Chapter 6: Property Bubbles and Market Crashes

This is an extract from the ebook How to Really Buy a Property.

In previous chapters we have seen that it is almost impossible to understand, let alone predict, property prices to any great degree of accuracy. The occasional person or organisation that does get it right once is then, more often than not, unable to repeat their success.

We have already looked at how an increasingly global world has an affect and also at why buyers and sellers do not seem to follow the logic economists would like them to in order to make their models of the market work.

But we do know, from experience, that property in Britain has booms and busts. One of the underlying reasons for this is that real estate, like the economy in general, suffers from bouts of over confidence and under confidence.

In the good times most people start to get carried away. They buy shares because the stock market always seems to be going up. They buy property because newspapers report ever rising prices.

To start with these increases are real. As a country moves out of recession wealth is created allowing values to improve. At some point however there is too much confidence. Like the casino visitor on a winning streak, its hard to stop. This is not just in property, but in everything. The business cycle is moving into its' boom period.

Eventually there is an event, such as the global credit crisis of 2008, which shakes confidence out of the system, and a bust occurs. Shares slide, property prices sink and the economy moves into recession.

At this point, en masse, the population is under confident. Concerned for their own lives and financial security they become over cautious and everything from the stock market to an apartment's selling price are below what they should be.

But economies move on and confidence returns to start the business cycle all over again.

Economists have, for nearly one hundred years, been trying to find a formula where steady growth can be achieved without the booms and busts but it is an almost impossible task given the emotional swings of human nature.

Speculators have also been trying to predict exactly when a bust will happen with, as we have seen earlier, the same success as the economists - very little.

Investors in stocks, shares and properties try to guess when should be the best time to sell. When has confidence taken over from reality and when will there be an event or moment that causes this confidence to be removed. Some manage it, some are lucky, some are not.

No matter what is printed on these pages, if you own one property or a portfolio and prices are rising, it is difficult to make that selling decision. If it were easy and everyone were level headed there would not be booms or busts.

Confidence and Capitalism

The capitalist system is built on surprisingly fragile foundations. We believe if we go to the bank we can take out our money but if everyone tried this at the same time it would not be possible. Most of it is imaginary, not even existing in printed form.

Even if all the pounds and dollars were there much is on loan to others and so could not be made available to every account holder immediately. And when it comes down to it the paper it is printed on is not tied to anything except confidence. We all have to believe, otherwise it is worth nothing and society would stop functioning.

Stocks and shares have a similar story. Companies are only worth what someone is prepared to pay and much of this value is also confidence. There is a problem with oil and airline shares move down. The oil crises finishes and airline shares move up. Nothing in the companies operations or assets have changed, only people's confidence.

But no one has ever thought to add all the values of stocks and shares together and then say they are over valued compared to the money people have. They don't because stocks and shares are bought and sold on a global stage and so it would be too difficult to calculate.

Now property is increasingly becoming a worldwide commodity but there are those who cannot let go of the idea that real estate values are anchored on the wealth of those who live in a country, or even a given location.

The truth is property prices are held up by, and increase because of, confidence. But then so are the stock exchanges, the banks and the whole of the capitalist system.

It is little wonder that Russian socialists during the Cold War thought the West would fall apart before they did.

In fact, if anything, the crisis of 2008 has shown clearly to what extent nations will go to in order to maintain the essential confidence that glues the system together. In many countries, including the UK, protecting property prices from large falls was part of that plan and a political necessity.

Property Bubbles

Bubbles are often confused with booms and crucially property booms are often misreported as property bubbles.