Through my telescope, I see a property bubble forming
Another week, another set of entertaining quotes from the auction rooms as a fresh wave of investors bids over the reserve for a piece of Sydney real estate. Oh, yes, you gotta love asset bubbles. They produce quotes that, when told on the other side of the crash, seem so ridiculous they’re unbelievable.
I will never forget, for example, in 1999, giving a talk for the Australian Stock Exchange at the Sydney Auditorium on Bridge Street. It was the height of the tech boom and the average first day listing premium for an IPO was 90 per cent. Yes, that’s right, you could buy into any IPO and your average return was almost a doubling of your money on the first day.
I asked the audience to raise their hand if they would be happy if their fund manager generated a 20 per cent return.
Not a single hand was raised in a room literally packed to the rafters. Indeed, the room was so full of ‘investors’ the fire department came in and informed attendees that they were not able to sit or stand in the isles.
Speaking of venues with standing room only, Fairfax reported that a property auction on Monday night in Double Bay, Sydney, was packed not only with 100 people inside but another 50 standing in the street outside.
“In a repeat of last week’s LJ Hooker’s Centennial Park auctions, parents buying for children, upgraders, downsizers and a fresh wave of investors bid over reserve price at nearly every one of the 10 auctions on Monday night.”
According to Fairfax one buyer who missed out observed: “There’s no land left and nowhere to build.”
Absurd! Especially absurd given many of the properties for sale were apartments – where land is created by adding another floor.
In another sign of a bubble, a jilted buyer was quoted saying, “Buying a property in an area like Bondi, where everyone wants to live, will never hurt owner occupiers or investors.”
John Kenneth Galbraith in The Great Crash wrote, “As noted, at some point in a boom all aspects of property ownership become irrelevant except the prospect for an early rise in price. Income from the property, or enjoyment of its use, or even its long-run worth is now academic. As in the case of the more repulsive Florida lots [in a mid-1920s Florida land boom], these usufructs may be non-existent or even negative. What is important is that tomorrow or next week, market values will rise—as they did yesterday or last week—and a profit can be realized…”
The aforementioned Bondi commentator was also quoted as saying, “With interest rates this low, people can afford to bid up another few hundred thousand…”
Back in 2011, I wrote, “a bubble guaranteed to burst is debt fuelled asset inflation; buyers debt fund most or all of the purchase price of an asset whose cash flows are unable to support the interest and debt obligations. The bubbles to short are those where monthly repayments have to be made.”
Make no mistake, the property market is officially in a bubble.
Will Rogers once said; “The fellow who can only see a week ahead is always the popular fellow, for he is looking with the crowd. But the one who can see years ahead, he has a telescope but he can’t make anybody believe he has it.”
When the man with the telescope makes his prognostications, they fall upon a stunned and disbelieving silence.
You be the judge about whether we are looking through a telescope or not.