FOOL'S EYE VIEW
Is There a Property Bubble?

By David Berger
August 29, 2001

Let's be honest here – we're all after a quick buck. Sure, the Motley Fool preaches its long-term message – patience, education, persistence, long-term, blah, blah, blah – and we all agree with it. So sensible. But what we'd really like, if only there's a sure-fire way, is to make a killing in the near future. Hey, we're not greedy though! We're prepared to wait as much as a year or two if that's what it takes. Come on, I'm right, aren't I? There's at least a small part of you which thinks along these lines. There's more than a small part of me which does.

Two years ago it was technology shares which were the great hope for instant wealth and, as always when subjected to great stress, the human animal flees back to what it knows best. The British have always had a love-affair with property and so it's in bricks and mortar where we tend to take refuge when everything else is feeling uncertain. House prices have shot up this year and the question on everybody's lips and filling the headlines is: "Is it a bubble?"

And the answer is...

Well, I dunno. Perhaps the most critical measure of house price affordability is the monthly mortgage payment as a percentage of take-home pay. At the moment it's around 30%, which is about the same as the historical average. On this basis, houses are fairly valued. In the late 1980s however, this figure rose to 60%, which was followed shortly after by the housing crash and resulting negative equity disaster for so many people. In other words, this historical precedent suggests there isn't a housing bubble at the moment, but we don't really know.

In a way, though, it doesn't matter whether there's a housing bubble or not. I mean, of course it matters, but what matters more is how you react to either the fact or the perception of the bubble. In any individual's lifetime there will be a few speculative bubbles and many more investment fashions or trends. To jump headlong into each one and discard whatever it was you were doing before is a recipe for long-term disaster. It means chopping and changing, discontinuity, extra costs, another steep learning curve and following fashion always brings with it the risk of buying near the top ("Hey everyone look, this is a wizard wheeze for making money!") and selling near the bottom ("Damn! Got fooled again.").

I'm not saying property isn't a good investment – it has proved to be one for very many people in the last thirty years and may prove to be so in the next, we don't know – just suggesting a broader view. If you were just starting to buy shares, especially technology shares, in late 1999 and are now very tempted to enter the buy-to-let investment game, just stop, stand back and survey the landscape. At that time the "Internet incubators" such as Jellyworks were setting up in droves and going public at astronomical valuations on the basis simply that they would be making unspecified investments in the Internet. Critically, at that time there was an all-pervading feeling that if you didn't get in NOW you'd be left behind.

I submit to you, dear reader, that it is this feeling of having to get in NOW, or else miss out heavily, which is the danger signal. When such a feeling pervades an entire society it can signify a bubble, but even if it doesn't, it causes the individual to act in emotional, frantic ways which almost inevitably damage his or her long-term wealth. This urge to make money quick is a false idol and needs to be resisted at all costs. So go ahead, whack up your personal mortgage and buy the biggest house you can afford, purchase that string of one-bedroom London flats on buy to let mortgages, buy a holiday cottage in a prime area of the West Country and rent it out. Whatever. Do all these things, by all means. They may prove good moves in the long term. But that's it – the long term. Plan to make money slowly, over five or ten years at least, and accept that you're not in it for a quick buck. Then, if you do make money fast, it's a cause for a bottle of champers, but in the meantime you won't have staked all on an unrealistically rapid path to wealth.

More: the Fool's Homeowning Centre