From the CEO: Bubbles are for Children
Dan Conn, Chief Executive Officer of Christie’s International Real Estate, shares that in real estate, there is no such thing as a “bubble”
I spent much of the summer running around (very happily) after my tireless five-year-old girls, who love nothing more than playing with their little bubble machines in Central Park. I watched them laugh and scream with joy as they popped the bubbles, one after another after another (note to self: invest in a bubble toy manufacturing business).
As I watched them, I thought back a few times recently to an interview I did in the spring of 2015. The anchors were pressing me to say that the increasing number of US$100 million+ homes was evidence of a real estate bubble (today there are 37 US$100 million+ homes being marketed publicly worldwide). My response at the time was that uber-luxury homes are evidence of absolutely nothing other than the fact that there is a very small group of individuals worldwide who can afford to own homes at the very high end of the market. (Forbes lists only 1,810 billionaires worldwide in 2016.) I also pointed out that these homes are generally one of a kind, have a unique and compelling provenance, offer spectacular features throughout, and provide the heightened level of privacy and service that these buyers require — perfect, in other words, for the discerning ultra-high–net–worth collector that Christie’s has advised for the past 250 years.
Dan’s twin daughters playing with bubble machines in Central Park.
Dan’s twin daughters playing with bubble machines in Central Park.
In retrospect, what struck me about the conversation was that their discussion of a real estate “bubble” (a frequent and sensational media topic when markets are hot) completely missed the point. In real estate, there is no such thing as a “bubble.” Homes don’t pop. Unless you believe in the three little pigs, or you have witnessed a serious weather event like an EF5 tornado, you will never have seen a home bursting like a bubble.
Scroll through our gallery of $100 million+ homes:
See a full list of the current $100 million+ listings worldwide
Beyond the visuals, here is the analytical point: while real estate prices rise and fall and rise again over time, the value is generally never lost (remember what Mark Twain said: “buy land, they’re not making it anymore”). In the worst of times, the equity invested in a home may be temporarily diminished. However, high–net–worth buyers have tended to be less highly leveraged and have held onto their real estate investments at times of crisis. For those who have mortgage financing, the winds were more at their back in the depths of the recent global crisis than they would have been historically. Between government pressure to curtail bank foreclosures, and lenders actually realizing that patience is a virtue in real estate, owners have often been allowed to keep possession of their homes, most of which have recovered their value since the depths of the great recession.
Banks learned long ago that a panicked foreclosure and sale strategy is a horrible way of recovering an investment in a global crisis. Patient lenders have almost always been rewarded for forbearing and waiting for home prices to rebound. The same cannot be said of investment banks and their clients, who deal with margin calls when equity prices fall precipitously in short periods of time. Unsurprisingly, many owners of equities who borrow against equity value have fared much worse in periods of heightened volatility — worst of all when they ride a stock to zero in a market collapse (unlike popping homes, corporate bankruptcy is not such a rare event).
The data supports my thinking. I looked recently at how U.S. national home prices performed from the beginning of 2000 to the end of 2015, and the value increase was approximately 75%. Over the same period, the S&P rose by less than 50%, and what you see when you look at the numbers is that there can be gut-wrenching volatility in the equity markets — stock prices drop significantly more than real estate prices in times of distress. Peak to trough, the S&P dropped by over 50% during the measurement period, versus only 25% for U.S. residential real estate. Looking at the stock market volatility index reminded me of my grandfather’s driving when I was a little boy — gas, brake, gas, brake, gas, brake.
Sure, you might say, but companies in the S&P pay dividends that increase the overall return. To which one might ask: can you rent your stocks out on Airbnb when you are away for vacation? Or by the month or year? And would you ask your stock broker if you, your kids, pet dogs and in-laws can all live in a stock certificate so that you can save on the rent you would have to pay if you did not own your home (sorry for the old-school reference — maybe I should say server where your stock holdings data is stored)? Of course not, because unlike real estate, equities are not “real” property. They represent a fractional ownership in a company that, like a bubble, really can disappear. And while you can borrow money against the value of your stock portfolio, you can borrow more (at still sensible debt levels) often at a lower cost of capital on your real estate. This makes your overall return from real estate more attractive — that is, if you are in it for the returns over the long term and not the memories of bubbles flying in the summer wind.
