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26-06-2012

Time to stop bubble babble

Landlords.co.nz

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.

By Philip Macalister

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.

Source: Landlords.co.nz

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