Basic Points - The Globe and Mail

The ObamaMama Bear Market?
Strategies For Coping With Cooling
Why couldn’t those
past cycles be
prologues for another
housing boom?
1. Demographic Cooling
An oft-told story that originated in The Economist tells of the meeting of the
endowment committee at an unnamed Oxford college. The fellows had managed
the fund for centuries.
Finally, during the 1980s, a lecturer in Economics became a fellow. He was appalled
to learn that the entire endowment was invested in real estate. He advised the Chair
that he was going to propose a new investment policy based on equities.
At the next meeting, he came armed with charts showing rates of return of all
asset classes over varying time periods extending back to 1945. Equities came out
clearly on top.
When the presentation ended, he preened himself, and awaited questions. The
Chairman, an historian, thanked him for his “most interesting presentation.”
He went on, “The College’s trust funds have given acceptable returns over a time
period that includes the Hundred Years War, the Black Death, The Wars of the
Roses, the Civil War, the Wars of the Spanish Succession, the Seven-Years War,
the American Revolutionary War, the Napoleonic War, the various Depressions of
the 19 th Century, World War I, the Great Depression, World War II, and the period
of troublesome inflation in the last decade. We shall be most interested if you can
supply evidence of satisfactory performance of your asset class over a relevant
time horizon.”
The core investment consensus—that OECD nations such as the US, Ireland,
Britain and Spain could have sustained economic recoveries led by a house price
boom of the kind that had occurred in earlier cycles—was actually a mania: it was
based on a denial of basic, observable, everyday reality.
Why couldn’t those past cycles be prologues for another housing boom?
After all, residential real estate has been a reliable long-term asset class. Apart
from catastrophes such as Bubonic Plague and the Thirty Years’ War, populations
have tended, through history, to grow faster from generation to generation than
the supply of well-located housing land. The long-term trend in growth of wealth
from the Industrial Revolution, progress in medicine, sanitation, and public health,
and sustained improvements in food production reinforced that trend in recent
centuries.
No more.
8 March
THE COXE STRATEGY JOURNAL