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

[Chris W]

Without any precision about just what figures are involved in 'steadily rising,' then, as any sort of valid advice, the item is almost totally devoid of merit.

If you look at the link to the source article, the main focus of the bloggers article was a checklist of questions to ask before buying a property, hence the lack of specificity on identifying property price bubbles.

[Bob Kane]

That’s why you should look at stats showing just how many speculators there are on the market. If there are a lot, don’t buy right now. Wait a couple years and you’ll see home prices drop through the floor.

Can you show me some stats about how many speculators there are?
I'm not sure that data is collected anywhere (does anyone tick a 'speculator box' when they buy a property?) but perhaps some assumptions are made which might be a guide to how many there are.
How many is a ''lot''? 100? 1000?
Is there a correlation between speculators and property crashes?
What number of speculators will cause a property crash?

[Chris W]

Their whole thing was quite different in that regard. Demand and supply both increased more or less equally. Plus the developer favourable laws for the hotel sector produced an oversupply that was breathtaking.
So yes they overbuilt like crazy.

OK, thank you for clarifying your perspective - think that I understand your perspective. Perhaps this summarises the two different perspectives on future property prices in Auckland:

1) Those that are positive on property prices (and believe that there is no property bubble) are focusing on the underlying housing supply shortage relative to the underlying demand for housing. The experiences in other property markets internationally (such as Ireland, US, Japan, etc) have different variables that impact underlying housing supply and underlying housing demand such as government policies, zoning, etc and hence do not apply to the NZ context.

2) Whilst those who are more cautious on future property prices are focusing on the historically high property valuations, the credit cycle, the indebtedness levels of property owners and their ability to absorb an interest rate increase or debt payment increase or an unexpected shock.

[Chris W]

Out of Las Vegas

How tales of property ‘flippers’ led to a housing bubble


By Robert J. Shiller, New York Times News Service
Tuesday, May 30, 2017 | 2 a.m.
Minh Uong / The New York Times
The boom and bust cycle in the housing market had terrible consequences. Yet unless we fully understand its causes, we may end up repeating it.

There is still no consensus on why the last housing boom and bust happened. That is troubling, because that violent housing cycle helped to produce the Great Recession and financial crisis of 2007-2009. We need to understand it all if we are going to be able to avoid ordeals like that in the future.

But the explanations for what happened in housing are not, I think, to be found in the conventional data favored by economists but rather in sociologically important narratives — like tales of getting rich through “flipping” houses and shares of initial public offerings — that constitute the shifting mentality of the era.

Consider the data for a moment. It shows us that extreme changes took place but doesn’t tell us why.

Real home prices rose 75 percent from February 1997 to December 2005, according to the S&P/Case-Shiller National Home Price Index, corrected for inflation by the Consumer Price Index. And then, from 2005-2012, real prices reversed course, falling to just 12 percent above their 1997 level. In the years since 2012, they have climbed 29 percent, about halfway back to their 2005 peak. This is a roller coaster in national home prices — it has been even scarier in some more volatile cities — yet we have no clarity on why it happened.

The problem for economists is that these changes don’t correspond to movements in the usual suspects: interest rates, building costs, population or rents. The Consumer Price Index for Rent of Primary Residence, compiled by the U.S. Bureau of Labor Statistics and corrected for inflation, went up only 8 percent in 1997-2005, so unmet demand for housing services can’t explain the huge increase in real home prices. It doesn’t explain the 29 percent rise in real home prices since 2012 either, because inflation-adjusted rents increased only 10 percent in that period. So what has been driving the wild ride in home prices?

I believe the price swings have something to do with the changing mentality of the times, changes caused by narratives that have gone viral and swept across the population. Looking for answers in such popular stories contrasts starkly with the prominent approach of modeling people as if they react logically to economic forces. But a less orthodox approach can be quite useful.

One thing is clear: The prevalent narratives of 1997-2005 did not include the concept of a housing bubble, not at first. A computer search using ProQuest or Google Ngrams shows that the phrase “housing bubble” was hardly used until 2005, the end of the boom. What is a bubble? It typically includes the notion that, spurred by the public’s expectation of ever further price increases, demand eventually reaches levels that cannot be sustained, and so the enthusiasm wanes and the bubble collapses. But that thought was just not on many people’s minds then, the evidence suggests.

Instead, during the 1997-2005 boom there were multitudes of narratives about smart investors who were bold enough to take a position in the market. To single out one strand, recall the stories of flippers who would buy a house, fix it up, and resell it within months at a huge profit. These stories appear to have been broadly exciting to people who didn’t flip houses themselves but who appear to have begun to think that stretching a little and buying a house with a large mortgage would make them wise investors.

In his book “The Complete Guide to Flipping Properties,” published in 2004, Steve Berges extolled what he called “the OPM principle,” meaning “other people’s money.” He wrote, “Your objective is to control as much real estate as possible while using as little of your own capital as possible.” In other words, borrow as much as you can. He wrote about the upside of leverage but not about the perils of leverage during the kind of big price drops that were just around the corner.

It can take a long time for narratives like this to grip the popular imagination. Flipping was “a thing” in the condominium conversion boom of the 1970s and ‘80s. The idea then was this: Big-time converters with deep pockets would buy apartment buildings and convert the rental apartments to owner-occupied condos, selling units to diverse individuals, some of them flippers. For public relations purposes, converters would offer to sell at reduced prices to renters already living in a building, and typically to some outsiders, too.

This generated buzz. When renters and speculators flipped their purchase contracts at a big profit, sometimes using borrowed money for down payments to flip multiple units without actually even closing on the condos, it was thrilling. It seemed that anyone with energy and initiative could get rich doing this.

Some people eager to make quick profits bought Donald Trump's well-timed 2004 book, “Trump: Think Like a Billionaire: Everything You Need to Know About Success, Real Estate, and Life,” written with Meredith McIver. Some enrolled in the less well-timed Trump University, which emphasized real estate investment in 2005, at the very end of the housing boom; it shut down, amid lawsuits and recrimination, in 2010.

Narratives about flipping weren’t restricted to real estate. Just after the time of the condo boom, stories of rapid buying and selling of initial public offerings took off as well. As with the condo promoters, IPO underwriters would sell some shares below market prices to customers, who might then “flip” the IPO for a quick profit.

The promoters of condo conversions and IPOs were onto something. By giving discounts to buyers who would make a high return, they captivated the nation with tales of people who had no advanced degrees or hefty résumés but made fortunes anyway.

By now, the notion of getting rich by flipping houses is entrenched. I searched Amazon for books on “flipping houses” and came up with 328 hits, most written in the past few years. Buying and rehabbing existing houses for resale is a legitimate business. But many of these books make extravagant pitches and seem aimed at inspiring amateurs to plunge into risky ventures.

The public fascination with speculating in housing has been held in check by regulators empowered by the 2010 Dodd-Frank Act, but that restraint is tenuous with the election as president of a real estate promoter intent on reducing regulators’ power. These narratives are still potent and could easily spur further spirals in the housing market.

Source: https://lasvegassun.com/news/2017/ma...-a-housing-bu/

[Chris W]

From the propertytalk.com blog ...

Are We In A Housing Bubble?

This is by far one of the most important considerations that you should consider before you choose to buy property. First, what is a housing bubble? A housing bubble is when houses rise in value on the market, essentially for artificial reasons. You might hear that a certain percentage of the people on the market are speculators. These people on the market know there’s a massive risk and hoping that they can capitalize on it quickly. It’s a dangerous situation to be in and one that you should watch out for when buying property.

When the house prices rise for artificial reasons, the ultimate outcome is somewhat inevitable. Eventually, the market crashes because supply outreaches demand and house prices drop through the floor. So, you want to buy after the bubble bursts, not before. If you buy before the bubble bursts, you might spend a massive amount and never seen a return of investment.

So, are we in a housing bubble? This will, of course, depend on the area that you’re in. Housing bubbles can be localised and won’t always be dependant on the international or indeed national. As such, you will have to look at home prices in the area where you’re thinking about buying. If they have been steadily rising over time, this is a clear sign that yes, that area is experiencing a housing bubble. However, it’s very difficult to know when exactly the bubble is going to burst. That’s why you should look at stats showing just how many speculators there are on the market. If there are a lot, don’t buy right now. Wait a couple years and you’ll see home prices drop through the floor.

Source: https://www.propertytalk.com/blog/5-...yers-must-ask/

For your reference, some stories from 2016

1) Auckland's nine most-flipped houses


Speculators are trading Auckland homes like baseball cards on the back of rampant capital gain. Property reporter Lane Nichols investigates the city’s most on-sold properties and the huge profits being harvested.
They're mostly a tired bunch of very average homes in some of the city's poorest neighbourhoods.

But Auckland's nine most "flipped" properties were sold a total of 38 times since January last year with their collective value escalating by more than $1.7 million, homes.co.nz figures reveal.

The numbers are hard to fathom and it takes a forensic accountant to unwind the frenzied record of listings, purchases and sales.
Many of the transactions settled on the same day, meaning sellers cashed in on juicy profits without ever having owned the properties or taking possession.



Full story: http://www.nzherald.co.nz/business/n...ectid=11684069

2)

Speculation is where I see the greatest risk and that’s been a big factor in the Auckland market. The risk sits mostly around developers and land bankers and in areas where buyers have been speculating over capital growth as a result of the unitary plan and housing shortages. A lot of this has been fuelled by foreign capital and a game of pass the parcel. The rule of the game is simple – ignore fundamentals and find someone who is prepared to pay more than you paid. This game clearly ends badly. The greatest speculative risks are on the periphery of the city where land prices and build costs are simply too high

Source: https://i.squirrel.co.nz/auckland-market-correction/

3)
Full house for auction as 'panic buyers' look to snap up homes


It should have been an empty room with enough space to swing a cat. Instead it was stifling hot, and packed so full the line went out the door and down the stairs.
Welcome to the frantic world of real estate auctions in Wellington as the deadline looms for a clampdown on lending.
On Thursday a simple four-bedroom house in the Porirua suburb of Titahi Bay, without a garage, drew five times the usual number expected for an auction of such a property.
Harcourts auctioneer Wayne Sutton said the turnout for the sale of the bungalow was a sign of "panic buyers" desperate to use pre-approved loans before stricter minimum deposit requirements kick in.
Instead of the usual five or six registered bidders, the auction at Harcourts Paremata drew 26 of them.

Source: https://www.stuff.co.nz/business/mon...-snap-up-homes


4) Investors Buying 50% Of Houses In Auckland City

https://www.facebook.com/Newlandburl...759116/?type=3

https://www.facebook.com/Newlandburl...e=3&permPage=1



5)
Data reveal instant resales as sharp investors ‘flip’ properties for quick riches.

Auckland property speculators are on-selling homes on the same day of purchase for huge profits, sometimes without even setting foot inside.
Incredibly, one Auckland house was sold three times in a single day with its value surging by nearly $80,000 in less than 24 hours.

Other astute buyers have "flipped" their new purchases for instant profits worth tens of thousands of dollars, with one speculator pocketing $100,000 the same day they bought and sold a Papatoetoe house.


Source: http://www.nzherald.co.nz/property/n...ectid=11706163

[Perry]

As such, you will have to look at home prices in the area where you’re thinking about buying. If they have been steadily rising over time, this is a clear sign that yes, that area is experiencing a housing bubble.

Without any precision about just what figures are involved in 'steadily rising,' then, as any sort of valid advice, the item is almost totally devoid of merit.

[Chris W]

From the Propertytalk blog ...


Are We In A Housing Bubble?

This is by far one of the most important considerations that you should consider before you choose to buy property. First, what is a housing bubble? A housing bubble is when houses rise in value on the market, essentially for artificial reasons. You might hear that a certain percentage of the people on the market are speculators. These people on the market know there’s a massive risk and hoping that they can capitalize on it quickly. It’s a dangerous situation to be in and one that you should watch out for when buying property.


When the house prices rise for artificial reasons, the ultimate outcome is somewhat inevitable. Eventually, the market crashes because supply outreaches demand and house prices drop through the floor. So, you want to buy after the bubble bursts, not before. If you buy before the bubble bursts, you might spend a massive amount and never seen a return of investment.


So, are we in a housing bubble? This will, of course, depend on the area that you’re in. Housing bubbles can be localised and won’t always be dependant on the international or indeed national. As such, you will have to look at home prices in the area where you’re thinking about buying. If they have been steadily rising over time, this is a clear sign that yes, that area is experiencing a housing bubble. However, it’s very difficult to know when exactly the bubble is going to burst. That’s why you should look at stats showing just how many speculators there are on the market. If there are a lot, don’t buy right now. Wait a couple years and you’ll see home prices drop through the floor.

Source: https://www.propertytalk.com/blog/5-...yers-must-ask/

[Perry]

Whether or not it has been "witnessed," I wonder how PT Forumites are placed to deal with adversity?

I suspect we have some who are debt free, so they will be the least concerned.

Would there be some sort of table ratio of worry, as that relates to (say) debt/equity figures?

100% equity - no debt : no concerns
90% equity - 10% debt : not worried

. . . . down to . . . .

20% equity - 80% debt : worried as hell
10% equity - 90% debt : shaking in my shoes.

Of course, the foregoing presumes tenants are still working and still paying the rent.

If not, then . . . .

[Chris W]

Some personal experiences from NZ in the 2008 / 2009 GFC

https://www.propertytalk.com/forum/showthread.php?42730-What-s-happening-in-Waiheke-Island-in-Auckland&p=431264#post431264

[Bob Kane]

Yeah - that's why the Ireland situation was unique to Ireland.
And the USA property crash was unique to the USA - nothing like Ireland.
And Japans 20 years of no growth is unique to Japan.
It's pretty hard to get a property crash, a country really has to do a lot of hard work to set up all the factors perfectly.

[Wayne]

Their whole thing was quite different in that regard. Demand and supply both increased more or less equally. Plus the developer favourable laws for the hotel sector produced an oversupply that was breathtaking.
So yes they overbuilt like crazy.

Also Ireland had encouraged a lot of new jobs in the tech sector. This was one reason for the occupancy reducing and changing the demographics.
A lot of those jobs vanished, along with the people and the need for the houses they were occupying.
All in all a number of factors arrived at the same time to bring it all crashing down.

[Bob Kane]

So there is one inevitable outcome to that.
The opposite is occurring in NZ.

[fuzzlevalve]

Their whole thing was quite different in that regard. Demand and supply both increased more or less equally. Plus the developer favourable laws for the hotel sector produced an oversupply that was breathtaking.
So yes they overbuilt like crazy.

[Bob Kane]

Fuzzlevalve, Can you tell me what other differences that you see that make the Ireland housing bubble situation in 2005 to be one that is irrelevant in a NZ context?

I was under the impression that Ireland built too many houses - didn't that report say 80,000 in one year?
Something like 2-300,000 empty houses?
I would suggest that is a major difference.

[fuzzlevalve]

A few thoughts Chris:

Irelands construction sector was 20% of Irelands GDP. NZ's is around 4 billion out of 200ish billion so only 2%
Ireland had over 13% of population employed in construction.
The ruling party was in bed with developers and passed numerous laws to benefit them directly.
Ireland was looking for a saviour having been in relative despair since independence.
Their regulators said "she'll be right" and made no attempt to manage their growth.