Bubbles Always Pop
Not only do bubbles always pop, but as Jeremy Grantham points out in his latest brilliant quarterly letter the assets always reverts back to at least its long term trend. Always have. Grantham even called out the Australian property bubble.
At some point the Australian residential property bubble will pop. It’s not a matter of if, it’s simply a matter of when. Everything else is noise. The worst of that noise is always the same during any bubble. The meme changes, but at it’s core is the scariest phrase of all, it is different this time. The particular refrain in this bubble is demand exceeds supply.
I concede that there is often little difference from between being early and being wrong. Sometime being early even results in a long walk. However, if you pull up any long term housing chart, besides a demand, you should be scared by the distance the Australian housing market could fall. Traditionally the Australian residential market hasn’t fallen
First I want to make sure I won’t be hurt by the fallout and then I’d like to figure out a way to profit from it. One way should be shorting companies exposed to the residential property boom?
Will Canberra’s back-flip on foreign students’ continued ownership of property once they leave Australia be the pin to pop the bubble? If not the pin, then surely one of the pins.
I said we were in a property bubble eleven months ago, and while I’m still won’t put a time frame on it popping, I give within 13 months a 50% probability and within two years 80%. That’s my estimate now. The wonderful thing about estimates is that they’re fluid and every estimate in probability is practice and opportunity for internal feedback. More valuable than that guessing game is knowing that making excellent long term returns from an above trend asset is improbable. Though short term gains in the final phases of bubbles can be sensational for those nimble and lucky enough.
“Many futures are possible, here is but one. Interest rates continue to climb in Australia, local investor and buyer interest decreases, then the Chinese property bubble bursts and they are too busy licking the wounds to worry about Australia.” I said that in a comment a week ago to someone insisting the bubble would continue. A few days later the government back-flipped and another possible future appeared. The key is not knowing what event will pop the bubble, but simply knowing that an event or series of events will. It worth having faith in events with high probabilities.
Related posts:
[...] house prices ran well ahead of growth in real incomes, real construction costs and real rents (see here). [...]
Hi Dean, it’s a question I’ve spent much time thinking about over the last few years as my wife and I have about as much in investment property as stocks. The investment properties have actually done much better in CAGR than the stocks due to the leverage.
CAGR for property was low (my guestimate inflation + 1% or less) prior to 1980. Since 1980 it has been over 8%pa. If you bought a house in Melborne or Sydney in 1980 for 60,000 chances are it would be worth 800,000-1,000,000 now. Which is pretty good for baby boomers.
After thinking about it, my view is that unemployement is a critical variable in house prices. I think it trumps all the other variables put together. I don’t think there is a high risk of a property slump unless there is a signficant turn in unemployment. I think this is what Keen missed. Overvaluations can become higher, particularly if the unemployment rate falls. Even if people are spending 40% of their income on housing, they will still do it as long as they have a job. At 80% leverage, if they lose their job, they end up having to sell the house within 6-12 months unless they have significant savings.
I was thinking that we would sell the investment properties before 2014 if there was a 50% increase but it could potentially exceed that if unemployment falls further, the stockmarket rallies further and the commodity boom rolls on. Houseprices are already horrendously overpriced, so how would you describe that level? A 20-30% or greater correction will probably occur at some stage. In the meantime, I’m still a participant in the bubble. Hopefully I won’t end up with it all over my face when it pops!
Good luck in your assignment!
A year ago there was total denial the real estate market was in any bother. Now the recognition is beginning to dawn on the smarter folks that something terribly serious is happening to the property market, but as normal their blind faith is that they will have the oft spoken about ‘soft landing’. Ha! No way hose! The bigger the boom, the bigger the bust. The property boom that began here in the late 90s started slowly and snowballed into the biggest property bubble the planet has ever experienced. This crash that’s now underway will be absolutely the same. My advice to real estate speculators is panic, NOW! As this year pans out you’ll finally recognize property in Australia is dead for generations. This crash is going to be a big one!
Dank Castle
Australian Property Crash Forum and Blog
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