When a Property Bubble Isn't Speculative

Now that I've started noticing the "speculative bubble" meme, I seem to be seeing it everywhere. The latest person to use it incorrectly (IMHO) is none other than Robert Shiller:

According to the Standard & Poor’s/Case-Shiller US National Home Price Index, home prices were already rising at almost 10% a year in 2000 – a time when the Fed was raising the federal funds rate, which peaked at 6.5%. The rapid increase thus appears to be mostly the result of speculative momentum that occurred before the interest-rate cuts.

Not all bubbles are speculative bubbles, and momentum can drive prices upwards even in the absence of speculation. Consider a housing market which has been rising at say 15% per year, or more. When a house comes on the market, a bidding war ensues. Each house that comes onto the market sells for more than previous comps. Sellers get greedy, ask for silly amounts of money, and, surprisingly often, get what they ask for. Buyers get scared about being priced out of the market, and desperately try to buy anything they can, just to get a foot on the property bubble. You know the story: we've all seen it happen. But the point is, there's no speculation: the buyers aren't buying to flip at a profit, and aren't motivated by the prospect of selling at a higher price in the future. In fact, their real motivation is fear (of never being able to afford a house), not greed.

For a prime example of a non-speculative housing bubble, look at Manhattan, right now. Prices here are continuing to rise even as they're falling elsewhere in the country, and even after they've already risen much more than prices in most of the rest of the country. And yet Manhattan has few if any condo flippers, buy-to-letters, or other byproducts of a speculative mindset. For one thing, most Manhattan apartments are co-ops, not condos, and it's very hard to flip a co-op. The vast majority of buyers in the Manhattan property market are simply individuals who want to buy a home to live in. They're not speculators a la Miami Beach or Orange County.

So now cast your mind back to 2000, when Robert Shiller claims there was "speculative momentum" in the US housing market. There was momentum, to be sure. But 2000 definitely predated the idea that speculating in property was an easy way to make outsize profits. Back then, speculating in tech stocks was the easy way to make outsize profits. The tech bubble had to burst before any kind of speculative bubble in property really got started.

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