Investment bubbles: houses, cars and tulips

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white porscheThis is not really a typical slugger topic but I thought it would be interesting to look at parallels with the housing bubble in Northern Ireland (and even more so the RoI). Keep that in mind if you find what I am writing too tedious.

I have a major interest in classic cars. I have a pretty encyclopaedic knowledge of 1960s onwards sporty cars and have got assorted classic car magazines for years. My real passion has always been Porsches. They do not suit my image at all being seen as the chariots of the yuppie and as a status symbol or other more impolite explanations for their purchase. Actually I drive a middle-aged Saab (befitting my status as a boring middle aged man): anyhow although it was the ultimate yuppie chariot I always wanted a late 1980s 911 Carrera in white. Shortly before I was married I had enough money to buy one (about £15,000 – that became a mortgage deposit) and went to look at one on the Boucher Road. Unfortunately the inside door was broken and after getting in I could not get back out and had to ring the owner from my mobile (in the car) to be released. Needless to say I did not go back to buy the car.

Why the nonsense above: well it is about investment bubbles.

Until about two years ago the price of those cars (late 1980s Porsches) had hovered about £10-15,000 for years with very good / perfect ones getting maybe £20,000 (far more than I could afford now). However, over the last two years prices have gone up massively so that all but the worst are now above £20,000 often more like 25,000 to 30,000. This is not merely a phenomenon of 1980s Porsches. All classic cars have gone up markedly in price. The BBC are noting a Ferrari sold for $35 million.

Objectively this is a bit difficult to understand. An old car is practically always less good than the one that replaced it (think 1980s Ford Fiesta to a current one). Older cars are slower, less comfortable, less safe, less reliable and less economical. As such they should appeal only to those with a hobby / enthusiast interest. Logically the number of enthusiasts should stay pretty constant. Clearly there has recently been an increase in interest in retro things but still that cannot really account for the increase in prices.

Furthermore the classic car press which unsurprisingly always mentioned price now talks a great deal of rising prices and the potential for prices to rise further. Adverts talk of the potential of the purchased vehicle to rise further in value.

As I said above the rise in such car prices in interesting to compare to house prices. Houses are centrally places to live in but during the boom they became less places to live than commodities the value of which could supposedly only rise. The same arguments about price were used as are now used about classic cars: they were not building enough houses versus in classic cars they are not making them anymore. In cars it is even sillier as to maximise the increase in value of the “investment” it is necessary to avoid driving it and so increasing the mileage – yet the primary purpose of a car is to be able to drive it.

There are now television programmes devoted to classic cars almost always about increasing their value and making money from restoring them etc. much as there were once (and still are, albeit fewer) about making money from houses.

The experts in the classic car market all talk about continued rise or plateauing of values. All again very reminiscent of the house price boom where we were told there would be a “soft landing” and a crash was inconceivable. There are other parallels in terms of investment. House prices far outstripped interest rates and stock market yields suggesting that the best way to make money was houses. Again currently the prices of these cars are going up faster than practically any other commodity (even including London house prices).

What destroyed the property bubble was more than anything the ending of easy (too easy) credit. This car bubble is likely to be ended by interest rates rising and hence, more money available for lesser risk in more conventional investments. In terms of cars we have been here before. In the late 1980s there was another classic car bubble that collapsed in spectacular fashion.

The original investment bubble is most often thought to have been the Tulip one in the Netherlands. More recently we have had not only housing, but also the dotcom bubble, and what looks like a bubble over internet currencies.

I suppose if there is any moral it is that it is not only in Northern Ireland and the RoI that sensible people think that such bubbles cannot burst. At least ours was about what is most of the time an appreciating asset: a house, unlike in the case of cars what is normally a depreciating asset (a car); or a thing of almost negligible worth, a bulb. Maybe I will stick to the Saab which will never be a classic being basically a posh Vauxhall from a company that went out of business.

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  • barnshee

    In a fit of what can only be described as stupidity I restored (with the help of a very kind ex mechanic /friend) an MGB.
    I learned a lot
    Managed engine refurb and replaced worn parts bit quite well -learned to weld a bit Outsourced the repaint and upholstery to professionals-spend an ridiculous amount of time and money. Ended up sick of the sight of the thing– sold it almost as soon as it was finished .
    I learned a lot -mostly don`t have anything to do with “classic” cars

  • Roy Walsh

    Cannot disagree Turgon and we’ll compared. The credit issue which caused the most recent crash was spurred by what caused the previous one, and the one in 1930, greed. The same will come again and our kids will be burned next time out. That said there is an issue, which you hint at, with supply and demand. The 1980’s feista would appeal more to me than the, in my wife’s recent experience, 2012 model.
    Houses near good schools or close to other amenities will hold value better than the new builds which make up the ghost estates throughout the country could ever have.
    Just like your Saab or my own Stag will only increase in value decades later, provided we can pay the hugely expensive service charges.

  • http://shinerevolution.com Rainer

    Very nice article, hopefully peoples mindsets will change over the next few generations, but I doubt it.

  • gunterprien

    Maybe you should have learned to avoid British Classic Cars.
    That would have been a better lesson.