The Driver behind the Real Estate Bubble
Let us understand how QE (Quantitative Easing) has become a dominant factor in the real estate bubble from 2007 to 2014.
What is QE?
QE is basically printing of money by the US Central Bank (called Federal Reserve Bank) to pump more money into the US banking system so as to prop up the US economy from the downfall of the 2007 Financial crisis.
How does QE work?
The US fed prints money ($4.5Trillion ~ 1/4th the size of US GDP) and lends it to US banks. You may also think of this as the Fed making a term deposit with the commercial banks just like you and me - except that we earn our money and deposit our savings in the bank while the Fed simply prints the money and deposits it with the US banks.
The banks were then supposed to lend the money to businesses for expanding their operations and providing employment to people in the US. Instead, the banks used the free money (because interest is almost ZERO) in speculative activities in markets around the world. (Why did the Fed not monitor/regulate this? Thatz a whole different story with a political twist!)
Capital Outflows
So, the QE money was exported out of US into developing countries with the sole objective of chasing higher returns. And that money went into blowing up the bond market, inflating the stock market, taking up gold to a historic $1800/oz and bubbling up real estate markets from London to Mumbai to Singapore. However, with the slowdown of QE since 2014, the US banks no longer had access to free cash and so they stopped their capital outflows into India and other developing countries. This eventually caused the real estate prices to cool off!
Was QE the only reason for the Indian realty bubble?
Remember "When it rains it pours"? So, the QE party was joined by private equity funds, venture funds, Foreign Investors etc - it was also joined by black money that was taken out of India which now returned in white (via fake companies in tax havens). Basically anyone who had access to ZERO% interest could invest in Indian realty, thus increasing the demand several folds within a short span of time, propping up the asset price and exiting with a whopping profit.
Has the free money completely stopped?
Not really because other central banks such as ECB (European Central Bank), BoE (Bank of England) and the BoJ (Bank of Japan) too joined the QE program by printing another $4.5Tn combined. However this money is now chasing a more liquid asset - stocks. So, the bubble has vaporized in the realty markets but may continue for a while in the equities market until Fed begins to move in forward gear (by raising the interest rate)!
What is QE?
QE is basically printing of money by the US Central Bank (called Federal Reserve Bank) to pump more money into the US banking system so as to prop up the US economy from the downfall of the 2007 Financial crisis.
How does QE work?
The US fed prints money ($4.5Trillion ~ 1/4th the size of US GDP) and lends it to US banks. You may also think of this as the Fed making a term deposit with the commercial banks just like you and me - except that we earn our money and deposit our savings in the bank while the Fed simply prints the money and deposits it with the US banks.
The banks were then supposed to lend the money to businesses for expanding their operations and providing employment to people in the US. Instead, the banks used the free money (because interest is almost ZERO) in speculative activities in markets around the world. (Why did the Fed not monitor/regulate this? Thatz a whole different story with a political twist!)
Capital Outflows
So, the QE money was exported out of US into developing countries with the sole objective of chasing higher returns. And that money went into blowing up the bond market, inflating the stock market, taking up gold to a historic $1800/oz and bubbling up real estate markets from London to Mumbai to Singapore. However, with the slowdown of QE since 2014, the US banks no longer had access to free cash and so they stopped their capital outflows into India and other developing countries. This eventually caused the real estate prices to cool off!
Was QE the only reason for the Indian realty bubble?
Remember "When it rains it pours"? So, the QE party was joined by private equity funds, venture funds, Foreign Investors etc - it was also joined by black money that was taken out of India which now returned in white (via fake companies in tax havens). Basically anyone who had access to ZERO% interest could invest in Indian realty, thus increasing the demand several folds within a short span of time, propping up the asset price and exiting with a whopping profit.
Has the free money completely stopped?
Not really because other central banks such as ECB (European Central Bank), BoE (Bank of England) and the BoJ (Bank of Japan) too joined the QE program by printing another $4.5Tn combined. However this money is now chasing a more liquid asset - stocks. So, the bubble has vaporized in the realty markets but may continue for a while in the equities market until Fed begins to move in forward gear (by raising the interest rate)!
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