Date: 2014-09-30
Why properties tend to be bubbly
In so many major crises, property bubble, which somehow is always there, either initiates or exacerbates the crises. This in my view is because the property market is inherently bubbly. We can find the reason for the property market's tendency to be bubbly in the nature and the structure of the property market.
First, it's a monopoly market by nature. Property owners have the monopoly over the location. Real Estate Investment Trusts and Private Equity groups exist, but still, they all collectively claim the monopoly right for a certain location, essentially. This means that, regardless of the rate of return of a certain property, as long as the holder of the property decides to keep the rate low while keeping the ask price of the property high, the property keeps whatever price tag the landlord decides it to have. As long as there is enough credit to keep the landlord afloat, even high vacancy can be endured for an extended period of time. Landlords' credit could often be earned from their property holdings, which ironically grow with the scale of their gearing or shortfall of cash.
Secondly, it's a relatively illiquid market. The transaction cost is high, and the minimum threshold of the capital required by the buyers is significantly higher than most other markets'. This hinders timely price discovery, if there is any.
Thirdly, valuation criteria are highly subjective, especially in the case of the residential estates. Intangible, artistic, emotional components of the space: convenience, stylishness, view, coziness, et cetera, are valid factors that should affect the residential estate values, and one is never in a position to judge someone else's preferences.
For the reasons listed above, in properties, whatever persuasive argument a seller can come up with and whatever interested buyer can afford end up deciding the market price: one price per transaction. So, it makes sense for the property market to effectively absorb excess liquidity.
Amazing market to play as a broker, it seems.