Time to stop bubble babble
Hubble and trouble, is there really a housing bubble? If I had my way, the term "housing bubble" would be expunged from the Kiwi lexicon.
Tuesday, June 26th 2012, 12:00AM 
5 Comments
It's a phrase that has no sensible meaning. What is a bubble? Why is a bubble so bad? You can have little bubbles, like those you get when you're washing the dishes, and you can get those ginormous ones that you see people blowing outside.
A bubble always starts small and grows into something bigger. When is a bubble too big and what would happen if the bubble liquid just stayed flat or, worse still, went down the sink or got spilled?
What gets me is that anyone with an ounce of knowledge about finance and markets knows that everything moves in cycles. House prices. Shares. Bonds. Gold.
If markets didn't move in cycles, life would be boring and no one would ever make any money (or lose any, either).
In the share market, we talk about these cycles as being either a bull or a bear market. In recent times it's hard to know what it is and whether it's just changing all the time. But when we have a bull market do we call it a bubble and have a collective panic? Nope.
The same happens with shares in a company. When they get overvalued is there widespread panic? Nope.
The simple thing about markets and prices, whether it's a house or a share, is that there has to be a willing buyer and a willing seller. If someone is prepared to pay a price which others may consider too much, it's no one else's problem.
These are two individuals who have the wherewithal to do the transaction. Likewise a real estate transaction is rarely done without a bank getting involved, and they know a bit about making money and risks.
They aren't going to lend money if they don't think that a) they won't get their money back and b) they won't make some money out of the deal.
And the other thing about the housing market is that it's not just one big, amorphous mass.
Each house in each street has different investment characteristics. Just like a house in Western Heights in Rotorua will be different from one in Manurewa.
It's time we popped this bubble talk. It's just babble.
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Comments from our readers
In response to other comments out there (as this was published elsewhere) it is correct that banks in Europe, the US and elsewhere made some stupid decisions which led to the GFC. However the Australasian banks actually handled the situation quite well.
I had an interesting conversation with one banker recently and he said that when the crisis struck they had little experience in dealing with losses from property investment, however it appears they managed the situation satisfactorily.
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Isn't this the reason the world is in financial turmoil at the moment? Among other things of course.