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Tuesday, October 27, 2009

REAL ESTATE...AND OTHER THINGS OF VALUE: Land Down Under Stays Above

Real Estate...and Other Things of Value

with Yossi Feigenson

I recently returned from a trip to Australia. Yes, lucky me; I got to fly for 22 hours. Australia is quite a place. There is lots of beauty there and the people are wonderful. Once you can overcome what I call “the two psychological barriers”, namely that you are a full day of traveling away from the western world, and almost a full day or time zone away, you can actually begin to enjoy it; that is, assuming you can ever overcome the third obstacle- jetlag. One of my children caught on to something. Every time I called home we were naturally on the opposite end of the day/night spectrum. They would be getting ready for school and I would be getting ready for bed. So I would say to him; have a great day at school, and he would reply; have a good night. He got a real kick out of saying that. For an eight year old it was quite intuitive. But, that is not what my article is about.

As an American businessman, (at least in my own mind), something else caught my attention. The economic environment and the overall mood wasn’t quite the same as we were experiencing here. It didn’t take me very long to figure out why. As many of the people were so proud to tell me, Australia had actually averted a recession. The fact that a country, about which they say, ‘when America sneezes Australia catches a cold’ was able to withstand the economic malaise was a remarkable feat.

Every armchair economist I spoke to gave me his reason and interpretation of the events that lead to the non-event. I felt like an investigative journalist picking up pieces of a story. Some said it was strong Government intervention; another said that vigorous regulation and oversight in the banking sector helped. The credit market, while it did tighten up and have some under performing assets, never got involved in the unbelievably stupid loan practices that some others across big oceans did. Psychologically, the Government reassured folks that the loans would be backed and secured, so that slowed the real estate crash. Another factor was that the Government actually helped the PEOPLE, not just HUGE corporations; they gave money to each individual to help stimulate and boost spending.

If you follow my writing, you will recognize this as the time when I ask: what really happened? What were the real underlying factors? And the more important question; what can we learn and possibly do different? I know I’m just one voice, but it would be nice if we can learn something.

The Dutch Tulip mania and consequent bubble is an almost exact precursor for what has happened here. This is from a blog entry By Robert Hardaway, Professor of Law at the University of Denver.

“In 1624, frenzied speculators in Holland pushed up the price of tulip bulbs from the equivalent of a nickel apiece to 3,000 guilders (about $100,000) for a single bulb.

People forgot what a tulip bulb was actually for. All they cared about was that even if you bought a bulb for the ridiculous price of 3,000 guilders, you might be able to sell it the following week for 3,100 guilders.

When fears arose that savvy investors might figure out that the bulbs were really only worth a nickel, fearful government officials induced lenders to make it easier for investors to borrow more and more money to buy the ever higher priced bulbs and thereby keep the bubble going in order to avoid financial collapse.”

This should all sound eerily familiar. In the past ten years what we had can’t even laughably be referred to as a market. We had frenzy and chaos.

As a real estate broker I often found myself in the enviable position of trying to sell properties that made absolutely no financial sense, on any level. I would perform an analysis on the property, run all the numbers and then sheepishly present them to buyers. Truthfully, I hated it. There were people out there, however, that simply would buy anything, as long as they felt they could pass it along to another, without too much difficulty.

An owner of a good amount of commercial and industrial property in Melbourne shared with me that flipping (an almost outdated term from the "boom") is highly discouraged by way of transfer taxes due on any flip. In the US, people were having simultaneous closings of one property.

There was a level of drunkenness, irresponsibility and recklessness, combined with lack of regulation, oversight and risk management that brought us down. It’s important for us to acknowledge this if we want to avoid this meltdown again.

For once it would do us all a bit of good to take a cue from our brethren in the Land Down Under. It is not so much policy and implementation, but more common sense and intuition for what is right and what is wrong.

For more information, please visit Yossi's TNNW Bio.

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2 comments:

Rick Raymond said...

Yossi, Your analogy to the Dutch tulip bulb mania is a clear and simple analogy to use in looking at our real estate/financial collapse. It is so easy to say "how dumb were the dutch!" The analogy helps us see ourselves better.

Rick Raymond
http://richardraymondassociates.blogspot.com/

TWINGLE said...

Yes, Im aware that The Govt gave Aussies money and helped to encourage a baby boom.
The Aussie $ is riding high and me I gave it all up to live elsewhere..But did you wonder what happens to the Aussies now that they are tightening First Home loans.. At any rate Aust is becoming an expensive destination to live in due to the cost of things even at the local supermarket. I couldn't afford to bring up my 3 children as they are accustomed to here in Israel.??

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