The Seven Immutable Laws of Bubbles: Example, Housing in USA, UK & Dubai

The cycle of bubble and bust in housing is drawing to a close. For many the ferocity of the bust and the collateral damage that followed was a shock, but bubbles and busts are not new; chances are there will be more.



I got interested in bubbles in early 2008 trying to figure out why my model of real estate prices that had worked perfectly for ten years was saying that prices in Dubai which is where I was at the time, "should" have been 30% less than where they were.



This is what I found out:



Law #1: All bubbles need a catalyst, like a stone to throw into a still pond.



Bubbles start in "good times", typically GDP is going up and people have money to spend and invest, so money starts chasing assets and if it takes time for the supply of those assets to increase, prices go up.



For example, the fundamental price of housing long-term is exactly equal to nominal GDP per house divided by a function of long-term interest rates (www.marketoracle.co.uk/Article6250.html). When nominal GDP goes up a lot faster than the supply of housing does, then the price of housing goes up; that's supply and demand, there is nothing wrong with that but it's the pebble in your hand; just you didn't throw it yet.

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Best real estate investment overseas

When it comes to overseas property investment there are several choices to be made. What type of investment a person makes depends on what they want from the property, and the type of investment they are making also affects the destinations they will consider.

If a person wants a holiday home that will pay for itself in rental income when the buyer is not using it, then that person is a holiday home investor. They must choose a property suitable to accommodate them and those they holiday with, in a destination that they would like to spend their holidays in, which also has a strong rental market.

Then there are pure-investors, which are then split into short-term investors and long-term investors.

Short-term investors must choose a property that is going to appreciate rapidly in value, in a location where there will be plenty of people to sell to 2-3 years down the line. For this they will probably be looking for a strong and/or growing internal housing market.

Long-term investors have a much wider choice; because, failing some catastrophic event, practically every property is going to appreciate in value over the long-term. The question is by how much?

For long-term investors it is primarily about economic growth and stability. It is growth in the economy that really pushes up house prices, and also increases internal demand for housing and second homes, which in turn provide the exit strategy.

Below we have attempted to narrow down this vast choice, by choosing five destinations we think will be among the most lucrative for long-term property investors.

Albania

Albania is busy making the transition into a great industrialised nation. The government has managed the economy excellently over the last decade, making some excellent structural reforms. Between 2002 and 2006 a quarter of Albania’s poorest were brought out of poverty. This led to the World Bank upping Albania’s status to a middle income country in 2007.

This meant that Albania could then apply for loans from international banks as oppose to being reliant on hand-outs from the likes of the International Monetary Fund.

Albania made the most of this; taking out several multi-million dollar loans for infrastructure projects to increase the productivity of the country.

These included a massive loan from the Japanese government to improve the country’s canal system, another from the European Bank for Reconstruction and Development to build a new terminal at Albania’s largest port in Duress, and another loan to build a major highway between Duress and Kosovo.

What’s more Albania is on track to join the European Union in 2014. Their loans and grants will aide in Albanian economic reforms, and EU membership will boost the economy massively.

Property values in Albanian cities, especially the capital Tirana will grow exponentially over the long-term, especially since they have such a low starting point. You can currently buy a luxury 2 bedroom apartment in Tirana for under £50K off the plan. This is likely to be worth £250-£500K within 7-10 years.

Panama

Even as almost every country in the world is falling into recession, the Panamanian economy is to grow by 3% this year according to the International Monetary Fund. Panama’s economy is primarily fuelled by its strong and massively growing services sector, especially the services involved in the operation of the Panama Canal, the only waterway that transverses the land-bank between Central and South America, as well as the Colon Free Trade Zone. More recently tourism has started to play a bigger part.

The Canal is currently being expanded to triple its capacity. This has led to Panama being at the centre of global investment, with many businesses seeing the benefit of having offices or distribution centres within range of the Canal. Because of this Panama’s economy will continue to grow between now and the completion of the expansion in 2014, when growth will accelerate.

The good thing about Panama is that it is the most popular choice for American retirees, to American’s what the Costas are to Brits if you like. This can be looked upon as an exit strategy for today’s investors. Panama property is likely to be worth 2-5 times its current value over the next 5-10-15 years.

Brazil

In Brazil’s case it is simple. Brazil is among the top 5 largest food exporters in the world, with the world’s second largest cattle stocks, and is also the second largest exporter of meat. On top of that Brazil’s services sector is growing rapidly as are the hospitality, construction, tourism and health tourism sectors

The world’s leading analysts have predicted that Brazil will be the fifth largest economy in the world in the next 5-10 years. Yet property is currently a lot less expensive than in the world’s other leading economies — especially if you look at houses on the internal market. As Brazil grows into one of the largest economies, property will grow in value till prices are similar to those in the other major economies, at which point growth will slow to the established market average of 10% per annum.

Tunisia

Tunisia is also one of the fastest growing emerging market economies, based mainly on massive growth in the agricultural sector, and more recently stable growth in the construction industry. The Tunisian economy is expected to grow by over 4% this year according to the IMF.

Tunisia is unique among the emerging markets because the government would not allow foreigners to buy property until over 75% of the internal population owned their own homes. This is far more than in the world’s larger economies, including the UK in which only 71% of people own their own homes.

Property in Tunisia presents the opportunity to buy property at the low prices you’d expect to find in an emerging market, within the developed internal housing market you’d expect to find in an established market. A great combo for the long-term investor.

Philippines

You can’t have a list of top overseas property investment destinations without including parts of Asia. The only reason there aren’t other Asian countries in this is because of laws preventing foreign ownership, and/or because they are better for short-term investment which is of course another article.

The Philippines is the tiger among the emerging markets of Asia. Its services sector continues to grow exponentially on the back of the outsourcing boom which has expanded due to the credit-crunch tightening the belts of global businesses. Worker remittances from the thousands of Filipinos working abroad also continue to grow. Because of these two industries and others, the Philippines economy is forecast to grow by over 4% this year according to the IMF.

The Philippines was among the worst affected by the Asian economic crash earlier this millennium, so property prices are currently among the lowest in Asia. Because of this and the fact that the two main growth sectors mentioned above are pretty much recession-resistant, the Philippines is an excellent long-term property investment destination.

World's Best Places For Real Estate Buys

Washington, D.C., traditionally takes a back seat to world cities like London, New York and Tokyo when it comes to real estate investment.

That's likely to change.

Thanks to a proposed $1 trillion wave government spending, investors are flocking to D.C. for opportunities in the commercial and residential real estate markets. All these new programs will need offices, after all, and their employees will need places to live.

This year, Washington leapfrogged London for the first-place ranking in the world's best cities for real estate investment. But don't count out the world's financial capitals just yet--even with massive financial troubles in London and New York, those cities finished second and third, respectively.
In Depth: World's Best Places For Real Estate Buys

Why? It's the appeal of long-term stability, and fears that emerging countries are going to take a harder hit. While the U.S. property market sputters, China is poised for its worst deflation in a decade, focused heavily on property price declines, according to Deutsche Bank (nyse: DB - news - people ).

"For the U.S. and U.K., part of it is flying back to safety," says François Ortalo-Magne, a real estate professor at the Wisconsin School of Business. " For China and India, there's a sense that we went there and tried it, but it wasn't producing."

Behind the Numbers
Forbes' rankings come from the Association of Foreign Investors in Real Estate, a research association that tracks where member investors are finding the best opportunities around the world. AFIRE surveys its 200 members, who collectively hold $700 billion in cross-border real estate.

U.S. cities surged up this year's list: San Francisco moved to sixth from 24th last year; Los Angeles moved to seventh from 19th; Houston moved to eigth from 32nd. Cities in the Asia Pacific region dropped: Sydney fell to 11th from ninth; Hong Kong dropped to 22nd from 10th place.

This year, investors know that valuations can't be trusted. In 2008, the American residential market fell 19%, according to the Case-Shiller index; U.K. prices dropped 16% according to Nationwide, a U.K. builder. Commercial values in both countries have started to soften due to recessions on either side of the pond.

In 2008, investors to spend tried to call the bottom and gambled in emerging markets. This year, they're looking at premium locations in cities with proven track records.

"We don't feel comfortable that we are able to identify what value is," says Richard Kessler, chief operating officer of Benenson Capital Partners, a global real estate investment group. "Having said that, if an opportunity exists on Park and 57th Street, or something we've always wanted to own on Pennsylvania Avenue in D.C., or some other very strategic long-term asset, we would look at it."

That makes 2009 the year of playing it safe and not chasing exotic opportunities in far-flung locations. It's even injected a sense of humility into the investing world.

"There used to be a rivalry between New York and London," says Kenneth Patton, divisional dean of the New York University Schack Institute of Real Estate. "The subject has shifted to the fact that we're both in the same lifeboat, and maybe it's leaking."

While some investors play it safe, others are content to wait out the real estate downturn entirely.

"Most of the [usual] participants are sitting on the sidelines," says Kessler. "There's a lot of capital, but everyone is uncomfortable about deploying that capital."

For their part, the optimists think 2009 might be the year that sideline money starts to come back into the marketplace--and, especially for the cities on this list, it will come back in a flood, not a trickle.

"There's a lot of money that needs to be invested, says Ortalo-Magne. "The instant people feel an inkling of a turnaround, money is going to flow in."

Whether that inkling comes in 2009 or 2010, however, is an altogether different question.

81st Edition of the Carnival of Real Estate

Christopher Smith at Real Estate Investing in the Real World writes the beginning of an article about investing in real estate long-term. I really enjoyed the article until it suddenly ended. It should have been a completed article. The beginning paragraphs were intriguing and well written. Too bad it was cut short.

DaltonsBriefs presents a post that references a Zillow post about activists doing damage to property to bring notice to their cause.

MyNewPlace discusses the Casulo, a bedroom set in a box. It’s not available yet, but might be a great idea for students or people traveling abroad.

Nathan Blair of Salt Lake City Utah Real Estate Blog thinks aloud about what is ”classic” in architecture.

International Listings presents an incomplete, and questionable (they forgot to mention the best real estate website) list of real estate websites that are 2.0.

Purva Brown, the Sacremento Real Estate Gal, brings up three mistakes first-time home buyers fall victim to.

Silveral of Celebrity News and Gossip talks about celebrity homes and the characteristics many of them share.

John Lockwood of Sacramento Real Estate Blog lists the “Seven Deadly Misktakes Buyers Make in This Market.”

Dee Copeland of Texas Realty Blog writes about the trend of “Boomerang Buyers” moving back to the Austin area.

Charles Woodall of Dotham Home Search suggests that “Days on Market are Irrelevant” and makes some good points. I have posted on this topic myself and think it’s a good topic of discussion with buyers, especially in areas that are in buyers market’s.

Dan Melson at Searchlight Crusade suggests that “The Mortgage Loan Market Controls the Real Estate Market.” His thinking is that as loan products go away, so do buyers who need those products to buy, and when rates go up, the buyer pool of a price range gets smaller.

Lenore Wilkas of Hillsburough, Burlingame Luxury Home Sales says “Be Sure to Ask Your Agent How Long the House Has Been For Sale.” The post discusses the practice of re-listing property to manipulate the days-on-market for the listing.

Raymond at Money BlueBook gives his reviews of the house-flipping shows currently on television.

Joe also gives us a look at some of the Tallahassee market’s pricing and sales trends.

Silicon Valley Blogger at The Digerati Life asks “Who’s To Blame For The Subprime Mortgage Mess?” With responsibility distributed between many people involved in the real estate transaction, he wraps up with some good advice to the buyers who, I believe, are ultimately responsible for signing contracts on homes they can’t afford.

Steve Leung gives us the “Consumer’s Rights When Purchasing New Homes”. He talks about warranties, having your own representation and protecting yourself.

Steve Faber at DebtBlog wonders, “Property Foreclosures- Is It Really as Bad as They Say?” Steve goes over some of the statistics showing some states, including Nevada, Florida and California have high foreclosure rates, but also had some of the highest run-up’s in prices over the last few years.

Cynthis Holt from Real Life Real Estate shares her frustrations with buying a short sale property in “War Zone”.

Kathy Koops from The Cincy Blog explains how the “3 Key Words in Real Estate” may not be as important as price.

Geordie Romer of Leavenworth Washington Real Estate Blog presents his “Top 5 Ways to Shoot Your Leavenworth Condo Project in the Foot.” He actually goes the extra mile and gives six, including “Don’t dismiss the internet as a fad.” Good advice.

Brian Block of Virginia Real Estate News says, “I’ve Officially Run Out of Room on My Business Card” and shares his experience breezing through the broker’s exam and the designations he holds.

Craig Schiller at HOME STAGING, Rants & Ravings presents “OOPS Goes the Staging!” The post is written well. There a lot of bold words, but the post shows how video can help make your point. It would have been great to have some more specific tips and even some examples on good staging. Hopefully that will be in the next post.

Rebecca Levinson of Connect2Agent presents “Do consumers want rock stars or real estate agents to sell their home?” She tells the story of another agent’s attitude and the impression it left on her.

Cliff Jacobson at WebHome USABlog presents, “Realtor Dirty Tricks” where he discusses Glenn Kelman and the NAR.

The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It

Review
With The Subprime Solution, Robert J. Shiller offers his formula to protect us from repeating such disasters: more financial engineering. It would be easy to sneer at this idea, but Mr. Shiller, an economics professor at Yale University, always deserves a hearing. . . . In what he describes as a 'brief manifesto,' Mr. Shiller argues that bailouts of distressed borrowers are inevitable to avoid wrecking our economy and shredding our social fabric--even though bailouts may punish the prudent (say, through higher taxes) while comforting those who gambled on real estate and lost.
(James R. Hagerty Wall Street Journal )

In The Subprime Solution, [Shiller] briskly sketches out his views on both short-term and long-term strategies for dealing with a housing meltdown that's left millions of Americans a lot less wealthy--and an unfortunate number at risk for losing their homes. . . . The book's most compelling discussion centers on the long-term opportunities that lie in this crisis. Shiller describes how key parts of America's financial system--the Federal Reserve, the Securities and Exchange Commission, and the FDIC, to name only three--were created in the reforms after earlier bank crises or the Great Depression. . . . Shiller suggests that political leaders should look at the current crisis as an opportunity to rethink the homebuying process and add new protections to keep homeowners from getting in over their heads during a future bubble.
(iel McGinn, Newsweek.com )

Yale University's Robert Shiller is one of the world's outstanding economic thinkers and intellectual innovators, with a record of foresight that is the envy of his profession. . . . His short, snappy and surprisingly far-reaching book on the subprime crisis is as interesting and indispensible as you would expect. . . . The Subprime Solution is an ambitious little volume. . . . It covers a remarkable amount of ground in less than 200 pages. . . . . [T]he book's broad framing of the issues is novel and valuable, and its arguments are always stimulating. . . . Shiller . . . is an ardent financial-technology optimist, and his book is a torrent of fascinating ideas. Anybody interested in the subject must profit from reading it.
(Clive Crook Financial Times )

Robert J. Shiller explains how trillions of dollars of mortgage debt, based on dubious loans to doubtful borrowers, were forfeited and how it can be fixed. An influential economist, he offers insights into the growth of the credit bubble and solutions for curing the ensuing chaos. . . . Shiller's reputation in economics, his majestic prose style, his statistical proofs and his vast coterie of admirers suggest that at least some of his recommendations will become part of U.S. mortgage regulation. . . . For those who want to figure out how to fix the global credit crisis that has developed as a result of Americans' inability or unwillingness to read their mortgage contracts, The Subprime Solution is vital reading. It is advocacy built on faith that government does good, that intervention never produces unintended results and that there is no other way to fix the mortgage mess.
(Andrew Allentuck The Globe & Mail )

In his new book, The Subprime Solution, the Yale University professor sounds an alarm that the credit crunch, now early in its second year, poses a dire risk. His text is a stimulating, rapid response to current events--and a forceful demand for dramatic action from Washington, where, he says, the White House and Congress have been 'totally inadequate' to the task. . . . [A] storehouse of valuable, provocative ideas awaits the reader of The Subprime Solution.
(Christopher Farrell BusinessWeek )

In The Subprime Solution, he argues that what united the missteps by the Federal Reserve, mortgage brokers, Wall Street bankers, and home buyers that together brought on the current financial mess was a shared belief that house prices never go down. What's the antidote to that kind of mass delusion? Shiller seems to have no interest in substituting his judgment, or the government's, for the market's. Instead, he sees information and innovation as the counter to group think.
(Justin Fox Time )

Robert J. Shiller's clear-eyed look at what happened in the U.S. housing market--and what might be done about it--is not keen to attribute blame to the actors in the drama. He explains that the development of subprime mortgages in the Nineties was welcomed as a way of extending home ownership to those once locked out of the market, and it was not the dishonesty of the mortgage lenders, or the greed of bankers, that led to the bubble. There was dishonesty and greed, but these were the result of the bubble, not its cause.
(Tim Worstall The Telegraph )

American optimism: Is there any investment bubble it can't fuel? Consider the excesses of the housing market, the effects of which are roiling the global economy. As Yale University economist Robert Shiller demonstrates in his short, whip-smart new book The Subprime Solution, there was a contagion at work that helped pushed home prices to unsustainable levels. . . . Shiller's views are grounded in exhaustive research and penetrating analysis. The Subprime Solution should be read by anyone with assets at risk in the global financial crisis and a desire to fix things ahead of the next crisis. Which is to say, all of us.
(Robert Elder Austin American-Statesman )

Robert Shiller's got an argument that will make some peoples' heads explode in his new book The Subprime Solution--we need more speculation in the housing market. . . . I said above that this solution will make some peoples' heads explode, that the solution to an excess of speculation is to create a market in yet more speculation. Yet in this case ti is indeed true, this is a valid solution.
(Tim Worstall The Register )

[The Subprime Solution] is short, punchy and political. Shiller is a top-flight academic economist who has often warned of the tendency of markets towards irrational exuberance, and of the harmful consequences that follow. He is rightly scathing towards the 'boosters' who kept assuring us that house prices only rise, and he gains authority for having spoken out during the boom, when it was an unpopular position to hold. . . . Shiller's debunking of house price myths is masterful. Especially important is his rubbishing of the concept of scarcity . . . Shiller's explanations are sophisticated and intelligent, and they are also admirably clear.
(Michael Savage Fund Strategy )

The Subprime Solution, his postmortem on irrational exuberance in the real estate market, is superb, even for general-interest readers otherwise confused by the whole mess. Though his introduction reads a bit like an arid position paper, his insistence on the fundamentally psychological, rather than economic, basis of the boom is supple and fascinating.
(Andrew Rosenblum New York Observer )

If you're unfamiliar with Robert Shiller then understand that he is perhaps the most eminent and considered examiner of modern investment bubbles. . . . Shiller's new book, The Subprime Solution, is a concise attempt to elaborate in just seven short chapters the genesis of the housing bubble, explode its myths, explore its scale and the dangers of its deepening impact, assert the need to maintain confidence in our economic and financial institutions by aggressive action, and then explore longer-term, more fundamental reforms and innovations that will create a population much more attuned to economic risk.... There are many more recommendations, but if this book has the ambition of Keynes' earlier work, and the scale of the problem is as suggested, I'd argue that the book is as accessible as you are going to get from such a modern behavioural economics guru. It's a book that everyone who lives in a house should own; just don't buy ten and try to rent them out to friends.
(The Knackered Hack )

Buy this book at Amazon...