Why property bubbles are like the Loch Ness monster

So what do property bubbles and the Loch Ness Monster have in common you might ask?

Just like Nessie they are rarely sighted (if at all), and even then they are just suggested as possibly looking like one. In Australia we have had just the occasional sighting which generally fails the credibility test when the facts are more closely examined.

The truth is that very few people in Australia have actually ever seen a property bubble given most can’t even define what exactly one is or does. I was sitting down this week with my business colleague Steve Patrick and had a deep debate about what actually a property bubble is? Given that we have both been selling real estate for around 30 years we are more than qualified to offer an explanation.

Have we seen one? Yes – in 1988 and nothing since then has come even close to resembling that property colossus and there is a very strong possibility we may never see one again in Australia. Collectively, it is our opinion that a property bubble is where property prices double over a two-year period. What makes 1988 all the more confronting is that the official cash rate back then was at the all-time high of 17.5%.

We also need to bear in mind that there were a number of events that led to this historic event.

Back on October 19, 1987 stock markets around the world crashed. It started in Hong Kong and spread west to Europe, decimating the United States where the Dow Jones Industrial Average dropped 508 points to 1738.74 which was (22.61%). This was later to be known worldwide as Black Monday. Most noticeable was the movement of monies directly into the real estate markets – this was to become the greatest financial disaster Australia had ever experienced given I would argue these combined losses were far greater than those suffered during the global financial crisis (GFC).

For this to happen it is most clear that property prices back then were significantly undervalued (which they aren’t today). In those days everything in Sydney went to public auction and for weeks and months at mid-week auction days it was common to see as many as 250 to 300 properties auctioned on the one day. Yes – they would start at 10am and the hammer was still dropping at 10pm that night. Forget Super Saturday’s that’s about 3,000 auctions each week in Sydney alone and this went on for months.

As it turned out, 1988 was also Australia’s bicentenary which marked 200 years since the arrival of the first fleet of British convict ships at Sydney in 1788. Back then the only bubbles we encountered were those of champagne bottles popping as the nation celebrated – any excuse for a party.

Like most big parties they are usually followed by that traditional hangover, which was in Australia’s case the “recession we had to have”. The major change was the ownership on the certificate of title changing to banks becoming the new owners. Property prices then fell by approximately 30 to 50% depending on the price demographic.

It is interesting to note that over the GFC the largest property losses were at or about the 30% level, although it should also be noted that property prices had been on a steady incline as against a boom that was experienced in the late – 1980s.

Yes we had experienced mini-booms (better known as high transaction levels) in 2000, 2004 and 2007 although nothing compared to what we saw in 1988. So one can’t blame those commentators who believe they have seen a property boom simply because they were not born or can’t remember the mammoth boom of the late 1980’s.

Given where we are today and what we now know, there is a very strong possibility we may never again see a property boom to equal that of the late 1980s as today we don’t see or construe property values as being undervalued.

So for all those who are claiming we are entering a property bubble there are others who believe that there is a much stronger chance of sighting the Loch Ness monster.