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

[Chris W]

The red line seems to be going only one way to me.
And that is with a log scale.
Is the only dip around 2006?

Bob,

The dip is around 2009 I think.

Are there any conclusions that you would make with respect to future prices?

[Chris W]

So far we are having trouble locating someone who has seen a property bubble in NZ.
Hopefully they will appear soon and enlighten us with their wisdom.

Here is a comment that I found from another thread. The comment was made by flyernzl


Well I have little knowledge of what went on in Spain and 'some American cities' . . .
. . . but I do have some depth of insight into what happened in Ireland.

The Irish collapse was triggered by developers building far too many houses, and doing so almost entirely with borrowed money.
When these houses did not sell the developers then went broke, obviously could not repay their loans, and thus took the lenders down with them.
(Established homeowners and established landlords were largely unaffected).

I suspect that if we do have some sort of property collapse in NZ in the near future, it will not be caused by an oversupply of housing.

[Bob Kane]

Are there any conclusions that you would make with respect to future prices?

It's really hard to get a property crash.
You have to take a number of different things which are all out of your control and magically align them together.
Being able to predict this happening several years ahead is virtually impossible.
The only measure you can safely use is house prices move by about the inflation rate + 2%.
If inflation is around the 2% mark then house price increases will be about 4%.

[mrsaneperson]

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...

[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.

[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?

[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.

[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.

[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?

[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.

[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.

[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.

[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...

[PC]

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

[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)