Markets are crowds and behave like crowds. Both are simply collections of people and both can be wise or irrational. The behaviour of the Auckland housing market is starting to resemble a crowd gone rowdy and riotous; not too different from a few hundred teenagers on a Coromandel beach on New Year’s Eve. It may not be at the drunken, bottle-throwing stage yet but by all appearances, one more step and it’s out of control. The Reserve Bank is shouting for everyone to go home, property investors and other interested parties are still handing out the liquor.
Crowds of all kinds become extreme because they work on social approval: when one person throws a bottle it is OK for others to so; one person paying $1 million for a dilapidated shack justifies others to do the same.
I am always looking for good investments but I have chosen not to join the Auckland housing riot – the hysteria in no way reflects underlying value. This is a speculative binge where people are paying fortunes for houses because everybody is doing it. By any sensible measure, this bash should have ended years ago and it should never have spilled out on the streets with cops involved. I remain hopeful that it will end nicely but when a crowd gets to this stage, you just never know how the party will finish up.
Article from Sunday Star Times, 31 May 2015 – Martin Hawes