Is the bubble about to burst?

Real estate is an interesting thing.

I was lucky enough to buy my first place when I was 23 - it was a shitty 100 year old villa that took me 7 years to finish. I learned a lot about DIY and property by getting involved pretty early on.
At one point, I was pretty close to the wire and sold my car, so I was biking to work each day, and sometimes buying milk or bread with money that could only come out of the coin jar. Oddly enough, I look back at those times with some pretty fond memories because those are the times when it seems that strength of character and ambition was more important than financial security. Those sorts of conditions can bring out the best (or worse) in a person.

Anyway, in NZ we have experienced a bit of a property boom since about mid 2001 - virtually to the month that we sold the house and left NZ for our 2-3 year Overseas Experience...that is now into it's 6th year. According to the stats, property rises have averaged 20% p/a for the last 4-5 years in some parts of NZ, and 80-100% increase in home values are not that uncommon. It's a similar sotry in other parts of the world, maybe the dates are different.
My view is that there is a correction coming. For the last 100 years, property has averaged more like 4-7% p/a in various parts of the world, so you have to ask yourself what impact the last 5 years of boom is going to have on the market in the next few years, if we are going to maintain that 4-7% p/a average.

Fortunately for me, I bought my first place when some people were reducing prices to sell. Indeed, Real Estate was going down. (I'm only talking the early-mid 90s here!)
These days, there is a new breed of people (or just those who have short memories) that believe 15-20% p/a increases are completely sustainable for the rest of their lives. Many people believe that this 15-20% p/a gain is something magical, "it's just the market showing it's true value" etc etc, but in the last few years, I believe that perhaps these unrealistic gains have been fueled by greed.
There are plenty of people who see 'flipping' as a realistic way to get ahead. Basically buying a place with the intention of selling it pretty quickly to the next person for a profit. Ya know, almost like MLM or Pyramid Selling.
The problem is, many of these people believe in "can't lose" mentality that they them selves are not content to cash up and enjoy the profits of their flips, rather, they extend their debt even further, making sure they are maximizing any equity they had by borrowing to the limit.
There is no belief that interest rates could possibly hike, or that the bubble will burst. Anyway, I think you get the idea.

Here is an interesting blog. It is by a 24 year old budding "investor", who didn't know any better and took what we wanted to believe from various get rich quick seminars. His name is Casey Serin, and he bought 8 houses in 8 months with no money down, and lost. http://iamfacingforeclosure.com/1/why-i-am-facing-foreclosure/

Check out out some of the comments. Wow.

Why is Real Estate so interesting? Cos is can make smart people do dumb things, and dumb people do smart things.

Screwing with the numbers

Some people make a living out of bullshit. Meet Kenneth Lay, recently convicted in all counts of fraud charges against him in the Enron collapse.

Here's a rant. The Media and statistics.
I get pissed off when the media misquote statistics to portray a completely different intent than the numbers show.

It's easy to do - ask yourself which burger you'll eat:
1. Hamburger - contains an almost whopping 20% fat....or....
2. Hamburger - over 80% fat free to say "Hello" to your heart.

I know that is simplistic, but one does sound a whole lot better....hell, OK, I'll eat both.

Anyway, I was having a debate today with a friend about whether the NZ property market is going up, down or flat right now. The last 3 years it's been cracking 15%-18% capital gain on average each year. What that equates to is 3 years ago a 200k house x 1.18 x 1.18 x 1.18 = 328k now. It's amazing what compounding capital gain can do in a short time.
The problem is, 100s of years of history has shown us that the market is cyclical and at some point it will correct to align with the average long term 7% per annum capital gain. Those people that have entered the market within the last five years for the first time (i.e. first home buyers) cannot believe their luck and how easy it is, and why the heck they didn't do it earlier.
However those that have been in the market a bit longer can remember the days in the early 80s of 20% mortgages and years of flat or declining house values.
When I bought my first house I was 23, the mortgage rates were 12.5%, and the market was flat for about 5 years after I bought it. Hardly a crisis at the time, but even the thought of those conditions now send some people into writhing heart attacks on the floor - they just don't believe it's possible.
Consequently, I believe in the cycle, and I reckon 15-18% capital gains are not sustainable for much longer and will ultimately get many people in a great deal of financial trouble when they correct soon.

Anyway, during this debate today, we referred to an article in today's NZ paper

http://www.stuff.co.nz/stuff/0,2106,3683844a13,00.html
PROPERTY INVESTORS STILL KEEN TO BUY - May 29, 2006

Many "hardcore" property investors believe now is a good time to buy investment property.

The finding comes from a survey by Kiwi Property Investor magazine and BankDirect - a member of the ASB Group - to try to find out what property investors are thinking and doing.
The 689 investors responding to the survey were divided into hardcore property investors - those with five or more properties now or with ambitions to have that many - and the rest.
Of the 203 hardcore investors, a net 30 per cent thought now was a good time to buy. But the rest leaned slightly the other way, with a net of (minus) -6 per cent thinking now was a good time.
ASB chief economist Anthony Byett said the bullish mood among the hardcore investors may be driven by perceived opportunities in a slowing market, or a confidence in their own strategies.

"Whatever their reason, these hardcore property investors are in the mood to invest - over two-thirds stated intentions to buy within the next 12 months."
BankDirect head Jim Anderson said there was an appeal to buying on price dips, and buying houses in the flatter stage of the cycle did work.
The key was to have a strategy, including a clear vision of cashflows under alternative scenarios.

Overall, 49 per cent of those taking part in the survey felt house prices would neither rise nor fall in the next 12 months. Of the remainder, a net 7 per cent thought prices would rise.

Now, if you take a closer look at that article, it is pretty misleading - especially the headline. What does "Many" mean? Does it mean most? Nope. The majority? Nadda. A good proportion? No. What "Many" means is "more than a few", so out of 600 people, "Many" can actually be, well, the minority.

This is what annoys me. Even reading the article it's easy to believe the complete opposite to the truth as stated by the numbers. I am sure this happens all the time, it's just this time it's so blatant I actually noticed.
What the article should say is this (based on their own facts):

"70% of a group of hardcore property investors believe that now is NOT a good time to buy property, according to a recent survey carried out by Kiwi Property Investment Magazine and Bank Direct.
The majority of investors surveyed believe that property value will neither rise or fall over the next 12 months, and of those that believe prices will actually move, and incredible 93% believe prices will decline"

I reckon there should be a law against this sort of thing. I mean, if you're not going to represent the facts then it's blatant bullshit to mislead in such a manner.

I like conspiracy theories. It must be the government.
Who again carried out the survey? Oh yeah an investor magazine and a bank, both organisations make the most cash when investors buy property. I guess they can't just hide the results now can they - they've gotta dress them up a little.

Mutton into Lamb or something like that.

Wiki article on Kenneth Lay and Enron