The Hindu Business Line : A bigger villain than inflation

What are people generally talking about in parking lots, corridors, and canteens? Not so much about netas falling like ninepins, as about prices rising crazy. Prices, not of vegetables or milk, gas or fuel, which one has reconciled to accept as given, but of stocks and silver, commodities and real estate.

The mood, by and large, is more of puzzlement than complaining, even as heads are put together to make sense of the relentless ascent of the market indices and other indicators. "How far is it real?" asks one, and the other responds, "Money is flowing in!" Isn't it hot, asks one, and the other says, "No, it's just spring!" Hot, however, is a 351-page document that came from the Reserve Bank of India on March 18: `Report on Currency and Finance, 2004-05'. It speaks of changes in `the monetary dynamics' thus: "Rising inflation is no longer a major concern," but "excessive increase in asset prices and credit have emerged as major challenges facing the central banks as this could lead to financial instability." The message, therefore, is clear - that asset prices are a matter of greater worry than inflation. "Inflation is no longer the major indicator of financial stability because strong swings in asset prices could lead to financial instability," alerts the report. Message is simple: Beware the bubble! A hurried search for `asset bubble' on Google News gets quick response. For instance, a March 18 report by Dave Downey on www.nctimes.com explains that an asset bubble is when "a market price of an asset is completely out of whack with the fundamental value of an asset," in the words of Christopher Thornberg, senior economist for the UCLA Anderson Forecast. And `housing bubble' means, "home prices have ballooned beyond what a region's income levels can sustain in the long run."

A simple measure that Downey mentions is that of comparing the mortgage payments with the rentals. "All across Southern California, home prices have risen much faster than rents have... As a result, many recent home-buyers are making higher mortgage payments for the type and size of home that others are leasing for much smaller monthly rents." Is something similar happening around your place too?

It seems Alan Nevin, director of economic research for MarketPointe Realty Advisors, has a different view - that it's not a bubble but a balloon. "Bubbles generally are very thin-skinned and pop very quickly, and I'm saying that we are in a balloon that has very thick skin."

Just the time to save your skin, you may think, but a conflicting signal comes from the land of the rising sun. "Japan's three largest cities had their first gain in commercial land prices in 15 years, adding to evidence the property market is rebounding in the world's second-biggest economy," says Bloomberg (www.bloomberg.com) in a story dated March 23. A sobering reminder, however, is that post 1990, the bursting of the asset bubble there wiped off "about two-thirds of the value of commercial property purchased in that year and about half of that for residential real estate."

Eerily, that reminds one of the witches of Macbeth who chanted: "Double, double toil and trouble; Fire burn and cauldron bubble... "

E&OE@TheHindu.co.in

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