I know its sounding like your math text book so lets look at feedback loop with the help of an example. A wheat farm uses pesticides to get rid of insects. In the process a major portion of the insects die but a few survive and develop immunity to the pesticide. As a result, stronger pesticides have to be used to get rid of this new breed of insects. The second time around, a few insects still survive and develop far greater immunity to the stronger pesticides, resulting in use of even stronger pesticides and survival of insects with stronger immunity to fight them. The cycle or loop continues. The ultimate result is the soil getting poisoned and the crops getting affected. There comes a stage when the pesticides no longer have an affect on the insects who in turn destroy the crops. More land is hence needed to substitute for the loss in crop output hence lesser is the amount of land available for other uses including housing and development. This results in the prices of real estate shooting up.
The loop is actually much longer and is also affected by a lot of macroeconomic factors but for the sake of simplicity we have shortened the length of the loop.
This is an example of a negative feedback loop. The loop works as a feedback to the initial input and gives an undesired output as opposed to the desired output. This in turn is multiplied by other dependant variables. These variables increase the magnitude of the effect of the loop making it more fatal than it otherwise would be.
Now lets analyze how feedback loop works to multiply the affect of increase in real estate prices.
Because of the growing demand for real estate development for malls and housing projects, lesser land is available for agriculture and other uses. This means that the country's dependency on infrastructure as a source of contribution to the GDP tends to keep increasing. In the long run the proportionate contribution of agriculture in the country's GDP will tend to fall. This in turn will mean that the country will have to depend more on developing infrastructure to substitute for the loss of revenue from agriculture. This in turn will result in more malls popping up 20 yards from your house and will eventually add to the shortage of land available for living and agriculture. The cycle thus would lead to the prices of real estate shooting up.
Lets now look at why are malls popping up everywhere and what contributes to this so called "Mall Culture". With the rising GDP of the country and the rising income levels, the average 16-32 year old is spending more on luxury goods, branded stuff and the entire shopping experience. The income levels make it easier to a certain extent. But by 2050 India's increase in the per capita income will be amongst the lowest in the BRIC nations. The people who mint money by analyzing buyer behavior understand the buying potential of the Gen Y today and thus are investing in projects developing malls. The money invested is recovered with many fold returns within the first 2 years of most malls being set up. There are obviously failures but these are few to be seen at this stage. This is where the feedback loop comes into play.
More land used for malls means lesser available for other uses and for agriculture. More malls tend to substitute for this gap in the national income arising from fall in agriculture. Hence more land for malls and far lesser for living and agriculture. This loop continues and multiplies the effect of real estate prices shooting up. The demand is more than the supply at this stage. But in the long run, at the current rate supply will tend to outgrow the demand and hence will come the long awaited correction in the real estate prices. This negative loop will primarily be absorbed by Malls and high end housing development projects. This does not mean that real estate will be any cheaper than it is now but simply means that there is some relief expected in the prices in the long run. How much will this be, depends on the demand and supply situation in future and inflation in particular. There are various macroeconomic factors as well that act as change agents in this process of feedback loop. In context of the real estate crisis, this would depend on the state or central government's attitude towards real estate development----specially governmental policy reforms for or against a bubble being formed in the industry. This is turn eventually will decide whether the feedback loop is negative or positive.
When you want to feed a hungry economy growing at an upwards of 8% & more and keeping in mind that in any political system whatsoever, its out of the question to do away with bureaucracy and red tapism ( the leeches always remain leeches )---- more often than not is this feedback loop NEGATIVE.
This is how a negative feedback loop works in context of shooting up real estate prices. The effect is long lasting and the crisis can be very real if proper measures are not taken in time. The only thing remaining to be seen is how long will it take the law of feedback loop to kick-in to cause a bubble being formed in the high end real estate development market in the country, particularly "The Mall Culture" --- a second version of the the real estate disaster in USA waiting to occur.....its just a matter of time.
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