When The Bubble Bursts: The Next Real Estate: Fill & Download for Free

Because we are the leaders of the free world everyone else must follow us. If something bad happens to us–like the housing crash during the Great Financial Crisis of 2008–then it must happen to China. So Western media created a permabubble in Chinese real estate:Will the China property bubble pop? CNN. December 30, 2009In China, fear of a real estate bubble. Washington Post. January 11, 2010.Real estate bubble in China: An empirical study. F Lei - ‎2011.Will China's real estate bubble burst?. CNN. Apr 24, 2012.China's real estate bubble CBS. March 3, 2013.China real estate: A bubble bursting? CNBC Aug 31, 2014.What next? A China housing crash? Financial Times. Aug 11, 2015China Real Estate Bubble: Will It Bring Down the Global Economy? Fortune. Nov 2, 2016China's Dangerous House Price Boom Is Spreading - Bloomberg. Nov 27, 2017China’s Housing Market Is Like a Casino. Can a Property Tax Tame It? New York Times, Jan 22, 2018.Alas, nobody thought to tell the bubble-blowers a secret about Chinese real estate: China’s real estate markets are almost bubble-proof because there is no Chinese real estate market–there are only local an regional real estate markets.In 2013 the prime minister, an economist, warned that homes are for families, not speculators and, in 2017, the president warned that speculators bankrupted by policy changes have only themselves to blame because, ‘houses are built to be lived in, not traded’. The following year, Tier One cities capped their populations and Tier Two cities raised their deposits from ten percent to twenty percent. But, because China had no residential property taxes, speculators’ carrying costs are negligible so some cities became ‘Trial Points’ by imposing progressive taxes on homes larger than 250 square feet per person. McMansion values dropped overnight, speculators released hundreds of thousands of units onto the market and the cities enjoyed a fresh revenue stream. One Quora homeowner, Chara Chan, explains what happens when policies change:I can’t remember how many banks I’ve been to for the last two days and I simply can’t mortgage my property to take out any loans to buy another apartment (worth about 1.5 million) that is going to be auctioned very soon. The managers kept telling me that the government has imposed very stringent restrictions on the loans since last year so, if I want to borrow the money, I have to pay more than 20,000 RMB to agents who have a relationship with the banks. Plus, I’m also banned from purchasing normal houses in the market since I already bought one last year so, according to the policy enacted last March, I am not allowed to buy any apartments or sell my current ones within three years. Even when I was buying my apartment last year, I was not allowed to buy in regions the government designated for the college graduates who want to settle in my city. So, at least in the real estate market, the bubble is not going to burst when the government has tightened its grip on the speculators.Another bubble-damper is that there is no national real estate market, just hundreds of local markets, a de facto partition created by an ancient, discriminative tool, the hukou, an internal residents’ visa.Yet another damper is that Chinese housing debt per capita is only a fraction of America’s, so there’s still a long way to go:

Well, there seems to be bubbles boiling up everywhere.There are bubbly stock markets like India, Brazil, and the U.S. Lots of bond bubbles: U.S. Treasuries, U.S. corporate bonds, global bonds in general, subprime auto bonds.There’s talk of a bubble in the international art market, solar energy, venture capital, lithium, and U.S student loans. We also recently discussed another possible bitcoin bubble.There’s evidence of real estate bubbles around the world: Vancouver, Auckland, Sydney, Toronto, San Francisco and London, for starters. There’s a reported bubble in “nine-figure real estate listings.”Chinese bubbles are a class of their own: Real estate, iron ore, cotton, garlic, eggs and soybean meal are some recent ones. Of course, China’s stock market bubble burst last summer.Then there is discussion of “the mother of all bubbles” also known as “the everything bubble,” which infers that a global debt bubble feeds all the other bubbles. With so many bubbles, it’s hard to keep track.Possibly a Bubble ETF (my proposed ticker symbol: POP) is needed, composed of the many bubble markets, so that there’s an efficient way to track and trade the world of bubbles.Yet, despite the fact that speculative bubbles are popping up everywhere, it can often be hard to tell you’re in a bubble until it pops. It would help to know how to tell a bubble is forming.Luckily there are about four centuries’ worth of speculative bubbles to study for answers.The first widely known and the most famous market bubble of all time was Tulip Mania, which occurred in Holland in the early 17th century. The Dutch became enamored with tulips that had flaming colors on their petals. They coveted the bulbs that grew into these unique tulips.As demand for the bulbs increased, along with their value, a market in tulip bulbs developed. As word of profitable speculation spread, more people piled in. Prices moved continuously higher.Then from December 1636 to February 1637, the price of premium tulips surged by 200 percent. At the height of the mania in 1637, the market price of a single prized bulb was sufficient to purchase one of the grandest homes on the most fashionable canal in Amsterdam – when that city’s homes were among the most expensive in the world.Needless to say, these prices were not an accurate reflection of the true value of a tulip bulb. In February 1637, buying tipped over into selling, and a domino effect of cascading lower and lower prices took hold. Speculators saw that they had spent vast sums to buy plants that were little more than glorified onions, and liquidated their tulip bulb holdings without regard for price. As wealth evaporated, pandemonium engulfed Holland. A deep economic depression followed.Tulip mania established a pattern that has since been repeated over and over in speculative bubbles ever since. Despite advances in economic theory and the increasing sophistication of markets, market bubbles, and human psychology, haven’t changed much since the 1630s.In 2008, Jean-Paul Rodrigue, a Canadian transportation scholar, conducted a study of the history of bubbles, and published a model of bubble stages:1. Stealth Phase. The initial bubble stage is where a new market opportunity, or paradigm, is cautiously recognized by early smart money investors.2. Awareness Phase. As market prices rise, more investors are attracted to the new investment story. The media begins to cover the story, adding to the momentum, and investors become increasingly interested – and increasingly less sophisticated.3. Mania Phase. Now everyone notices the rising prices. The media is touting “the investment of a lifetime.” Price becomes detached from underlying economic reality. Euphoric, irrational investors project recent price gains into the future. Enthusiasm spreads like a contagion between investors. A feedback loop ensues – rising prices amplify stories that seem to justify high valuations, which attract an ever increasing number of buyers.Even cynical traders join the buying, expecting to sell to “greater fools.” Price gains become nearly parabolic. Paper fortunes are made. Greed rules. Meanwhile the smart money is selling to the dumb money.4. Blow-off Phase. At some point buying abates and a paradigm shift slowly – or sometimes quickly – unfolds, as market participants realize something has changed. Sellers now find few buyers and prices fall quickly. Leveraged speculators face margin calls and are forced to sell. The decline becomes a crash.Everyone now views the market as “a house of cards,” and prices plummet at a rate much faster than when the bubble was inflated. Often, prices fall below pre-bubble levels. The market becomes universally hated. But eventually the smart money starts buying again, recognizing the panic has created an opportunity to buy assets at bargain prices.This classic bubble pattern is apparent in the most notorious bubbles of the modern era, including some very recent ones.For instance, at the beginning of 2013, you could buy one bitcoin for about US$12. By the end of November, you could have sold it for US$1,100 – a 9,000 percent gain. When the bubble popped, bitcoin prices fell over 50 percent within a month.As shown below, in 2013 bitcoin went through all the phases of a classic market bubble.Another example is the Shanghai Composite index just last year. Starting in August 2014, the index gained 125 percent in 10 months. This was fueled in part by easier margin lending rules, which allowed Chinese investors to borrow more to invest.This amplified the speculation and buying, so prices kept going higher. Thinking that buying stocks was an easy way to make money, less sophisticated investors entered the market and mania ensued.But eventually the bubble popped. Investors realized stocks were way overvalued and the market collapsed and fell 32 percent in less than a month.Over 400 years of market bubbles have shown a recurring pattern: A smart investment idea gains a following, and prices rise. The media discovers the story, ever more investors join in, becoming increasingly excited, and prices rise even more. Valuations lose connection with economic reality. Sooner or later the bubble bursts, prices crash, and many investors are ruined.With potential bubbles in so many different markets across the globe, it’s a good time to study this historical pattern. Knowing what stage a market bubble is in can help you avoid taking a bath when the bubble pops. And bubbles always pop.Learning to control the emotions that can cause us to get caught up in market bubbles is also important. You can download a special report on how to deal with these cognitive biases by clicking here.For more insight and education about a ​range of finance and investment ​issues, you can also receive my free daily investment newsletter by clicking here.

The current housing bubble is driven by two factors more than anything else. A very high demand in metro areas where the jobs are and a lack of housing in those same areas. There is largely not a national bubble. Although some housing has far exceeded its peak during the last housing bubble around 2008 that’s only true in certain areas. Many rural areas and some lower demand cities have still not recovered from the last housing crisis. Housing is also being driven by a higher than average number of investors and speculative buyers who took advantage of an over correction during the last bust to buy up property at fire sale prices. They are less likely to be subject to foreclosure risk than an over-leveraged primary home buyer would be, but are also more likely to liquidate the property if they believe the investment potential over the next several years looks poor in comparison to other investments particularly if transient renters start leaving their properties in droves and can not be replaced.If you want to know when this housing bubble will burst, it will be less about whether owners can’t pay their mortgages and more about what will shift buyers to look for more value based properties in currently less appealing places. Right now metro areas, like the Bay Area, are extremely expensive and that expense is already driving out lower income residents at an increasing pace, however, high income workers are still attracted to the area due to the better opportunities and are more than able to make up for the massive exodus. Supplies are also still getting more, not less, constrained due to an inability to zone for housing relative to office space that makes only a small imbalance in incoming residents having a disproportionate effect on housing costs. This trend is true for almost all metro areas where housing prices are soaring and amplified in places where suburban sprawl took priority over denser, more walkable, and more livable cities. The cost in housing is rising directly with the unrestrained growth in office space in the same locations where residential housing is more constrained.This is unlike the previous bubble that was driven by unqualified buyers getting into the market and buying more housing then they could afford. This bubble is very much driven by a hot employment market and healthy companies with lots of cash at their disposal they can use to continue to grow. That means if you kill the jobs, you will also kill housing. Those same high income residents who recently moved to the high demand metro areas are also likely to have shallow roots and won’t have diversified reasons for staying. That may sound obvious… recessions always kill housing demand, but in this market, expect a recession to have greater then normal effect on housing. It still may not be as acute as the last housing crisis, but lots of investment properties will likely come on early after the signs of a prolonged recession become apparent and as rentals make up a greater portion of the market then that have in the recent past, existing residents are not as tied to high cost areas. The smart move for investors will be to sell in those high costs areas where values are at all time highs and buy up properties in low demand, but high value areas where the low income employees will be drawn and high income employees will no longer be tempted to leave to the major metro areas with fewer available opportunities. Houses in the bubble are out of whack with rental prices and out of whack with the intrinsic value that competing areas offerAs to when that will actually happen, that’s hard to say, but we just paid for the past year of employment growth with debt financed tax cuts whether we needed it or not and can likely live off that at least until 2019, maybe longer, but over the next 5 years, the tax cuts for the middle class expire and if nothing else that is going to get politicians trying to do big things when we have no runway for failure. The tax cuts eroded the safety net and unlike every other developed country that is now paying off debt and positioning themselves for better long term stability, the US did the opposite and bought itself guaranteed volatility during the next down turn. There will be a recession at some point, it will be significant, and housing in the most volatile areas will see the greatest declines.