Real Estate: Bubble or Not?

Every time I talk about my sector of specialisation, that is the real estate sector, I get asked about my opinions of the real estate bubble forming in Mauritius. With time, it happened to me that some people use the expression to showcase their understanding (more often misunderstanding) of the price hike in the real estate market. Increase in land prices is however not synonymous with bubble! Caution needs to be exercised when using this term as crying bubble unnecessarily is like crying wolf!
Many claim that the first major financial bubble started with the Tulipmania during the mid-1600s. In the 1637, the price of a rare tulip bulb, with a rather stable production cost and not much usefulness, reached a level of about 20 times the level of three months earlier. The beauty of the tulips seemed to entice the Dutch people (just like our dodos did back then, you can imagine!) and the rarity of the flower meant that they were selling at a premium. As prices started to rise, people were trading their land, life savings, and everything else they could liquidate to get more tulip bulbs. The prices shot up fast and high until people decided to cash in their profits. Soon, with more sellers than buyers in the market, the prices started to dive, making many casualties on the way.
There is no accepted definition of the word “bubble” except that we know two things for sure: (1) bubbles ultimately end in a price crash; and (2) when people are in a jolly mood, lessons from previous bubble bursts are easily forgotten! Fast-forward to several centuries after the Tulip mania, the world has witnessed countless bubbles – precisely confirming the point (2) above!
According to Shiller, the financial guru, bubble starts to inflate with investors’ contagious enthusiasm that spread from one person to another. Just like a gossip, which gets out of hand, the embellished success story in the property industry keeps amplifying, drawing in larger classes of investors. Since everyone wants a piece of the cake, despite doubts of the real value of an investment, everyone is drawn by the success stories mostly through envy and partly through a gambling excitement. Everybody wants to buy, build and cash in the profit!
It is however all too easy and naive to label all increases of property prices as real estate bubbles. People do get very imaginative about bubbles and the bubble bursts, without them properly understanding the economic fundamentals. The basic interaction of land demand and land supply nevertheless can be the hardest thing to gauge, even escaping the grasp of the most experienced economists. In fact, “economists have long debated whether bubbles can be identified, or indeed stopped, before they can cause widespread damage, as the crisis of 2007-08 did” (The Economist, 11/02/2017).
As an island, Mauritius is in a very delicate situation for: (i) it has limited land resources with topographical constraints; (ii) it is evolving into a high-income country; and (iii) it is a strategic geographical springboard into Africa. Restricted land supply and good demand fundamentals therefore mean that hikes in land prices are inevitable. We are however not immune to the irrational enthusiasm of investors. It is crucial to tread carefully but also a total aberration to oppose real estate development based on misapprehension.
‘Opinions expressed are solely my own and do not express the views or opinions of my employer or organisations I support.’