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Real Estate Price Is Reversible

Sanjoy Chakravorty in "A New Price Regime: Land Markets in Urban and Rural India" (EPW, 27 April 2013) argued that the real estate price rise in India over the last 10 years or so is not reversible. This response says that prices can fall in real terms if the government effectively does away with the licence-permit-quota raj in the real estate sector.

Undeterred by data problems, Sanjoy Chakravorty has done great service with his article on real estate prices in both rural and urban India “A New Price Regime: Land Markets in Urban and Rural India” (EPW, 27 April 2013). Due to limited space, I will confine myself here to analytical issues related to prices in urban India.

Given the high prices, the media often airs the view that there is a bubble in real estate prices in India. Chakravorty (2013) refutes this view. His argument is that the price rise is due to increased additional demand which is related to rising inequality, rising incomes from “white, black and foreign sources” and increased availability of housing loans since about 2000. This additional demand increase is over and above the usual one due to factors such as rise in population and urbanisation. This additional demand increase is, he argues, not temporary and so the price rise is “no mere bubble”. It is more or less irreversible. I will offer a different view that emphasises (a) the supply side, and (b) the ambiguity about prices. This view is consistent with research findings as outlined in recent writings such as that of Shiller (2008), Glaeser and Gyourko (2008), Saks (2008) and Monnery (2011). Though Chakravorty does touch on the supply-side problems, he does not go deeper into this issue as his focus is different. I will attempt to complete that part of the story and consider its far-reaching implications.

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