|Housing Bubble - Boom or Bust?|
Consider an investment: You have a 50% chance of doubling your money, and a 50%
chance of halving it. Quick now: do you take the investment?
The correct answer, clearly, is yes. If you take out a large number of
investments like this you would (on average) increase your capital by 25% each
So, let's apply this to buying real estate. You don't really know if house
prices are going to go up or down. Doom-sayers talk about a 'correction' of 50%,
while every real-estate agent seems to insist that you will double your money
'in only a few short years'.
So what do you do? Clearly, you buy now! You borrow the most money you can to
buy the most expensive house you can. Not only did the strategy work well for
your parents, but the logic above is inescapable. Follow the crowd, and you
can't go wrong. Or can you?
Well, the logic makes a bubble which eventually collapses. The probability
of a fall (versus a rise) gets greater and greater, and then property becomes a
So what does this mean? Property won't fall until an overwhelming majority
believe that it will fall. When will that be? Who knows.
In the meantime people will continue to make money. After all, even fools
can be right by chance, like one of the most foolish economists in history
"Markets can remain irrational a lot longer than you and I can remain solvent".