YES VIRGINIA, THERE IS A PROPERTY BUBBLE
In 1897, prompted by her father, eight-year-old Virginia O’Hanlon wrote a letter to the editor of New York’s Sun newspaper wanting to know if Santa Claus actually existed, and the response, titled “Yes VIRGINIA there is a Santa Claus” was printed on 21 September 1897. It has since become history’s most reprinted newspaper editorial, appearing in part or whole in dozens of languages in books, movies, and other editorials, and on posters and stamps.
“DEAR BRETT: I am 38 years old.
“Some of my friends say there is no property bubble.
My accountant says, ‘If you say there is – then it’s so.’
Please tell me the truth; is there a property bubble?"
VIRGINIA, your friends are wrong. They have been affected by the short attention span that is symptomatic of the information age. Despite our vast knowledge about so many things these days we relentlessly deny the obvious and believe the unbelievable.
Yes Virginia, there is a property bubble. It exists as surely as night follows day and indeed represents the very essence of the living, breathing, dynamic thing we call the residential property market. A market made up of millions of real people, living in real houses, paid for with real money, from real jobs, doing real things.
How dreary would our existence be if property bubbles didn’t exist and house prices moved in straight, predictable lines. Of course it could only be so if people and their quirky collective behaviour were removed from the picture and that would be no fun at all. In fact a property market devoid of real people would clearly be quite pointless.
There are many wondrous things in our world Virginia, not least of which are the amazing technologies that provide everyone with a platform to express an opinion, champion a cause or push a barrow. Perhaps therein lies the cause of your doubt. It may well be the murky confusion of conflicting opinions and mixed motives that blurs the issues and questions the very existence of property bubbles.
In the free market economy in which we choose to live, there will always be property bubbles. Fluctuation in prices, up and down, is as essential to the operation of a free market as breathing is to life.
Not believe in property bubbles! You might as well not believe in capital gains taxes or state stamp duties providing revenue for schools and hospitals.
Virginia, you could no doubt enquire of strangers on the street what they think about property bubbles and many would likely blame the bubble for all things evil in our wonderful world. Others would have no idea what you were talking about. It is so sad to see people being browbeaten into a state of bubble mongering or even worse, outright bubble denial. The question isn’t whether bubbles exist, it is about why they exist, understanding how they behave and using the bubble phase of the property cycle to advantage.
It has become popular, even opportunistic to decry the phenomenon of market cycles and misrepresent or just misinterpret their impact. This is because most people misread the property cycle and enter the market at the wrong time. The way to deal with a property bubble is to anticipate bubble formation conditions and enter the market in the pre-bubble phase. The subsequent ride on the bubble-coaster can be exhilarating and hugely rewarding even with the inevitable deflation which will occur beyond peak bubbleocity. This takes guts Virginia, always has, but it is the time-honoured way to use the bubble for good not evil – to create a positive outcome, to reach your goals. It is called counter-cyclical property investment.
The alternative is to join the conga line of property investors who refuse to believe it until they see it and wait until the bubble has begun to form, enter the market at a highpoint, take a bubble bath, then start a blog to tell the world it’s the bubble’s fault. They didn’t read the signs and paid a price.
Property investment isn’t a walk in the park. It is a complex exercise, requiring careful planning, based on quality information and an ability to see the big picture, to recognise the real opportunities.
So yes Virginia there is a property bubble. It is real, it is normal and will ever be so. In a thousand years there will be property bubbles just as hundreds of years ago there were bubbles in the trading of spices and tulip bulbs – fragrant bubbles indeed but bubbles nonetheless. They form when people act in unison to drive a price beyond its longer term intrinsic value. This will almost always happen. It is in the nature of free markets to overshoot on the way up, forming a price bubble, and overshoot on the way down providing what is often a once in a generation opportunity to enter a market. All you and your friends have to do is know the difference.
An ongoing collection of thoughts, opinions, observations and recommendations by long time property analyst and commentator Brett Johnson.