I have always been intrigued by the concept of value, in particular what makes certain investments more desirable and valuable than others.
When crypto currencies like Bitcoin were dominating the headlines and social media this year, I was left wondering whether I was missing the boat.
I simply did not understand what everyone was going on about, and I don’t tend to invest in things that I don’t understand. It felt like what we were experiencing had all the hallmarks of a bubble, but it has only been hindsight that has proven this to be true.
Recently, I read an interesting article by University of Western Australia’s associate professor of finance Lee Smales who put things into perspective. It left me wondering what lessons we could learn as we head into our own potential North Coast real estate bubble in the coming years.
Smales writes that nearly 170 years before the invention of Bitcoin, journalist Charles Mackay noted the way whole communities could “fix their minds upon one object and go mad in its pursuit”.
Millions of people, he wrote, “become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first”.
The Bitcoin bubble surpasses all other cases identified by Mackay, including the well documented ‘Tulip Mania’ in 17th century Netherlands.
Bitcoin is perhaps the most extreme bubble since the late 19th century. In four years its price surged almost 2,800%, reaching a peak of US$19,783 in December 2017.
It has since fallen by 80%. A month ago it was trading at more than US$6,000; it is now down to US$3,500. Only the future will show us where the currency is headed but it does leave us with an important lesson about what creates the values that drive speculative price bubbles.
Essentially a bubble begins when the price people are willing to pay for something differs significantly from its intrinsic value. Bitcoin’s intrinsic value is based on trust and adoption and people’s willingness to accept it as a form of payment, but this is a pretty speculative and risky value as we have come to see.
In real estate we often talk about current market value which essentially is what price a purchaser will pay for a property. The intrinsic value however might include the ability to generate cash flow through a rental income; the scarcity or rarity value; and potential use.
With all the impressive new residential developments being launched on the North Coast, it is important for investors, speculators and end-users alike, to take a considered approach and learn from the past. By way of an example, historically we saw significant price increases of land within established estates such as Simbithi and Brettenwood, due to the perceived scarcity and hype.
Once the developers got closer to selling out of their available stock, it perpetuated this sentiment and we saw a number of record land prices. It has only been since a number of re-sale sites and homes have come onto the market, and following the launch of new opportunities such as Elaleni and Zululami and the announcement of much more to come, that land and house prices have normalised somewhat.
The challenge for an investor, who paid a premium for land during these bubble-like periods, is that when reselling the home they have built, the market value might in fact be the same or even less than their replacement costs due to an increased supply of other competing stock.
It is with this lesson in mind that we need to be wary of the future land and brick and mortar supply heading our way.
While we are not quite yet in a bubble, it is important to understand the big picture and look at the market in relation to an ever increasing property supply, not one of scarcity.
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