Supply creates its own demand….
Not sure if you have heard this, but this is true in many cases. Take the example of travel options from Mumbai to Pune. You have air, trains (exclusive to Pune and all trains going south), taxi, buses, ….and all seem to be full. When each of these services started people may have wondered…’Is there a demand for such a service’…
When I went to a doctor for a friend…one question the doc asked was ‘Is it paid for by the company or by the insurance company’. I guess he was asking : Do you need a proper bill and do you really care how much is the bill for? Sad, but true.
Similarly when a lot of money is available to buy an asset, price of the asset goes up. For example the amount of money available for housing finance is just gone through the roof. Just SBI alone has a mortgage (residential) of Rs. 100,000 crores. This is not small. Now assuming that Hdfc, Axis bank, Icici bank, Indiainfoline housing, Dlf, and zillion others put together should have another Rs. 8,00,000 crores, at least.
The builders go to the banker and decide how much money they have to make from a particular product. Based on project cost, funding cost and the probable demand flats are priced. Due to the availability of easy money just too many people are buying houses (with borrowed funds) and keeping it locked. The assumption is that the house for Rs. 1500 psf WILL appreciate to Rs. 3000 in 3 years…so even borrowing at 12% is fine…because the implied rate of return is about 24% 🙂
Too many people are over committing – and hoping that flipping will work. Well flipping does work in a boom…what happens in a slow down is the question to answer.
Imagine you and your spouse are working in Jet Airways and Kingfisher. Have a take home of Rs. 180,000 p.m. and you are paying 2 EMIs totalling Rs. 110,000 …Rs. 70k is your monthly expense.
Suddenly one income stops, other stutters….OMG.
The worst thing is the same thing is happening in the MBA colleges also. Banks know you will get a degree (and in most cases your Dad’s house is hypothecated), colleges are charging a bomb (bank is paying no?) , you get a degree…but hey..somebody changed the scrip…
You were supposed to get a salary of Rs. 6 lakhs, right? well the best offer is Rs. 250,000 (GROSS)…then there is tax, bonus, how will you pay rent, food expenses and the education loan?….
believe it or not…the next sub prime problem INTERNATIONALLY will be the student loan…in India it will be called a scam…of course we will not do anything till the figure reaches…Rs. 200,000 crores…
Murali
The government does everything under it arm to propogate this swindle. It firts increase the expenses of colleges by increasing the salary of Professors ( except in reputed Govt colleges others do not deserve even atenth of their salary). next w they say colleges are expensive. Our duty i to provide only primary education even which we unable to provide. Because even after paying higher than market rates to our primary school, we will pass the RTE bioll ask the pvt players who pay lesser salary to provide education. And Finaaly banks
Ashish
Indeed Sir. I read somewhere that first time in the history of US – the Student Loans debt has touched sum total of Credit Card Debts.
Ashish
Also that Students Loans debt (US) > 1 trillion USD.
suncity gloria
The Americans are already up in arms against their rising Student loans, and want the govt. to wipe them off.
varghese
Also I read that around 20% of the education loan in US is owed by Seion Citizens.
akshat
Interesting that you should have a post on student loans. Recently read an article in the context of RTE that student loan regime should be made more ‘liberal’ and lesser interest should be charged and tenure should be 25 years! Debt slave for life.
param
i couldn’t agree more on the student fee scandal. just because media reports the highest wage bagged by exceptional students, people start to think that opening salary of 1lac pm is ‘typical’ for MBA, then colleges think they ‘should’ be OK to pay 10 lac for 2yr – after all, cost is recovered in just 1 yr. parents also think the same & banks step in where parents are asset rich, cash poor. finally, average salaries come down to 3lac pa & there is a shock… of course institutes on their part will offer 10K pm salary to ‘leftovers’ in their different departments & declare 100% placement. cheers!
pravin
slight confusion(but a major one ) about Say’s law: Supply of X creates demand for all non X.The baker’s supply of bread creates demand for all non-bread items.
the keynesians used the wrong interpretation of ‘supply of bread creates demand for bread’ as the basis of their general theory of employment and called for govt intervention everytime demand for bread(aggregate demand) goes down. obviously it is not based on facts.
wealthucreate
The base line is never over commit. When you have your spouse working dont be too over optimistic. Keep spouse salary as back up. you never know when one might stop working.
If such a thing happens then one your plan should not go for toss.
I think the heading is not matching the content. The content is thought provoking.
anon
70 K monthly expense?!
LuckyOye
@anon…not too difficult to imagine 70K pm expense. We had about 15K pm expenses in 2007, that has ballooned to 55K today…and this is without any customary monthly outing/restaurants etc. This is just food/bills/clothes/soaps/transportation/petrol/medicines and the occasional toy for the kids.
aditya
@Lucky oye
Pardon my Question if it offends.
Did you get married. As a batchlor am spending 18 k PM
aditya
Subra:
Exactly the same concern was raised by Peter thiel founder Ebay,
Surprisingly, psychologists found a pride feeling among students who take education loans..
and now Govt want MBAs colleges/IITs to compete with ITC for last mile penetration, my country is in perils for a surety
pravin
i’ll agree to luckyoye.for a family with a child,with rare eating out and using a small car,and a simple pvt school,we still end up with 75+k on expenses.luckily EMIs are under 5%.if we tried hard,we could probably cut another 10k,but inflation is here to stay
milind
see this yesterday’s news on same topic
http://www.dnaindia.com/academy/report_now-school-loans-to-the-rescue-of-parents_1680461
krish
In last two decades, the trend clearly shows that banks are in charge of economic growth. The easy lending for many sectors have sparked the price rise. The per capita debt is on steep rise. If debt is offered, people are queing up and are ready to sign anything. I really doubt whether responsible borrower is existing in the market today. Any additional income be it rise, spouse salary or windfall, people are rushing to borrow more.
pravin
^^ krish.do you have any data about household indebtedness of india?i really doubt that a majority of indians are splurging on debt.more farmers are definitely going for debt either out of peer pressure or knowledge that the govt will waive them off -these are the bought vote banks.then there are urban people risking their financial health in search of some unaffordable lifestyle.
the real problem starts when the govt starts backing these debts.pornob mukerjee is already introducing govt backed student loans and housing loans.
if the banks indulging in them are private and they go belly up,the tax payer will not suffer,but if they are PSUs ,we know who will foot the bill
Milind N
Comparision with others….Neigbours Envy ,owners pride is responsible when Expenses Increse Skyrocketingly…Yes Inflation is Danny Denzoppa but so is “CTC” and “LEVELS ” in organization play on mind …….Lets reflect
Rithin
Dear Subra sir, I completely agree to your first observation that the easy money available in the real estate sector is creating a bubble there. But, I can’t agree to your argument that a similar situation exists in the education sector. The education sector is entirely different, at least in our country. We are a nation of one billion people and the demand for quality education is always here. The institutions are just utilising (or exploiting) that demand. i.e., no one goes to two or three collages since the education loans are available at cheap rates!!!