Talk of a bubble in Aussie Housing sounds ridiculous to me. The Great Bowling Bubble of 1960 shows you what a bubble really looks like.
What does a bubble look like?
Well, if you believe some people, you’re looking at one right now. See that house? That’s what a bubble looks like.
I know. Crazy, right?
But just so we’re all on the same page, let’s have a look at how a bubble really works.
And so I present to you the Great Bowling Bubble of 1960.
If you’re like most people, you’ve probably never heard of the Great Bowling Bubble. It was never responsible for the kind of carnage we saw in the dot-com bubble, and you won’t find it in economics text books.
But it gives us a great insight into exactly how a bubble works – the dynamics of destruction.
In post-war America there was a relatively short-lived boom in ten-pin bowling stocks. Yep. Ten-pin bowling, that great American pass-time. And I guess this is one of those ‘only in America’ stories.
We think about bowling as being a pretty recent pastime, but the game itself is ancient. Throwing balls at a target has been around since Moses was a minor. Apparently, the modern American game has it’s roots in Dutch immigrants.
But like many bubbles, our story begins with a technological innovation – the invention of the automatic pin-setter in the 1950s.
The thrill of a mechanised, indoor leisure activity was a revolution, and the popularity of the game exploded, especially among blue-collar working Americans.
As a result, the number of bowling alleys in America nearly doubled from 6,600 in 1955 to 11,000 by 1963. Over the same period, the number of people bowling in leagues increased from less than three million to seven million.
And around this time, “action bowling” emerged in New York City and quickly spread. According to the New York Times, this was “a high-stakes form of gambling in which bowlers faced off for thousands of dollars”
“You’d go at 1 in the morning, and there were 50 lanes and the place was packed,” bowling hall of famer Ernie Schlegel (no, I didn’t make that name up) told the Times. “The action was huge back then, like poker is today.”
And with so many people believing that the golden age of ten-pin bowling had come, share prices in bowling companies exploded. Stocks in Brunswick Corporation for example increased a mind-boggling 1,590% between 1957 and its 1961 peak.
And all this euphoria resulted in a huge expansion in the number of bowling alleys. In ten years the number of alleys doubled, from 6,600 in 1955 to 12,000 in 1965.
But there was never the demand to support that kind of capacity. The profitability of alleys slumped, and with it, share prices came thudding back to earth.
Demand never reached expectations. The novelty wore off and people started looking for other things to do. Blue-collar workers also started fleeing the inner-city for the suburbs.
Bowling remained a popular pass-time. President Nixon had a bowling alley installed beneath the White House in 1970! But it’s never regained its peak. Today, there are still less bowling alleys in American than there were in 1955.
So what do we make of all this?
Well first of all, the bowling bubble, like all bubbles is initially carried on the back of supply and demand.
In the early years, there were more people wanting to bowl than alleys to house them. The profitability of alleys spiked, and accordingly, so did their share price. That’s phase 1.
In phase 2, euphoria kicks in. People stop believing that we’re looking at some sort of temporary supply/demand imbalance, and start believing that we’ve entered some sort of new world order. The popularity of bowling would increase indefinitely until every American was bowling, all of the time.
We saw the same thing with the dot-com bubble. People believed we’d entered some brand new golden age of e-commerce, and the ridiculous valuations being given to tech companies were justified.
Phase 3: Reality bites. Supply catches up with, and then over takes demand. People see the golden age is a myth. Over-capacity leads to falling prices and falling profitability. The bubble deflates or pops.
This is pretty classic really.
So how does the Great Bowling Bubble compare with Australia’s housing “bubble”?
Well, phase 1 is about right. We’ve seen a run up in prices because the supply and demand dynamics have driven it that way. Household wealth, low interest rates and Chinese buying have driven up demand and prices have responded.
But what about phase 2? I haven’t heard of anyone talking about some sort of golden age of housing. There’s no revolution in the housing market that suddenly means everyone wants two houses to live in. No radical new way of doing housing.
No. Housing’s just been doing what it always does. Nobody’s making plans on the belief that housing has been through some sort of radical paradigm shift.
And likewise with phase 3. There’s no over-capacity in the housing market. No great swathes of suburbs left empty and waiting for buyers.
In fact, as I keep pointing out, for the past decade, every year has seen fewer houses come on to the market than the year before. Under-supply is a much bigger threat than over-capacity.
And without over-capacity putting pressure on prices, what’s going to prick this so-called bubble?
The Great Bowling Bubble was built on the assumption that bowling was only going to become more popular. When that assumption didn’t hold, the market collapsed.
What’s the equivalent unproven assumption in housing? That our growing population will need more houses? Seems pretty safe to me.
I’d love to think that this is the end of it, but we haven’t heard the last of this bubble talk.
It comes back with every cyclical upswing.
Richard B says
Wrong, John. There are and have been housing and property development bubbles before. Just three instances as examples. I remember Canberra in the ’70’s with whole suburbs developed by the Government of the day but nary a house in them. Took years to infill. A few years ago in Melbourne there were huge developments planned and built, but few if any buyers. Lots of property specs went bust!! Prices fell dramatically to clear and have only recently recovered. Right now there are whole cities in China, replete with high rises, shopping malls and the lot. Only thing missing is people! No one lives there.engine and tired of making more people! Lots of investors will do a bundle.
There will be more people eventually and they will need somewhere to live, so later rather than sooner, they will be occupied. It’s really a matter of timing rather than bubbles.
So, in the end, you’re right too. But plenty of people, like me for instance, have done a motza in property by going in at the wrong time and couldn’t wait the distance until it turned, to get out!!! My bubble certainly got burst in property, but I’m prepared to go again, a little (read, LOT) wiser this time. But, I’ll never go bowling again.
brett says
For housing to keep on rising you need people being employed. If a person loses their job do you think they will still afford the mortgage payments. With car manufacturers leaving Australia and a certain communications company recently losing 300 plus jobs how do these people buy products and pay mortgages. Only professionals and wealthy overseas investors can now afford the high prices of Australian Property. I like Richard am not prepared to borrow massive amounts of money to put into one property purchase the risk is too high..
Thomas says
Yeah I am still in waiting mode having bought in to an off the plan apartment beachside Perth for 1.8M at the top of the bubble in 2008. Bank valued it at 1.4M on settlement 2 yrs later in 2010, and now it looks like around 1.2M on market if I am lucky enough to find a buyer. Cos its just 1klm Sth of Cottesloe beach I believe it will come back one day but as I am 63 I may be dead by the time it does. Other problem is holding costs inc interest and strata costs – rent return is pathetic ROI just $900 pw fully furnished. What do others think hold or quit?
mik says
In your 60s, i rather go hold ten pin bowling then holding debts.
Andrew says
Some food for thought.
1. you could get similar return on your money in a TD with no risk. (also no potential for capital gains)
2. sell it, take your $1.2M and use 40% leverage to buy a commercial property with a 7% yield, which would give you $140Kpa, take our your repayments and you would have $90Kpa and still have exposure to the capital gains you are hoping for in your residential property. (using no leverage you would probably still find a place for $1.2M with a 6% yield which would give you $72Kpa)
Good luck, by the way I am not qualified to give financial advice.
For qualified financial advice you would need to go and speak to a 25 year old with a Cert 4 in financial services and $25 in the bank.
Suzsi says
Thomas, i reckon you got given really bad (or no) advice. Spend that sort of money on something you want to live in – but a residential rental will NEVER give you a decent return in that high a market. In a falling market, the expensive homes fall first and hardest. Livable mid-range stuff hardly suffers. For a similar amount of money, you could have bought 4 homes around $500,000 and let them out at $380 – 420 p/w each – so nearly doubled your income. + 4 homes to go up in value and if you sell one – you’ve still got 3.
I think it’s a rising market. Hold for a while and examine your selling options towards the end of the year.
Remember, if you sell in a fallen market and you buy in a fallen market, your losses aren’t too bad. If you sell and never re-buy, it’s all loss. So wait a while.
i am absolutely not qualified to give advice. My opinion is just that – my opinion.
coljohnsonColin says
Well, I’ve both won and lost at real estate. In the end, this blog is really about one man’s opinion – John’s.
I can’t help but think that our bubble, if it is one, is intimately linked to the Chinese one. And when the music stops in China, and they try to repatriate some of their “profits”, the a**e will fall out of the Sydney/Melbourne markets as the Chinese sell their Oz properties at any price.
Like I said, I’ve been wrong before. Am I wrong this time?
Gerry says
S’right Colin. If anyone is old enough to remember the Japanese investment bubble about twenty five years ago, they came here spent up enormously, all on credit expansion back in Japan, where property prices and share prices went ballistic. Built resorts here, and bought up aussie assets inflating prices all on the back of the ‘miracle economy’. When the bubble burst, asset prices came crashing back to earth, and they retreated back to the homeland. Japan’s credit expansion a quarter of a century ago pale’s in comparison to China’s current situation. Hang in there first home buyers, your time will come.
Kellie says
We too have been caught in the supply demand mismatch between the construction and ongoing development phase out in Chinchilla.
We built a fully furnished 3br 2 bth 2 car home out there in 2012 when men were living in tents in the show ground.
Initially we were lucky enough to get a corporate rent of $570 pw on a 12 mth lease. A great little cash cow!
Now there seems to be an oversupply in the area. 30 odd listings for furnished property’s of the same standard and another 40 odd for unfurnished, on the rental pages of RealEstate.com.au.
We can’t get it rented at $450 pw!
Which would just cover costs.
Looks like the cow has gone dry! And we have been stuck holding the bag!
We believe the demand will catch up with supply again with new project approvals getting the go ahead but until then we are having to find the holding costs like many other Mum and Pop investors involved.
Any one want to rent in Chinchilla?
Andrew says
Some food for thought.
1. you could get similar return on your money in a TD with no risk. (also no potential for capital gains)
2. sell it, take your $1.2M and use 40% leverage to buy a commercial property with a 7% yield, which would give you $140Kpa, take our your repayments and you would have $90Kpa and still have exposure to the capital gains you are hoping for in your residential property. (using no leverage you would probably still find a place for $1.2M with a 6% yield which would give you $72Kpa)
Good luck, by the way I am not qualified to give financial advice.
For qualified financial advice you would need to go and speak to a 25 year old with a Cert 4 in financial services and $25 in the bank.
Andrew says
Is it possible the second phase of the bubble is the large number of people owning residential property as an investment? I beleive we are in this phase, and that eventually there will be a phase three, but i don’t think it’s started yet.
Tom says
With so many Aussie SMSF property purchases, there is an inbuilt long-term stability supplied. All SMSF investments MUST have the sole purpose of providing financial support in retirement. Family Trusts may be able to buy and sell, paralleling and benefiting from the market movements, But SMSFs have to be investing for the long haul.
The nature of Australian property investment has changed since the days of “Negative Gearing” and simply “Buy Low & Sell High!!!” Now, there is a much larger portion of Middle Market purchases, using Positive Gearing with “Buy Low & Hold!!!” Very little bubble potential here. If the market drops, the SMSF investors will be forced to hang in there hoping rent returns hold – or at least cover repayments.
The Chinese Bubble is potentially a bigger worry.
Angus says
I was interested in one that I heard the other night that as the deral government is broke they are encouraging immigration to bring in new revenue and spending to Australia. These migrants will all need housing so could well assist with increasing demand and putting medium level house prices up.
Peter says
Safe as houses ? Nyet. No more.
Garrybreezmann says
Jon, I’d love to know your thoughts on my comments here. You’ve been talking up Aussie real estate for a while, and I know we have a housing shortage, however, if you look at the companies that have gone from the Australian business scene recently, it seems that Australia is in for a severe financial setback. We have lost, Kell & Rigby, started in 1910, gone after 100 years; Alcoa, Toyota, Ford Holden, Marshall Batteries, SPC bought by Coca Cola, looking for a $50 million dollar handout from government after declaring a $250 million profit … The Federal Government is now talking about a waiting period for young people to get the dole. Good. But where is the education to enable them to work, where are the jobs to give them a career path and the ability for home repayment?
This housing bonanza you talk about. Who is going to buy these houses, and with what?
WRJ says
It seems to me that a very common mistake is thinking that Australia is one homogenous market. Property prices are always subject to supply and demand in the local area because you can’t pick up the land and take it to the buyers. Chinese foreign buyers are not buying houses in Chinchilla or Werribee. They are buying in city centres and suburbs near existing Chinese communities from estate agents who can speak Chinese. Gold Coast and Perth beachside apartments are sold predominately to out-of-town investors – usually because those people have visited as tourists when their guard was down, and were led to imagine that the tourist markets will always exist. Every market for discretionary luxuries is subject to bigger swings than markets for inexpensive essentials. The demand for expensive holiday apartments is no different.to the market for luxury cars, expensive jewelry and luxury travel – when times are hard they plummet, when times are good they boom. And when they boom, builders build more. The price for low to mid range property is affected by the supply and demand within a commutable distance to places where ordinary people spend large amounts of their time (employers and educators). The best advice I have had is to buy property within 20 minutes drive of where you live and keep tabs on the cycles and events that affect supply and demand so you can buy at a price you can afford, hold while the market increases, and avoid being forced to sell below the price you paid. Everything else is a question of how you manage to stay in the game (ie pay the holding costs) through good times and bad.
Dayne says
Jon, just read all the above replies. Wow ! Maybe it it’s just me but I’m excited about all these people staying on the side of caution! I’ll take all the opportunities that seem to elude them.
If not for me there go I !
Eileen says
Thomas, the first rule of ‘The Investors Club’ is Never, Never sell!
It makes sense, since you don’t pay capital gains and you’ll never sell at the wrong time…………………
Only you can make the call, as you’re the one paying the bills! Most people only lose money if they’re forced to sell. I would say if you think you’re going to lose money anyway, how much do you think you’d be prepared to lose before you bite the bullet? Is there a possibility that you might not…………. if you wait?
We have four investment properties in our family, (plus our home) so I think we’re committed to the property market. People rarely lose money on houses, if they’re in it for the long haul. We looked at different areas to invest in, (for over supply) and also for the ratio of investment to the rental return.
We never considered buying shares, even though we know there’s more money to be made, (and lost) as we would be completely out of our depth………which shares to buy, when to sell etc.
We found that the rental returns on cheaper properties were better value than more expensive ones, (ie; Cost 312k – v – rent $340 p/wk) (Cost $352k – v – rent $390 p/wk) (Cost $420k – v – rent $465 p/wk) (Cost $565k – v – rent $560 p/wk). They’re cheaper to service and whenever they’re empty, you don’t lose as much rent. You could argue that you don’t get as much rent in the first place, but if you look around, you can find rental returns very good in relation to cost outlay.
Andrew……..you’re funny!
Andrew says
Thanks Dane, I’m with you, all these negative comments, I’m excited about bubble or no bubble. More deals for you and me. Can I suggest to all the others to go an invest in some education so you can create your own market and irrespective of rising markets , falling markets, bubbles, Chinese investors blah blah your investments recession proof, safe as a bomb shelter , profitable and cash flow positive.
Happy investing
Andrew
Ps: thanks Jon for that post good analogy
Dayne says
Nailed it Andrew!
The best investment I’ve ever made was in myself! And the best part is that it was free! Still amazes me though, here we have a bloke who has the runs on the board, is willing to share his knowledge time and wisdom to help other people be successful ( for free! ) Yet some people who have made mistakes dare I say failed, feel the need to challenge some of the most logical explanations I have ever heard.
People don’t let your life be ruled by circumstance! The moment you except 100% responsibility for your current situation is the moment you will take 100% control if your future.
If it’s too be, it’s up to me 🙂
Rachel says
Thanks Dane and Andrew for your comments. I’m with you guys. I’ll also take the opportunity these guys don’t seem to want to take due to negative market conditions which may or even possibly may not eventuate.
The worst thing I have ever done in my life is not take any action because I listened to negative comments about market conditions from (so called) property investors who really knew nothing about the creation of wealth through property. A big lesson learned by me ‘Don’t let someone else’s opinion become your reality’.
Like Andrew says, educate yourself. Purchase properties where you can manufacture your own capital growth on your investments irrespective of market conditions. The rise in the market should be more looked upon as a bonus when it happens. It’s not the be-all and end all to create wealth in property. Don’t focus on what you are purchasing, think about what you can create with that investment.
When I do listen to someone else’s opinion, well I definitely would rather listen and take on board someone who has what I want and where I want to be.