With the number of mentions of the word "bubble" on this
blog, some of you probably have started viewing me as a doomsday sayer. Well,
that's what I actually like about market bubbles, people tend not to see or
agree with the predictions till they burst!
People just don't see the over-valuations, or even if they see
them, they think it would last or even go higher, what they actually see is an
opportunity and when everyone thinks this same way, the bubble gets even bigger.
It’s called a Gold Rush and it precedes a bubble burst. A gold rush may start
when the commodity (gold, stock, real estate) may still be valuable and people
are still profiting, but it becomes a bubble when people pay a higher price for
what it’s worth and hoping or even expecting to sell it at a much higher price
in a very short time because the price keeps going up. So, once the price
starts going down, everyone rushes in to cut their losses by dumping the
commodity and the commodity’s price collapses, or in other words, the bubble
bursts. This is exactly what may happen with the real estate market in some
parts of Nigeria in a few years.
As I was writing this post, I saved a draft of the first two paragraphs
and left it till I felt like writing again. What inspired me to return to the
post immediately was a chat I had over a cup of tea just a few hours ago with
my "economist" Dad. We spoke about the astronomical prices of real
estate in Abuja and the actual cost of building the structure (cost of building
materials and the labour involved).
What my father suggested was that these houses (real estate) are
not actually bought with their true valuation in mind, because most of the
buyers are trying to find somewhere to stash their government loot and real
estate seemed like a very good idea, they are not trying to make a
profit. At least they think (as people always think in a bubble) even if
they over-pay for it right now, the value will go up in the future, even if it
doesn’t go up, what the heck, at least they got some place to keep their money
for a while and they can flip it when they need the cash, this makes the price
of real estate go up artificially. So I asked him, “what will happen to these
valuations if all of a sudden, everyone needed the cash?” “The market and
pricing will collapse” he said. This is simply what drives a BUBBLE, thinking
you can overpay now because it will be a bargain in the price of the future or
you can at least get your cash out. Once everyone wants their cash out, the
prices take a nose dive.
With a few people going around looking for fancy houses to stash
their easy earned money, these astronomical price tags become the norm.
Remember your law of demand and supply? Well, if you don’t remember that law,
go back to your basic economics, then come back after to continue reading this
post.
So once there is the need for the cash amongst a reasonable number
of these high end property owners, they flip the properties at a lower
valuation, even below the prices they bought them for and the more want to
sell, the lower the prices go. Even those owners that don’t need the cash,
they’ll see the valuations of there properties go down and some would panic and
decide to sell before it gets any worse, and as they sell, there is more panic
and more falling prices and the whole property market could take a nose dive.
It’s a domino effect.
Is this similar to the collapse of the real estate market in the
US? No it’s not. Their’s more like a credit crunch, people couldn’t pay back
the money they “borrowed” to buy their houses so they lost their homes and as
more homes were lost, the values went down and owning a home or those mortgage
loans started to look like a very bad idea and the companies that made huge
bets on those loans collapsed. Well, it’s pretty much more complicated than
that, but you get the idea.
What we have here is different
They say, when it comes to value of real estate, 3 things matter. Location,
location, location. I think that’s an excuse for over valuation. To real estate
agents, they can’t see anything more important than location because it is the
biggest driving force behind the real estate deals and sales. But, for me as
someone into building design and construction, I know the actual cost of the
building structure shouldn’t be over-looked. Last weekend I was in Abuja and
one of my class mates back in Architecture class invited us to help her make a
few decisions about some interior finishings shes working on at a huge estate
development somewhere in the town (won’t say the location though). The
estimated cost of building the houses was just a tiny fraction of the prices
they were going for and trust me, there is nothing special about the location.
Another problem is too many housing estates, apartments or
whatever you like to call them are being developed and sold at high prices. You
know what happens to the price tag of a commodity when there is too much
inventory right? The market is surely over-valued but we won’t see a sudden
collapse like what we saw in the US. But in 10 to 15 or even 20 years,
something will happen and shake the market and the real estate market in
Nigeria will correct.
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| Ok this photo has nothing to do with Nigeria, but it has everything to do with the warning of a bubble. |
In 1929 before the market crash that lead to the great depression,
a wise Wall Street guy said, “You know it’s time to sell when shoeshine boys
give you stock tips. This bull market is over.” Come to think of it, have we
ever had more real estate agents, experts and advisors like what we have now?
If everyone is doing it, then it’s time to get out. You mustn’t get out now,
but be ready to when it happens.
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