Mental Health and Property Bubbles
Our colleague Gavin Putland is quoted in this article by Leon Gettler:
PROPERTY bubbles suspend laws of supply and demand. In markets for widgets, demand goes down when the price goes up. With real estate, it’s the other way around. Higher prices lead to more demand as people seek to profit from the boom; property prices go up and potential buyers expect further increases, so they are willing to pay more. Maybe these laws are also inverted for other asset bubbles but the combination of leverage and low-priced finance leaves housing markets chronically vulnerable.
Bubbles tipped to burst this year include China, gold, US Treasury bonds and, according to the Melbourne-based Land Values Research Group, Australian property.
LVRG director Gavin Putland puts it bluntly: “It’s months rather than a year, but how many months is hard to say because it’s so irrational and being irrational by definition makes it hard to predict. But reality must assert itself.”
If he is right, it will be a shock to many. In the late 1990s and early 2000s, the idea that homes and flats were fabulous investments took hold of the public imagination. Hence the frenzy. Newspapers in recent weeks have been fuelling the excitement, running pieces about half of Sydney’s home owners becoming millionaires by 2020 and sitting on a daily $766 average increase in the value of their properties.
The article ends with a shocker quoting Yale economist Robert Shiller:
Shiller says society needs mechanisms to let air out of property bubbles, something more than interest rates. These include home-equity insurance and new markets selling real estate futures with the potential to tame speculative bubbles.
So derivatives will save the day?!!! Short selling on an 18 year land cycle will do little to curb the boom busts. A tragedy that the history of economic thought has been watered down to such Junk Economics.