Saturday, December 20, 2008

The beauty of property bubbles

Anxious investors descend on far away locations ready to pay money to anybody for a piece of paradise ... and then flip it. Dubai? Panama? No, Miami 1925...

The more things change the more they stay the same...

Booms and busts

The beauty of bubbles

Dec 18th 2008
From The Economist print edition

Property bubbles have painful consequences. They also have useful ones

THE fireworks could be seen from space (allegedly), putting China’s Olympic displays to shame. Hollywood celebrities studded a guest-list of 2,500 people. Kylie Minogue, a diminutive Australian singer, cavorted in a gold and black corset designed by Jean-Paul Gaultier. Guests consumed an estimated 1.7 tonnes of lobster.

The launch party for the Atlantis hotel in Dubai on November 20th was a perfect, noisy finale to the world’s latest age of excess. But its loudest echoes—the man-made islands, the iconic hotels, the overheated property market, the celebrities and the sun—are from another, more distant time: south Florida in the 1920s.

The summer of 1925 was mania time in Miami. Speculators descended on the city, hungry to buy land in the hottest property market in America. Salesmen swarmed to meet them. “Bird dogs” (youngsters looking to make their way in the industry) scanned the new arrivals at Miami’s train station and steered the most promising prospects to their bosses’ offices.

The heart of the boom was Flagler Street, clogged with traffic and tourists. Would-be buyers were put in the hands of “binder boys”, named for the binders in which sales were recorded. Transactions were swift and shoddy. Buyers had to put down only 10% of the purchase price for the lot they were buying to close a deal; further instalments were payable when the sale was legally recorded. Many new owners had no intention of waiting that long. In another echo of modern-day Dubai, they wanted simply to flip their property, which often had yet to be dredged from the ocean, on to the next man. Some bits of land were sold and resold several times during a single day.

Among the principal beneficiaries of Florida’s extraordinary land boom was Carl Graham Fisher, a serial entrepreneur who can take much of the credit for turning Miami Beach from a swampy strip of mangrove trees into the most talked-about resort in the country. As prices soared, so did Fisher’s fortune, at least on paper.

But he saw trouble ahead. Along with a handful of others, he had spent many years turning his vision of Miami Beach into reality. The quick buck was not his goal. As sales grew more and more frenzied, he tried to dampen things down. In a letter to the publisher of the Miami Daily News, whose pages were fattened with property advertisements, he gave warning that many of the development schemes were misleading and that prices had become wildly inflated: “Some of the property being sold in Florida will not bring as much money in 30 years as it is selling for now.” Fisher did more than write letters. He instructed his own salesmen to raise the required down payment on land from 10% to 25%, and to entertain bids only from buyers who planned to develop the lots on offer.

Fisher’s foreboding was soon proved justified. Savvier investors began to pull back from their interests in Florida. In the winter of 1925-26 the number of visitors dropped. So did the level of property transactions. A capsized ship blocked entry to Miami harbour in early 1926, slowing the pace of construction work. Banks that had lent money to property developers wobbled. As concern grew that the skin of Florida’s bubble was tearing, nature provided a drawing-pin of its own. On September 18th 1926 a hurricane hit south Florida, ripping through the hotels, piers, marinas and mansions that had been put up in the preceding years.

The storm killed 400 people and made another 50,000 homeless. It also marked a decisive downward shift in south Florida’s economic fortunes. “Castles in the Sand”, a biography of Fisher by Mark Foster, records that bank deposits in the region fell by 75% between 1925 and 1929, bankruptcies jumped by 600% and the value of building permits slumped from $101m to less than $13m. And all this was before the Depression piled on further misery.

Fisher himself did not escape the damage. His worries about Florida had not stopped him embarking on another grand project, to develop a dazzling resort much farther up America’s east coast at Montauk Point on the tip of Long Island. But his ability to finance the Montauk scheme largely depended on the money flowing in from Florida, money that dried up as the bubble deflated. With no cash in the bank and big bills to pay, Fisher was forced gradually to dismantle his Florida empire, selling and bartering land in a desperate bid to balance the books.

The Montauk project went bust in 1932. By 1933 most of his remaining employees in Florida were being paid in property deeds rather than cash. Fisher declared bankruptcy in 1935 and died four years later, still in Miami, bloated from cirrhosis of the liver but a shrunk figure in every other way. His former wife, Jane, described his final years in Miami Beach: “Through its streets Carl moved slowly, hardly known by the new crowd whose cars flashed through the streets he had built.”

What is left behind

The story of Florida’s land boom is a classic example of a bubble and its dangers. The costs are clear: growing speculation as the bubble inflates, driving prices and value further and further apart; the sharks and the fraudsters, peddling fantasies to misguided investors; the gathering doubts about sustainability; and then the calamitous bursting of confidence, causing debts, defaults and despair.
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