The phrase “property bubble” is never far away from the headlines whether you are looking at Australia, the US or the UK. Despite the fact that we all know the potential damage that property bubbles can inflict on economies it does make you wonder why governments around the world don’t do more to stop them occurring?
There are many ways to look at a property bubble and the reality is there are many reasons why they occur. We will now take a look at some of the subjects associated with property price bubbles which you may not have considered.
Whether you are investing in property or stocks and shares human nature does play a major role in the direction of individual markets and individual asset prices. The impact which human nature can have on property markets can be summed up in three words “fear and greed”. There is the fear of missing out on a rising market or being left with an asset in a falling market. This prompts over exuberance and excessive negativity in equal measures.
Greed is also a major factor, often prompting investors to throw tried and tested strategies out of the window and literally follow the markets. While there is a place for momentum investing you need to have a focused mind for this particular activity and detach yourself from emotions.
Weight of money
While governments of day obviously have the power to pass new legislation the fact is that many investment markets such as property are dictated to by the weight of money they attract. When you bear in mind the billions upon billions of pounds invested in the UK property market in any one year, this can reduce government options in many ways. While the weight of money coming into a market can push prices higher, the weight of money leaving a market can push prices to “unbelievably low” valuations.
Historically while some major government policies and regulations can have a significant impact upon property markets in the short term, in the longer term markets tend to find a way to come to terms with change. In many ways uncertainty is the greatest enemy of any investment market because, whether good or bad, if you have the details of forthcoming changes you can adjust valuation models.
The reality is that a home will for many people be their largest investment and therefore it is in the best interests of the government of the day to ensure that property markets remain buoyant in the longer term. The ability to inject a feelgood factor into the electorate just prior to an election can be a game changer as many political parties have seen over the years. Do not underestimate the power of the feelgood factor which can often paper over the cracks of issues in years gone by.
We have touched on a few reasons why property bubbles keep on occurring time after time despite the fact they can be particularly harmful to economies. We have only scratched the surface of this very interesting and often controversial subject.