Has anyone witnessed firsthand a property price bubble? What does it look like?

[Perry]

Don't you first need to prescribe the size of the bubble, before you prick it?

Likewise with the "property always goes up" cant.

It took a bit of finding, but my PPOR property value went down in 2000.

1998/1999 year - CV: $230k.
1999/2000 year - CV: $205k.

That did not change until the 2001/2002 year, when it went back to $230k.

[Chris W]

Rare and infrequent? You mean every 7 to 10 years, as predictable as any other cycle........

Not sure about your definition of rare and infrequent. To clarify, I was referring to a one in 50 -100 year event. For example, in the US, the time frame between the two property price crashes was about 77 years between 2007 and 1930.

Most people who are saying that there is no property price bubble in NZ have very likely never personally experienced a property price bubble. They are very likely to have only experienced a history of property price increases in the last 50 years or so. The question is - how can someone who doesn't know what a property price bubble looks like say that there is no property price bubble? Only those who know what a property bubble looks like can truly make a more informed conclusion if we are in property price bubble.

That was the purpose in asking if anyone had experienced firsthand a property bubble to share their experiences. Now some of you will be quick to say, who has been around 77 years to experience a property price bubble?

There have been property price bubbles internationally, such as Ireland in 2008, Spain in 2008, US in 2008, Asian Financial crisis in 1997 (affected countries such as Indonesia, South Korea, Thailand, Philippines, Singapore, Hong Kong etc), Japan in early 1990's etc - and there may be participants on this forum who have experienced it.

In the absence of personally experiencing a property price bubble, the other method of learning what a property price bubble looks like is through reading and studying financial history.

[fuzzlevalve]

Rare and infrequent? You mean every 7 to 10 years, as predictable as any other cycle........

[Chris W]

You've got to get over this obsession with discount percentage. What you have to know is what yield you require and go and buy that. That may be 20% over so called retail but if it performs that is irrelevant.

The most recent comparable transaction method is the main valuation method that most owner occupiers, buy and hold property investors, & valuers look at when purchasing real estate. It is also the reason that they get caught out at or near the peak in those rare and infrequent property price bubbles.

[Perry]

The How?

. . then suddenly you have tens if not hundreds of millions of retirees (globally) taking a massive haircut.

What sort of 'haircut' are you referring to?

Haircut is economist-speak for the great mass of common (i.e. unimportant) investors being robbed of a significant portion of their money in order to prop up the important (i.e. professional) financial institutions.

Yep. Silly mum and dad accidental property investors is how they see it.

I wondered about the exact mechanism.

If I recall aright, the expression haircut was last used on these forums in relation to people have some percentage of their in-bank funds skimmed off to assist banks' solvency (Oh, and bank shareholder dividends & execs' bonuses, of course)

[PC]

Or $3Billion wiped off Telecom shares by a Government policy change.
Oops - Nothing to see here - move along...

[Davo36]

Haircut is economist-speak for the great mass of common (i.e. unimportant) investors being robbed of a significant portion of their money in order to prop up the important (i.e. professional) financial institutions.

Yep.

Silly mum and dad accidental property investors is how they see it.

Should have their money with a fund manager who can give it to companies that are creating 'growth'. Cause they never waste the money like Fonterra throwing away $350m to the Chinese (again) or Fletchers or Mainzeal...

[fuzzlevalve]

You've got to get over this obsession with discount percentage. What you have to know is what yield you require and go and buy that. That may be 20% over so called retail but if it performs that is irrelevant.

[Frezzinghot]

After seeing all this, if you were in the market to buy a new property in Auckland, what discount would you be targeting? Bearing in mind we could be in for a period of no or declining property prices. If 15% realistic or something less.

[flyernzl]

Haircut is economist-speak for the great mass of common (i.e. unimportant) investors being robbed of a significant portion of their money in order to prop up the important (i.e. professional) financial institutions.

[Perry]

. . then suddenly you have ten's if not hundreds of millions of retirees (globally) taking a massive haircut.

What sort of 'haircut' are you referring to?

[WINZ]

The trend is up, but couple of dips there mate.

I'm no oracle but my take is that the next downturn will be very very different from the previous cycles, on the basis of two-fold:

1) Cycles - Boom and busy cycles are a natural phenomenon albeit are magnified/curtailed by modern monetary policy. If you take the great ole USA for instance each boom (and subsequent crash) is getting larger and larger as a result of the FED effectively doubling down on their monetary policies in order to inflate their way out of the potential deflationary (recessionary/depressionary) scenario. They are doing this successively with lower and lower interest rates, and money printing (QE). Given interest rates are now at 5,000 year lows, and the Fed Balance sheet is at all time highs ($4.5 trillion) this almost guarantees that the next crash will be more severe;

2) Demographics - In all prior cycles (since the 1920's) the demographics have been favourable. E.g. in 1987, the boomers were coming into their prime, in 2007 they were maturing to their peak earning power, this time around they are.. oh wait retiring?

What this means is that if the equities/bond/property markets all go, then suddenly you have ten's if not hundreds of millions of retirees (globally) taking a massive haircut. The logical conclusion to this event is that we want see prices recovering (fully) for a very very long time (i.e. several generations). This factor alone has been evidenced in Japan where property prices are well below their 1992 peak (despite unprecedented money printing from the BoJ).

Based on both trends I'm confident that we are at or close to "peak asset prices" globally. It will be an interesting world on the other side if these markets finally decide to crack.

[flyernzl]

I bought a property in the late 70s.
Banks would not lend, so we had to get a Solicitors Trust Account mortgage - 18%pa.

Over the next few years it rose until it got to 23.5%

However, the recompense was that house prices were also rising very steeply.

From my own view of the Auckland market over 40 years, we have had periods of price stagnation (in where those that HAD to sell may have done so at some loss) but generally prices only fell a few percents.

These lulls lasted just a few years, and then things took off again - but of course the past is not always an indicator of what will happen in the future!

From what I hear (no direct involvement. thank God) the areas that do suffer significant drops when times turn tough are places where the majority are holiday homes - Northland beach areas, Pauanui, Matarangi, Whangamata etc.

The worst are the inland towns that were one-industry dependent. These collapse and don't usually recover.

[Chris W]

At the time of the crash. I do remember the ""Contributory Mortgage "" companies that setup and many went bust. They were offering far higher rates of return than the banks were on their term deposits.

Their prospectus told prospective investors, your money with them was covered by insurance against loss . However they didn't mention the fact that they also owned the insurance company...

Mrsaneperson,

Just to clarify, which market are you referring to? US? Ireland? Spain?, Portugal?, other?

[Perry]

Good.
You would have noticed that the mortgage rates of 21% at the start of 1987 reduced to about 12% a few years later.
What did that do to house prices?
In your opinion, was there a crash in residential house prices over that time?

I wasn't a PI back then, and blissfully unaware (ignorant) of such things.

I remember that selling my PPOR in Papatoetoe around 1997 was a challenge, though.