Saturday 25 November 2017

Home Truths: The bubblegum school of economic theory

Mark Keenan

Mark Keenan

THE Dublin, Cork and Galway City property markets appear to be moving through "Enthusiasm", while elsewhere in Ireland the markets are characterised by "Stealth" (buying that is).

All appear to have left "Despair" well behind.

This is how Ireland's property markets (there are arguably at least two) appear to fit into the "Four Phases Of A Bubble" model of Dr Jean Paul Rodrigue.

Dubbed the "bubblenomist," the academic from New York's Hofstra University revealed his cyclical market rollercoaster model back in 2008 just as the world financial crisis kicked in and as Ireland's property market slid towards what he calls the "Despair" stage of a market cycle.

Many believe the Rodrigue model, designed to apply that the financial markets can equally be applied to property cycles, or indeed any market at risk of a bubble.

Applied to property, his bubble phases will interest householders, as they appear to define the emotional rollercoaster of being an owner or investor as the market moves through the harsher phases.

Rodrigue's model depicts a "groundhog" market constantly repeating itself in endless four-phase movements defined by periods of "Stealth", "Awareness", "Mania" and "Blow Off". Each "phase" is in turn divided into "stages".

The most interesting phase is "Mania" (the third) in which the market progresses through stages of "Enthusiasm", "Greed" and "Delusion" to "New Paradigm" – when property prices hit their peak and investors start to believe they won't ever fall again (things are different this time/there'll be a soft landing!). Does any of this sound familiar?

At this point, prices plunge. We enter the "denial" stage when the vested interests lash out at those who report the beginning of the downturn and manage to persuade the gullible to buy in during the "Bear Trap" which follows – a temporary price rally caused by a delusional scrum to avail of the first round of price cuts.

Of course, prices soon start to fall again – passing through the stages of "Fear,"(when panic selling sets in) and then "Capitulation" (when those who can't keep up their repayments finally throw in the towel) and finally "Despair" (self-descriptive) when prices fall well below the mean long-term average. After this, the market eventually returns to "Equilibrium" and runs through the whole gamut all over again.

So where might Ireland stand in Rodrigue's "bubble" cycle?

Dublin has certainly passed the "bear trap" stage – that first jumping-off point when nervous owners sell at the first half-way decent offer.

The capital's prices fell briefly by 1.5pc in December last – having risen prior and then again afterwards. Was this what Rodrigue calls the capital's "First Sell Off"?

So Dublin, and perhaps Cork and Galway, are currently at the "media attention" stage of the "Awareness Phase" – this is marked by the prepon-derance of columns saying things like: "Hey, what about those rising property prices folks?" and "Are those price increases really based on reality?"

Worryingly, the "media" stage is the bridge from the "Awareness" phase into the early stages of his "Mania" phase.

And what about the rest of Ireland? Suggestions that some "ghost" estates and better located properties have been purchased quietly would put the rest of the country somewhere in his "Stealth phase" and perhaps even on the cusp of his "take off" stage – the point the capital likely attained early last year and also the point at which his "smart buyers" get in.

Thankfully the capital still has a way to go before the "Greed" stage kicks in and we progress to "Delusion".

But is Rodrigue's "Four Phases" model really a credible form to apply to a property market?

The answer truly depends on whether you believe in the most fundamental assumption on which Rodrigue's model is based: that when it comes to the market, we never, ever, learn our lessons.

Irish Independent

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