**[investwise]** The Illusive Security Of Real Estate

 

Illusive Security of Real Estate Why are the likes of Anantraj, DLF, IBREL, HDIL and Unitech reflecting an approaching reversal of fortunes-somewhat akin to early 2008? For most of 2009 these stocks had done well, but they have lost out against virtually all the set benchmarks. The reasons: First, Look East at Japan, and Then Look West Towards The US.   The answer is simple-Real Estate both in the US and in Japan was fuelled by easy credit , virtually near zero interest rates for a prolonged period of time. Japan has been in deflation for 2 decades, the US is mid-way through it's first decade of Real Estate deflation.   But the severest repercussions will come for the people living in the populated regions of China and India-where planners are following the same degraded credit policies that have brought the East and the West to their knees.   Cheap credit-yes, cheap credit.   Money has a value-this fact cannot be forgotten. A genuine consumer will take credit only and upto a time he can pay it off, with or without interest. But irresponsible Governments believe that the anti-dote of all recessions is to flood the system with artificiallly created paper money.   The impact is visible-look at precious metals (they are shining), look at industrial metals (they are in decline), and paper currencies all over the World are in a free-fall against everything. Bewildered nations have no clue.   How can the Government stop people from buying cars when banks do not know where to lend? They can raise fuel prices, but that will immediately hurt GDP numbers. They can raise interest rates, but then people will not borrow.   The Real problem before the Third World is how to accomplish Growth with Inflation, in a World Wrecked by Deflation-the answer to such a problem was not available even to Lord John Maynard Keynes, forget the minnows Geithner and Bernanke.   Deflation in all Asset classes could become the new norm.   The scenario in the developed and the developing world could not have been further apart. While the former is grappling with deflation, the latter is trying to curb the ill effects of inflation. Having said that, in the longer term, inflation is also expected to pose a problem to the rich world. Especially if the expansionary monetary policy continues for too long.   So on being asked which is the greater of the two evils, inflation would probably get more votes. The interesting thing to note here as elucidated in the Economist is that many governments have had experience in tackling excessive price increases in the past couple of decades. But deflation (a scenario of depressed prices) has been much harder to deal with. Classic example in this case is that of Japan.   Not just that, deflation in the developed world is also increasing the risk of bubble formation in the emerging markets. As most of the US and Europe are sticking to lower interest rates, investor money is being channelled into emerging economies for better returns. This has fuelled asset bubbles in many of these economies.   In this case, China is a classic example. Already property and stock prices in the dragon nation have run way ahead of fundamentals. Deflation in the rich world is also impacting India. Ever since India started showing visible signs of recovery, foreign investors have been pumping money into Indian equities. And they have been doing it at a faster pace.   This has caused valuations of many companies to look rather rich. What is more, abundant liquidity in the system also means that inflationary pressures loom large. This means that in an increasingly globalised world, even stronger emerging countries could find it harder to keep their economies stable if deflation continues to persist elsewhere.   The most obvious solution is to tighten monetary policy. India has already started doing that. But in the longer term, a close watch will have to be kept on how the rich world manages to pull itself out of the slump.   Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.   Nothing in this article is, or should be construed as, investment advice.

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