Increase in real estate prices giving rise to property bubble

Hyman Minsky, the noted American economist, linked an economy's life cycle with speculative investment bubbles which are endogenous to it. He stated that during prosperous times when the economy booms, corporate cash flows rise higher than corporate debts, and this leads to speculative euphoria.

This euphoria continues to develop, allowing borrowers to borrow more until their income streams become inadequate to service their debts, creating a financial crisis. This speculative borrowing bubble then causes banks and financial institutions to reduce lending, which in turn causes a further contraction in the overall economy.

Our economy is currently facing such a contraction. Overall economic activity has slowed, with GDP growth estimated at 4.9% in 2013-2014. True, this is an improvement of 40 bps over the previous year and we have seen growth in the traditional agricultural and allied sectors; however, industrial output and manufacturing in India are currently in a stagnant mode in terms of growth.

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