in recent quarters.
  • Chronic inflation and depreciating currency. 
  • An increasing trade deficit.
  • Falling domestic savings rate (in single digits – the lowest in a decade).
  • Increase of NPA’s on the balance sheets of domestic banks.
Which of these signs reflect prosperity or strong fundamentals? It is likely that the decades of monetary inflation have resulted in over-consumption and malinvestments and have distorted the capital structure of the Indian economy.

Ostrich Argument #3: A definite rise in prosperity as illustrated by sales of luxury cars and designer labels; swanky restaurants and malls. However consumption can never be taken as a sign of sustainable economic growth. A prosperous and growing economy is one that produces more goods, and not one which consumes more. Unfortunately these examples are more reflective of conspicuous consumption which manifests itself during a false boom. Monetary inflation tends to drive money into assets increasing the net worth of the super-rich, ultimately manifesting itself in the form of conspicuous consumption. Additionally, inflated asset prices makes people think they are richer than they really are, and the seemingly surplus funds are likely to get splurged on account of this money illusion. This too is consistent with ABCT.

Ostrich Argument #4: Lending standards of banks and financial services institutions are not lax. There may be an element of truth in this statement. Specifically the Reserve Bank of India (RBI) has imposed a Loan to Value Ratio of 80%, stepped in increased risk weights on housing loans, and increased standard asset provisions on teaser loans. However government regulations have never been able to prevent bubbles from occurring in the past (the case in point being the collapses of companies such as Enron and the US financial houses in 2008 – all of which operated in heavily regulated environments). Irrespective of the regulations in place, funds created by credit expansion out of thin air need to go somewhere, and given money is non-neutral
it would fuel a speculative bubble in the process. Moreover, what goes un-noticed is that the realty boom has also in part been driven by the growing services sector in India – comprising of financial services, outsourcing, and media – all of which would come under heavy weather in the near future on account of global cues arising of the weakening of Western economies.

Ostrich Argument #5: Prices may fall – but not too much. This is the final argument offered when all other arguments are broken down. But the reality appears to be that people have short memories. Real estate that appeared to be over-priced in 2008 appears to be reasonable today given the constant monetary inflation which has fueled price rise. Unfortunately ABCT is also fairly categorical about what the eventual bust would bring with it. Following the end of an artificial boom asset prices are likely to return to pre-boom levels, or even below that. Price adjustment can be delayed through intervention in the form of stimulus, bail-outs, and through more monetary injections…. but cannot ever be prevented. A case in point is Japan which has seen ten rounds of monetary stimuli since their real estate bubble popped; but property prices are still way off the 1980 levels. Also, the attempts of preventing liquidation of poor investments through fiscal and monetary stimulus in the US following the 2008 crisis are less than convincing.

Ultimately one cannot think of any good arguments to refute the case against a bubble. It becomes more obvious if you were to analyze rental yields on housing. In India gross rental yields are around 2.68% in most metropolitan cities which are amongst the lowest in Asia [Check Note 3]. Asset prices disconnected with yields is the most evident tell-tale sign of a bubble.

Don't Tell Me How... Tell Me When!

The ABCT also helps us anticipate when an artificial boom is likely to come to a close. The trigger that will turn the artificial boom to bust is a cessation or even a marked deceleration in the rate of money creation. A slowdown in money creation causes interest rates rise and deprives the economy of its monetary heroin and bubbles begin to pop in the face of a liquidity crunch. Now this is what India’s M3 data shows: it confirms a visible slowdown in the rate of monetary injections (see chart).
According to theory the moment this happens the music will come to a stop slowing bubble activities that arose on the back of loose monetary policy. This is what the economy witnessed in part during the end of 2010 and early 2011 once the effect of the monetary steroid started wearing off.

Given the decline of economic activity, the RBI has attempted to gradually inflate using Open Market Operations (OMO). However this gradual expansion of M3 in H2 2012 is likely to be insufficient to prevent bubbles from collapsing.

The Impact

There are very few bubbles which can be larger than a housing bubble (maybe with the exception of a bubble in government securities and currency). Housing bubbles are seldom innocuous given that they have a tendency to destabilize the entire banking sector. Specifically almost half the loans extended by banks in India to individuals are towards real estate. Specifically the exposure of the top 10 banks to real estate loans are estimated at approximately $90 Billion [Check Note 4]. The impact is likely to be more significant given that existing real estate is seldom mortgaged by businessmen to banks for raising funds for business expansion. Real estate prices in post-independence India has only gone one way – which is up – given the incessant monetary inflation brought under Socialistic and then Keynesian economic policies.

For those who have real estate investments in India, it might be advisable to stop dancing before the music comes to a sudden stop. And do remember that there is adequate historical proof that real estate prices can also fall – and it is unlikely that India will be a special case.


[1.] NHB Residex Data is available at http://www.nhb.org.in/Residex/Data&Graphs.php. Historic data between 2001-2007 http://www.nhb.org.in/Residex/RESIDEX.php.

[2.] Carl Menger viewed money as an economic good just like any other good. But Menger considered money to be the most marketable economic good. Menger believed that money originated spontaneously as a result of market processes to overcome
the limitations of the barter system, and ultimately it is the market that defines and chooses what would be acceptable in money. Markets have traditionally considered gold to be a marketable economic good and hence has been used as a store of value. Thus, Austrians do not consider gold to be a worthless yellow commodity. Instead gold is considered to be money.

[3.] Source http://www.globalpropertyguide.com/Asia/rent-yields as retrieved 28 December, 2012.

[4.] Source: Info graphic from http://economictimes.indiatimes.com/markets/real-estate/realty-trends/buying-a-home-to-get-cheaper-as-rbi-says-no-to-restructuring-of-real-estate-loans/articleshow/17406901.cms
11/6/2013 06:04:00 pm

Hi Saurabh,

I am trying to understand, how the RBI actually tries to control interest rate and money supply? You have shown here that there has been substantial increase in money supply but if you look at the interest rates for the past 4-5 years they have declined quite significantly in 2009 but ever since then the rate has returned to its previous levels i.e around 7-8%. I am just trying to understand how the money supply continues to grow whereas the interest rates fluctuates and returns to the previous level

4/7/2013 06:54:59 pm

Hi Albert,

Do apologize for the delay in getting back on this comment. I wanted to write a detailed response to you, and given the time-crunch that I have of late I have been really behind in my writing.

Fair points raised by you. The workings of monetary policy are a little complex. Let me attempt to answer both questions.

Firstly, the RBI controls money supply and the interest rates via multiple mechanisms. Just like any central bank, the RBI can influence the money supply in the economy using the tools available at its disposal. Some of them are the Open Market Operations (OMO) where-in they can increase/decrease the money stock through bond sales/purchases; modifications/changes to the policy rates such as Repo, Reverse Repo, Bank Rates; and; finally though modifications to the CRR and SLR which enables the fractional banking system to expand credit. Since currency is in effect not backed by gold (or any other real commodity), the RBI just like any central bank in the world can expand money supply (and inherently credit) out of thin air… and once money is injected into the economy it invariably finds its way into the banking system, thereby enabling banks to expand credit and therefore the money supply.

Now coming back to the second question, interest rates are determined by two major elements. The first, and more important reason, is via the interplay of the forces of demand and supply for loanable funds. If demand for loanable funds is higher than the supply of loanable funds, then interest rates go up, and vice versa. The actions of the central bank interferes with this natural market process. For example, when there is a shortage of loanable funds available, the natural tendency would be for interest rates to rise. The RBI in this case can choose to step in an provide more liquidity to the banking system through its policy instruments thereby providing a supply of loanable funds out of thin air. This in part would sterilize the tendency of interest rates to rise proportional to the demand for loans. Hence you won’t have a 1:1 correction between a rise in money supply and a reduction in interest rates. The second major factor that is responsibility for rising interest rates is expectations of economic agents. As economic agents (such as banks) being to expect more and more inflation and/or a higher risk profile on lending because of economic weakness, their natural tendency would be to start increasing the rates at which loans are extended. In such a scenario interest rates would rise irrespective of the actions of the central bank i.e. interest rates can also rise in scenarios where there is continuous monetary pumping.

You won’t find a mechanistic correlation between money supply and interest rates. It might also be helpful if you could read this excellent book by Rothbard explaining how the central banking process works. http://mises.org/document/614

Hope this helps.


Ashish Deshpande
23/8/2013 03:39:11 pm

Dear Saurabh,
I totally agree with you,infact I have been saying these for last year and a half,Infact I hv made a conscious decision of selling my home which had increased 6 folds and moved into a rental apartment in sept'11.Share me your email address and I will share you my points for reaching the same conclusion.


25/8/2013 05:17:54 pm

Avinash: My e-mail ID is updated on my site (you would find that on the home page). You may reach me at saurabhthirani at gmail dot com.

30/1/2014 05:36:53 pm

Hi Saurabh,
very valid points indeed. What should be the investment changes one should make , forseeing a bubble burst. In case of a burst the first causlaities will be the banks. What happens to our deposits in banks then ? is gold a better option ? is there any thing we could learn from the japan/US bublle bursts on that front. ?


16/2/2014 02:49:56 pm


If the real estate bubble pops (and it is showing the early signs of popping) then one would definitely see the banks coming under a lot of stress. If banks come under high pressure then it is likely to trigger bank runs.

Usually under scenarios such as these the best financial advise is to aim towards conversing your investable capital instead of looking for high gains. IMHO Gold is the best place to park your funds and sit on cash. You would be able to grab a lot of assets down the road at fire sale prices.

Also you might want to read Chapter 9 of my book STNEB for some perspectives about how you might want to think through your investments.

Best regards.

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5/5/2014 03:40:35 pm

Your reality of the Indian housing bubble post is great and it provides us the best idea where the real estate in India is going and what will be the future of the market. So this post is great to know about most of the things people want to know about the real estate market of any country.

6/5/2014 09:45:37 pm

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