Greater Fool Theory & Indian Real Estate

Greater Fool Theory & Indian Real Estate

The Greater Fool Theory is an investment belief that says there will be an investor always to buy an asset however overpriced it is. Thus even if the original investor had paid a higher price than was necessary, he would make a profit as "a
greater" fool would buy it from him at an even higher price. In most of the
asset markets like real estate, equity and gold, the greater fool theory is
applicable. Many people buy an asset thinking or rather hoping its value
will go higher and they can sell it. This cycle continues leading to
inflationary prices - BUBBLES.

Will the greater fool theory benefit you?

It depends on the type of the market. If there is a bubble in the market
(real estate or stock), you can be benefited. You buy  a stock or invest in
a property. In a bubble, there can be irrational buying which can lead to
rise in the prices and some buyers will be ready to pay a higher price than is the true value of the asset. On the other hand, if it the bubble bursts or investors as a collective realize that the market is overvalued, there will be no buyers. If you were looking for a buyer to pay a higher price, you will not find one. Some investors sell in such a market leading to further devaluation. Your property/stock can lose value quickly in this market. (It's better to avoid bubbles than playing smart - it's like "passing the parcel", you never know what will happen when music stop)

The theory can be applicable in different areas

For example, 15-20 years back, working in software companies was considered
a lucrative career with a good salary, stock options and overseas
assignments. Everyone wanted to become a software engineer and tried every trick in the book to get into Inofsys or TCS. But today, the profession is
not so lucrative from a money perspective as there is too much supply
compared to demand, companies are trying to right size the staff. Stock
options have dwindled and overseas assignments are lesser now or not so
attractive. Moreover in the long run, if all engineers work in the software
industry, there will be shortage of skilled resources in other industries.
They will also suffer consequences of the 'Greater Fool' theory.

US Housing Market Bubble

2000-05, there was a housing market bubble in the United States, where the
real estate prices went up or were artificially made to rise. People bought
houses at these high rates thinking there will always be someone to buy it
at an even higher rate as the housing market was going through a boom. But
then interest rates began to rise and demand for houses reduced. This led to
default in payments triggering a real estate collapse. People ended up
having real estate that was worth little at that time and owing big loans
that were taken to finance the purchase.

Indian Real Estate

In India, we view buying property as a source of wealth and income
generation. We buy property thinking it will secure our future generations.
Till recently the real estate prices were on the rise to the point of being
almost unaffordable to people. But in the last 2-3 years, there has been
stagnation in real estate prices. Demand has been decreasing. This is
because the prices are so high that people are unable to buy at these
levels.(or investors feel they will not be able to find Greater Fool) There
have been many regulations in place to curb black money getting invested in
real estate and the real estate market was dependent on investors to put
money in it. Now investors are slowing down or playing the waiting game.
There are new norms for lending to real estate sector which also has brought
a slowdown in funds getting pumped in real estate.

Property prices remained relatively same between December 2014 and March
2015. Prices in the Mumbai Metropolitan Region fell by 2.18 percent. Prices
in Chennai, Hyderabad and National Capital Region remained flat (Source:
Real estate research and rating firm Liases Foras). This is quite different
from earlier when real estate prices were only rising. Moreover, the
FICCI-Knight Frank Real Estate Sentiment Index for the period January to
March 2015 states that only 15% of respondents in its research expected
residential sales to increase.