Turn That Bubble Into Bricks!

This week the New York Times published a story about Chinese investors snapping up property in the United States. Prices are rising here, but I don’t think these purchases are just speculation. Instead, the stateside spending spree is probably the latest manifestation of a well-known phenomenon: bubble buying. 

Back in 1989, Japanese investors were doing pretty much the same thing. Asset prices had rocketed in Japan, and plenty of people suspected that a bubble was growing. The smart ones sold off some of their Japanese assets at high prices and took the proceeds to markets where prices weren’t quite as inflated, like the United States.

It was in October of that year that Mitsubishi made headlines by buying Rockefeller Center. Back then, the Nikkei stock market index was sitting pretty at about 35,000. Within a year, it had sunk to 20,000. By that time the United States was also wrestling with recession, but I don’t think Rockefeller Center ever lost 43 percent of its value.

Fast-forward ten years to January 2000. Steve Case rocked the media world by using AOL’s high-priced shares – their price-to-earnings ratio was about 250 – to buy Time Warner. It became the archetypal example of a company whose value was built on hype buying a company whose value was built on tangible lines of business. Within a few months, the Standard and Poor’s 500 index had surrendered all-time highs that it would not see again until 2007. AOL’s shares lost roughly 80 percent of their value in the three years after the buyout.

So does this mean a bubble is about to burst in China, or are Chinese investors just smartly diversifying their portfolios? Don’t ask me. But China’s asset prices are notoriously non-transparent, so if a bubble is inflating, a rash of real estate purchases in the United States might be one of the only signals we’d see.

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