tim's experiment

It seems the business pages are awash with people who wish to assure us that there is no housing bubble. Prices are perfectly reasonable in historical terms and there is no need for the government to do anything. Well it would perhaps be too easy to ascribe this to either a position in the market or a desire to please friends in the business, but it does seem a bit suspicious. Some of the evidence cited in support of this view is very technical. Some of it is a bit tacky. It seems that real estate agents can always come up with convincing reasons why this is a good time to buy. I wonder why that is…

A particularly eye-catching part of the statistical scenery is the figure for empty flats in Hong Kong, of which there are apparently 120,000. If you are determined to look on the sunny side of things you interpret this as indicating that there is no shortage of flats in Hong Kong. Current high prices are purely a result of our dollar being tethered to Mr Obama’s apron strings. So mortgages are cheap. And there is no bubble. And the government should not increase supply, and if it does then it will get the blame when prices come down.

I have a problem with this interpretation. I do not see the owners of these 120,000 flats making frantic efforts to let or sell them. After all if they wished to do so, they could manage it by lowering their asking price. Every economist since Marchall has maintained that a free market which is functioning properly will “clear”. In other words, if there are 100,000 empty flats for sale, then the price will come down until 100,000 willing buyers appear. Why is this not happening?

I turn at this point to J.K. Galbraith’s old but still very readable book on the Great Crash of 1929/30. Galbraith does not go in for any of the exotic statistical stuff now on offer. He looks at interest rates as a possible problem and rejects the theory. His bubble indicator is rather qualitative. A bubble forms when people aquire things for which they have no use or need, with a view solely to benefiting from an expected rise in the asset’s value. If you bought a tulip bulb because you wanted to grow tulips that was OK. When people started buying tulip bulbs because they thought the bulbs would double in value just sitting on a shelf, they were blowing bubbles. If you bought shares in the South Sea Company because you thought it was a good company with excellent long-term prospects then you were an investor. If you just bought them because you were fairly confident that someone would pay you three times as much for them next week then you were blowing. If you bought a flat recently, to live in, fine. Whatever happens to property prices you will still have somewhere to live. If you bought it because the rent income would more than cover the mortgage payments that is also OK. I hope you didn’t subdivide it. If you bought it because propsrty prices always rise so it will be worth more next year than this year .. well good luck. You’re probably getting better odds than you would get in Macau but it’s still a gamble. And the government is not obliged – though it may be talked into it – to ensure that you win.

The question we now have to ask ourselves is why these 120,000 flats are sitting unsold on their owners’ metaphorical shelves. They are not being let. They are not being sold. They are not being lived in. They are, as one bubble non-spotter put it, a “popular investment for middle class Hong Kongers.” Not to mention mainland money-launderers. But investments come in two categories. Investments which produce an income flow you hold for the long term. Investments which are intended to rise in value are dropped like hot bricks if the relevant prices seem to be going down.

Well we shall see. The proof of the bubble is in the bursting. Bubbles do not deflate gently. They pop. If the fall in property prices is slow and smooth then the apostles of complacency were right. If the fall is sudden and precipitate it will be because there was a bubble after all. It will not be the government’s fault. But some blame will attach to the people who told us there was nothing to worry about, and prices would go onwards and upwards …. for ever … to infinity and beyond…