CAN PROPERTY PRICES FALL?
There is a general myth that property prices can not fall and can only keep going up.
There are various reasons given for this. "Everybody wants a place to live", "Land is always in short supply as it can not be produced", "Inflation will push up the prices constantly". There are so many similar arguments and almost all of them will be so convincing to believe that the property prices,particularly Living Homes, will rise forever.But history reminds us that there have been enough crashes in property prices in the last 200 years. On four different occassions in U.S - during the 1830s,
1880s,1920s and 1980s. It is also a strange coincidence that it has happened almost once in every 50years in U.S. Not only in America, it has happened in other countries also. In 1773 there was a crash in property values in Britain, in 1838 in France, in 1870 in Germany and again in 1890 in Britain.In his paper"Urban land and Building Prices" Prof.E.A.Vallis puts the average price of residential land in Britain in 1899 at 900 Pounds an acre.By 1904 the price had fallen to 130 Pounds an acre, a fall of 85% in 5 years.
Now let us come to the 1920s property boom and bust in Florida,Miami, U.S. After World War-1, America, like many other countries was in the grip of recession, particularly in 1919-1921.But with the boom in Automobiles in 1920s and the completion of Dixie Highway,an increasing number of americans to fulfill their endless desire for leisure moved towards Florida.Rich soil and good climate made Florida extremely attractive to citrus fruit growers who moved in and bought large tracts of land for farming, which was costing only a few dollars an acre.Quickly developers saw a growing need for vacational and residential homes. The chain of events pushed up the property prices quite sharply that people started speculating by booking houses with a meagre 10% down payment with no intention to pay the 1st instalment of 25% in 30 days time but will look to sell it at profit before that.This speculation fire started in 1924 was ablaze by mid 1925 and stories of extravagant profits started floating around further inflating the price. There was a plot in the city which a poor woman bought for 25 dollars in 1896 which she sold for 150,000 dollars in1925. The theory of greater fool came into play as everybody is looking for the somebody to pay a higher price for his plot or piece of land. According to state cencus, the population of Miami increased from 30000 in 1920 to 75000 in 1925 and nearly 25000 of them were REAL ESTATE AGENTS - 1/3rd of the population. Eye catching hoardings with sky scappers were kept everywhere projecting Friendly sun,Gracious Rain and Soothing Tropical Wind.
By the end of 1925 there was a slight pause in the upward momentum in prices but the Mayors of Miami,Miami beach and Coral Gables assured that it is only temporary or a technical correction(as Finance minister or Exchange Regulators often say during stock market fall)By mid 1926 the anticipated interest from America's wealthiest Bussinessmen and Sportsmen was not coming through. Finally the real hit came on 18th September 1926 when 2 harricanes hit the avenues of Miami streets. The soothing tropical winds had a great start from West indies and gathered speed to toss big steam yachts, trees,lumber,pipes,tiles and even small cars and sent them crashing into the houses. The terrible wind left 400 dead,6300 injured and nearly 50000 homeless. This lead to defaults in all the margin payment trasactions and banks quickly seized the properties to recover whatever they can.Still the bank failures came thick and fast in1928 and 1929. In those 2 years, deficits from the failing Florida banks were higher than those of any other state in America. A person who visited Miami in 1929 described like this: It was looking like a Ghost town with most of the real estate agents office closed and showing signs of dilapitation, the exotic street name boards surrounded with bushes.
Conventional wisdom has it that residential property values always rise in the long run. But sometimes the run can be so long that most of us are dead by that time. It took 40 years for the Florida Property prices to return to the peak values of 1925 notwithstanding the inflation.
There are various reasons given for this. "Everybody wants a place to live", "Land is always in short supply as it can not be produced", "Inflation will push up the prices constantly". There are so many similar arguments and almost all of them will be so convincing to believe that the property prices,particularly Living Homes, will rise forever.But history reminds us that there have been enough crashes in property prices in the last 200 years. On four different occassions in U.S - during the 1830s,
1880s,1920s and 1980s. It is also a strange coincidence that it has happened almost once in every 50years in U.S. Not only in America, it has happened in other countries also. In 1773 there was a crash in property values in Britain, in 1838 in France, in 1870 in Germany and again in 1890 in Britain.In his paper"Urban land and Building Prices" Prof.E.A.Vallis puts the average price of residential land in Britain in 1899 at 900 Pounds an acre.By 1904 the price had fallen to 130 Pounds an acre, a fall of 85% in 5 years.
Now let us come to the 1920s property boom and bust in Florida,Miami, U.S. After World War-1, America, like many other countries was in the grip of recession, particularly in 1919-1921.But with the boom in Automobiles in 1920s and the completion of Dixie Highway,an increasing number of americans to fulfill their endless desire for leisure moved towards Florida.Rich soil and good climate made Florida extremely attractive to citrus fruit growers who moved in and bought large tracts of land for farming, which was costing only a few dollars an acre.Quickly developers saw a growing need for vacational and residential homes. The chain of events pushed up the property prices quite sharply that people started speculating by booking houses with a meagre 10% down payment with no intention to pay the 1st instalment of 25% in 30 days time but will look to sell it at profit before that.This speculation fire started in 1924 was ablaze by mid 1925 and stories of extravagant profits started floating around further inflating the price. There was a plot in the city which a poor woman bought for 25 dollars in 1896 which she sold for 150,000 dollars in1925. The theory of greater fool came into play as everybody is looking for the somebody to pay a higher price for his plot or piece of land. According to state cencus, the population of Miami increased from 30000 in 1920 to 75000 in 1925 and nearly 25000 of them were REAL ESTATE AGENTS - 1/3rd of the population. Eye catching hoardings with sky scappers were kept everywhere projecting Friendly sun,Gracious Rain and Soothing Tropical Wind.
By the end of 1925 there was a slight pause in the upward momentum in prices but the Mayors of Miami,Miami beach and Coral Gables assured that it is only temporary or a technical correction(as Finance minister or Exchange Regulators often say during stock market fall)By mid 1926 the anticipated interest from America's wealthiest Bussinessmen and Sportsmen was not coming through. Finally the real hit came on 18th September 1926 when 2 harricanes hit the avenues of Miami streets. The soothing tropical winds had a great start from West indies and gathered speed to toss big steam yachts, trees,lumber,pipes,tiles and even small cars and sent them crashing into the houses. The terrible wind left 400 dead,6300 injured and nearly 50000 homeless. This lead to defaults in all the margin payment trasactions and banks quickly seized the properties to recover whatever they can.Still the bank failures came thick and fast in1928 and 1929. In those 2 years, deficits from the failing Florida banks were higher than those of any other state in America. A person who visited Miami in 1929 described like this: It was looking like a Ghost town with most of the real estate agents office closed and showing signs of dilapitation, the exotic street name boards surrounded with bushes.
Conventional wisdom has it that residential property values always rise in the long run. But sometimes the run can be so long that most of us are dead by that time. It took 40 years for the Florida Property prices to return to the peak values of 1925 notwithstanding the inflation.
Labels: home prices, U.S property bubble
posted by manipayal @ 4:12 AM
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