How can we tell if rising property prices are genuine or a bubble?
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How can we tell if rising property prices are genuine or a bubble?

Just going to OK. So how can we tell if rising
prices are genuine or a bubble? OK. This is a really interesting
one because people tend to use the
word bubble a lot when they’re talking about
high property prices. But there’s a question
of, is there actually a reason for those high
prices, or is it a house of cards that could collapse? We’re clearly getting
to a point where investors have got to start
thinking, how much further is there to go? Property prices can
only go so high. Property yields
can only go so low. There’s a couple of things
that we look for in real estate to see if there’s a
bubble, and one of them is excess lending –
definitely a feature before the financial crisis. The other is excess
construction. Now, a lot of markets, at
the moment, analysts say, are much calmer in
both of those respects than they were
before the crisis. To some extent, people
have learned their lesson. And in 2006, 2007, when
people started defaulting, financial institutions, who no
one had any idea had exposure to the real estate
market, suddenly found themselves
in real trouble. There were lots of people
carrying a lot of debt. But none of them
are, you know, banks, deposit-taking institutions,
the kind of people who we bailed out in 2007. They’re property funds,
individual investors. No one’s counting
on these people to be there to cash
their paychecks. You know, they don’t play a
systemically important role in the financial system. The problem with that is that
systemically important roles in the financial
system are much, much easier to spot in hindsight. What happened in 2007
was that a lot of people, who we thought were
unimportant, turned out to be really, really important. And maybe that will turn
out to be true, now. It’s really, really
hard to say in advance. One of these areas
where it looks like we have had excess
building is high-end apartments in global cities, which
has the sort of added side effect of making
people very angry because there aren’t
enough affordable homes. And now, we’ve got
too many luxury homes. How does that work? So that definitely
was a bit of a bubble which has sort of
burst or is bursting. There may well be more. This is sort of a classic
late-cycle play for investors. They’re looking for
safety at the moment, rather than looking for
massive capital growth. Is this a bubble? It might turn out to be. But it’s really too soon
to decide whether or not this is one of those situations,
which will, ultimately, go pop.

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