Opinion

Time to stop bubble babble

Hubble and trouble, is there really a housing bubble? If I had my way, the term "housing bubble" would be expunged from the Kiwi lexicon.

Tuesday, June 26th 2012

 

It's a phrase  that has no sensible meaning. What is a bubble? Why is a bubble so bad? You can have little bubbles, like those you get when you're washing the dishes, and you can get those ginormous ones that you see people blowing outside.

A bubble always starts small and grows into something bigger. When is a bubble too big and what would happen if the bubble liquid just stayed  flat or, worse still, went down the sink or got  spilled?

What gets me is that anyone with an ounce of knowledge  about finance and markets knows that everything moves in cycles. House prices. Shares. Bonds. Gold.  

If markets didn't move in cycles, life would be boring and no one would ever make any money (or lose any, either). 

In the share market, we talk about these cycles as being either a bull  or a bear market. In recent times it's hard to know what it is and whether it's just changing all the time. But when we have a bull market do we call it a bubble and have a collective panic? Nope.

The same happens with shares in a company. When they get overvalued is there widespread panic? Nope.

The simple thing about markets and prices, whether it's a house or a share, is that there has to be a willing buyer and a willing seller. If someone is prepared to pay a price which others may consider too much, it's no one else's problem.

These are two individuals who have the wherewithal to do the transaction. Likewise a real estate transaction is rarely done without a bank getting involved, and  they know a  bit about making money and risks.

They aren't going to lend money if they don't think that a) they won't get their money back and b) they won't make some money out of the deal.

And the other thing about the  housing market is that it's not just one big, amorphous mass.

Each house in each street has different investment characteristics. Just like a house in Western Heights in Rotorua will be different from one in Manurewa.

It's time we popped this bubble talk. It's just babble.

Comments

On Wednesday, June 27th 2012 9:48 am Anthony said:

The problem is, housing as well as being an investment vehicle, is also a necceessity of life. When the cycles over-pitch and then retract; average Joe Bloggs can also get hurt in the fallout. Most people purchase a house out of the desire to house their family. They can't put their lives on hold for years to ride out a bubble before purchasing. When prices start being set out of speculation rather than fundamentals, it also unfortunately takes Joe Bloggs along for the ride. Steady growth is far more attractive than boom-bust with far less casualties.

On Wednesday, June 27th 2012 9:45 am Nick Fraser said:

Why oh why isn't sensible comentary like this published as front page news in the major newspapers. Also there was an excllent newsletter from General Finance last week pointing out that people investing in Telecom have lost more value than the entire finance company debacle.

On Wednesday, June 27th 2012 8:44 am Craig said:

Who came up with this gem,(They aren't going to lend money if they don't think that a) they won't get their money back and b) they won't make some money out of the deal). Isn't this the reason the world is in financial turmoil at the moment? Among other things of course.

On Wednesday, June 27th 2012 2:42 pm Anthony said:

I actually wonder if the writer has lived in a "bubble" for the last 4 years with this simplistic article. It is wrong on so many levels.

On Monday, July 02nd 2012 12:40 pm Philip said:

Anthony, Yes the writer has quite a few grey hairs. In response to other comments out there (as this was published elsewhere) it is correct that banks in Europe, the US and elsewhere made some stupid decisions which led to the GFC. However the Australasian banks actually handled the situation quite well. I had an interesting conversation with one banker recently and he said that when the crisis struck they had little experience in dealing with losses from property investment, however it appears they managed the situation satisfactorily.

Heartland Bank - Online 6.69
SBS FirstHome Combo 6.74
Wairarapa Building Society 6.95
Unity 6.99
Co-operative Bank - First Home Special 7.04
ICBC 7.05
China Construction Bank 7.09
BNZ - Classic 7.24
ASB Bank 7.24
ANZ Special 7.24
TSB Special 7.24
Unity First Home Buyer special 6.45
Heartland Bank - Online 6.45
China Construction Bank 6.75
TSB Special 6.75
ICBC 6.75
ANZ Special 6.79
ASB Bank 6.79
AIA - Go Home Loans 6.79
Kiwibank Special 6.79
BNZ - Classic 6.79
Unity 6.79
Westpac Special 6.39
China Construction Bank 6.40
ICBC 6.49
SBS Bank Special 6.55
Kiwibank Special 6.55
BNZ - Classic 6.55
Co-operative Bank - Owner Occ 6.55
ASB Bank 6.55
AIA - Go Home Loans 6.55
TSB Special 6.59
Kainga Ora 6.99
SBS FirstHome Combo 6.19
AIA - Back My Build 6.19
ANZ Blueprint to Build 7.39
Credit Union Auckland 7.70
ICBC 7.85
Heartland Bank - Online 7.99
Pepper Money Essential 8.29
Co-operative Bank - Owner Occ 8.40
Co-operative Bank - Standard 8.40
First Credit Union Standard 8.50
Kiwibank 8.50

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