The fire triangle metaphor explains the Chinese (New Zealand, Canada, ....) housing bubble

The fire metaphor was used in the book Boom and Bust: A Global History of Financial Bubbles by William Quinn and John Turner perhaps the best historical analysis on extreme market moves over the last 300 years. 

Their framework begins with a metaphor of bubbles as fires that grow based on a classic triangular combination of oxygen, fuel, and heat. With enough of each ingredient, a spark can set off a long-lasting market inferno. We have the metaphor working in excess with respect to global housing. When all of the fire triangle ingredients are in place, the end result will not be pretty for investors.

Quinn and Turner’s analogue to oxygen is marketability, the ease of buying or selling an asset. Marketability includes divisibility, transferability, and the ability to find buyers and sellers at low cost. Assets that lack marketability will never see the broad demand required to create a bubble. Marketability is increased by improvements in market structure, low-cost exchange trading, and the introduction of derivatives. 

A bubble’s fuel is easy money and credit. Without cheap and bountiful funds for investment, there is no opportunity for asset prices to be bid higher. Excessively low interest rates create demand for risky assets as investors reach for yield. 

The final side of the triangle is heat generated by speculation. This is defined as purchasing an asset without regard to its quality or current valuation, solely out of belief that it can be sold in the future at a higher price. 

For this metaphor to work, the market’s catching fire, it must require a catalyst—the proverbial match. There is invariably some cause that creates the strong belief in the prospect of abnormal profits. 

In the case of housing, policies of cheap money with a desire for citizens to acquire ownership created the current environment. Housing is still the number one asset for most households, so governments want to protect this investment for their own political well-being. Investors who funded property companies through bonds or equities have suffered and will continue to feel the pain until markets adjust to normalcy. Bail-outs will occur but not without all parties paying a steep price. 

This is not a new story, but one that has to be relearned.