Tulips and tract homes

Luxury home prices are faltering.

Four lessons of Mania

NEW YORK (MarketWatch) — Speculative bubbles, such as those in real estate and dot-com stocks, have happened through history.

The tulip mania that bloomed in 1630s Holland showed the way. And while a lot has been written about bubbles recently, the phenomenon is hardly new. Nor is the analysis. I’d like to cite an account of the most celebrated mania of all — the Dutch tulip mania of the 1630s. English-born Dutch historian Mike Dash’s “Tulipomania” is a nice 230-page summer beach read examining manias and how they run their course. It’s hard not to think of the recent real estate boom — or the dot-com stock bubble — as you read “Tulipomania.” Some things change, some stay the same.

The story in a nutshell The tulip originated in the mountains of central Asia and made its way west into the Ottoman Empire as a prized object of the sultans, arriving in Holland as a gift in trade in the 1560s. A virus (they didn’t know that then) created rare and exotic variations. These prized bulbs were sought by connoisseurs of the wealthy merchant class. The tulip trade had begun. Gradually the so-called “artisan” class — the early Dutch equivalent of the working class — saw the tulip trade as a way to make money. They jumped in as the original “florists” — dealers buying and selling flowers, often sight unseen and with no personal use or interest.

Prices went crazy in 1636 to early 1637. A single exotic bulb went for 5,200 guilders — about 21 years’ salary for a carpenter. With no direct trigger, prices suddenly broke in February 1637. Buying interest evaporated and prices plummeted some 95% in a few months. Some things never change Fast forward 370 years to the similarities:

1. Investible income. The Dutch “Golden Age,” built on dominance of world trade, produced one of the earliest middle classes. Prosperity brought investible income to the “artisan” class of carpenters, weavers, cobblers and smiths, who saw tulips as a way to invest for extra income — and saw others making lots of easy money.

2. “Flipping.” Florists — traders — bought and sold tulips sight unseen for a quick profit, often in the same day.

3. The mundane became the prize too. As traders saw fortunes made on high-end product, they bid up prices for ordinary stuff too, called vodderij by the Dutch — just as the can’t-miss real estate mentality spread to ordinary homes in ordinary subdivisions.

4. Largely unregulated market. There was a code of ethics among traders, but little outside regulation or accountability. Like the mortgage industry?

But homes aren’t tulips Differences: 1. Intrinsic value. Homes have value as a place to live, enough said. And it’s tangible and measurable against something else — like other real estate and other investments.

2. Little else to spend money on. No Ferraris in 1630s Holland and Rembrandt wasn’t dead yet, so there wasn’t much to invest in besides tulips. Not true today.

3. Tavern trade. Tulips were bought and sold in smoky, beer-sodden taverns of the day — not a public exchange or with professional assistance as in real estate.

4. 95% drop in value in three months. We’re not seeing that today. Good thing. Lessons learned Unless you’re an unfortunate homeowner, real estate or construction worker, or in the financial industry tied to the mortgage crisis, the boom and bust in real estate probably isn’t as severe. For that we can be thankful.

Still, important lessons bloom forth about manias and investing in general: 1. Focus on fundamentals. If prices are increasing, understand why. Is demand real? Are supply constraints or competitive advantages lasting and real? Could real estate prices really grow and stay at 7-10 times annual income or 30 times annual rent? Are market participants real or in the market to buy, sell, flip, and speculate?

2. Watch for “vodderij.” When everything starts to go up, look out. Like overbuilt, dime-a-dozen condos and tract homes or broken Internet businesses with no future.

3. Don’t invest in something just because you see others making money. Self explanatory.

4. Don’t wait for the tide to go out. Don’t be the last to sell, and don’t be greedy. Before or after reading “Tulipomania,” I also suggest the Wikipedia entry “United States housing bubble.” Find a nice chair, dab on the sunscreen, and learn to avoid the next mania.


#1 David on 05.28.08 at 12:52 am

Financial bubbles certainly predate the age of the computer and the Internet. Historically there have been some large financial bubbles that all ended the same way. Besides the Dutch Tulip Mania, other bubbles of note were the Mississippi Bubble of 1720, Credit Mobilier Bubble of 1868, The British South Sea Bubble of 1720, the Florida Land Bubble of the 1920’s and other less notable, but no less financially damaging episodes.
The fuel for bubbles is usually an excess supply of cheap money, financial innovation, a complete aversion to risk management, an expectation of asset inflation and investment in assets with no history of actually generating revenue and earnings.
The sad truth is that all bubbles seems to come to the same sorry ending. The overextended have no desire to hear the news that the party is over and neither do the real estate industry vendors. As far as real estate in Canada is concerned, the Titanic has not yet been introduced to the iceberg.

#2 newguy vancouver on 05.28.08 at 1:26 am

I read the wikipedia entry. Interesting stuff! If you look at Greenspan’s statements throughout this thing, you can see that he actually saw a lot of the problems before they occurred. I know that he gets a bad rap in some circles (including in your book), but I think that it is, for the most part, undeserved. The ones who deserve the blame are the tools like Lereah, and the Americans who overpaid for their homes.

If you read Greenspan’s book, which came out before this mess, a main theme of his predictions for the future is an increase in inflationary pressures due to the advancement of China and other nations that have previously been providing cheap labour, and keeping prices down.

I think that time is proving that he was right. The housing bubble was merely a symptom of uncontained inflationary pressures, which now are being directed at energy and materials.

#3 Qaxyf on 05.28.08 at 9:20 am

Extraordinary Popular Delusions and the Madness of Crowds , first published in 1841.

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one!” Charles Mackay

“Of all the offspring of Time, Error is the most ancient, and is so old and familiar an acquaintance, that Truth, when discovered, comes upon most of us like an intruder, and meets the intruder’s welcome.”


#4 Mani on 05.28.08 at 12:34 pm

I have been reading your book Garth and am mid-way reading it…

When the Stock market crashed in the 2001, people flocked to Real Estate – Effectively $$$s moved from Stock market to Real Estate

Whats your feel on where the $$$’s are headed now ? Back to Stocks? Commodities and Emerging countries?

Thanks, Mani

#5 anonymous on 05.28.08 at 12:57 pm

You don’t need to avoid bubbles. You can make a lot of money on them. Just don’t drink the koolaid and never get greedy. Take a profit when you can and quit before the local newspapers start talking about it.

Oilmania is obviously a bubble. So, buy a little when it dips below $100 and sell a little each time it moves up. You don’t know when it will pop.

It’s easy finding bubbles, but profiting off them is a lot harder and requires an iron stomach.

#6 Vancity dude on 05.28.08 at 1:25 pm

mid-May condos listing in Vancouver


#7 David on 05.28.08 at 2:20 pm

The housing bubble is somewhat different from other manias that have swept the financial world in the past. By and large most of the historical bubbles were driven by new technologies like railroads or computers or the potential exploitation of new lands. The housing bubble was quite low tech and the financiers were not offering the IPO of the week for folks to get in on the action.

#8 Terry on 05.28.08 at 6:38 pm

Having read Wikipedia explanation of stagflation
it occurs to me that maybe housing prices and the increases in resources like oil is the start of massive rise in inflation. It has been over 20 years since we have seen inflation in the double digits. Both Australia and New Zealand have central bank rates of over 8% to try to combat rising home prices along with inflationary impact of rising oil prices. I believe Canada’s central bank would love to increase interest rates but as history has shown has to follow the US on interest rates. That leaves the question if Canada’s housing prices do not decline and the US prices keep declining where does this leave Canada?

#9 ThePope on 05.28.08 at 6:52 pm

There’s an interesting article in last months Harpers magazine about the increasing frequency of bubbles and an economy that is built to require them – I won’t post a link because I’ve never had a comment show up here, possibly because of links, but you can find it on the Harpers dot org site.

It’s written by Eric Janzen of iTulip who believes the next Bubble may be in alternative energy.

#10 Huy on 05.28.08 at 8:09 pm


you are wrong, Greenspan is to blame. he was the gatekeeper and the one that lowered interest rates and kept it there too long. no doubt that he was right in his book, that’s because he new exactly what he was doing and what the results would be. why do you think he bailed just before things got bad? he’s no dummy but he will go down in history as the worst central banker in the US.

most of us in here probably knew or had feelings that the US real estate market was going down and we’re not economists or geniuses. all those mortgage brokers and banks knew, that’s why all the top execs walk away with millions and sold stocks or options at the top.

its the same here in Canada right now. we all in here know RE is over, but you won’t hear that from the RE industry, banks, Harper or Mark Carney (our Central Banker).

but Greenspan is not the only one to blame. banks, governments, and yes the guy that overpaid for his house too, he should blame himself. sucker!

the titanic is going down, i’ve got my lifeboat.

#11 newguy vancouver on 05.28.08 at 8:39 pm

“Huy” said of Alan Greenspan “he’s no dummy but he will go down in history as the worst central banker in the US.”

That’s quite the nice piece of Monday morning quarterbacking there, Huy. Greenspan led the Fed for 19 years, a record, and was reappointed by both Democratic and Republican presidents. From your post, I don’t even think that you read Greenspan’s book, yet you critique it – which is a bit strange – don’t you think?

Of course, the man was not perfect. But trust me, he was way better than you or I would be as Fed chairman – and way better than Mark Carney, who still thinks that real estate is not a bubble — and its now 2008! At least Greenspan caught on in 2005, but come on, how can you still not realize it now?


Terry wrote “it occurs to me that maybe housing prices and the increases in resources like oil is the start of massive rise in inflation.”
Bingo, buddy. Inconspicuous inflation is the real menace here. I don’t know why more people haven’t figured that out yet. (Of course, Greenspan realized this eons ago — for more on that, see my earlier post)

#12 Terry on 05.28.08 at 10:09 pm

If you want to place blame on the current housing crisis in the US look no further than Ronald Reagan. Reagan’s policies of deregulation of banking in the 1980’s led to the abuse and expansion of money lenders in the US. If a taxi cab driver can be allowed to sell mortgages to his friends and neighbors then I would have to say the system is broke. It is the number 1 job of government to protect it’s citizens while still allowing for a fair and balanced business climate. This is one major differance between Canada banking system and the US, allowing Canada to become one of the best banking systems in the world. Although not perfect the government must change banking regulations when problems in areas like mortgages occur. It is also time that CMHC policies are monitored more closely by the federal government and the Bank of Canada is given more power to control CMHC’s power and policies, this must now also include private mortgage insures.

#13 $fromaSia on 05.28.08 at 11:35 pm

CHMC helps co- operative housing less and less as it scalps more and more from buyers. Really it’s what CHMC wants, they want everybody to go out over their heads and buy a home. CHMC then gets paid upfront a large some of cash to ensure the Bank/lender that the buyer can make his payments.

Total B.S. CHMC is not helping the affordability issue …
CHMC through a very short time has helped and now it’s to late. Housing prices skyrocketed to the bent lending rules of purchasing.

CHMC is perpetuating the in affordability problem.

#14 patriotz on 05.29.08 at 12:34 am

At least Greenspan caught on in 2005


On whether recent gains in housing prices have produced a “bubble,” Greenspan said that while “we certainly cannot rule out home price declines, especially in some local markets, these declines, were they to occur, likely would not have substantial macroeconomic implications.”

June 9, 2005

#15 Future Expatriate on 05.29.08 at 4:31 am

The bubbles, the deregulation, the real double-digit inflation figures once housing and fuel prices are factored in, all of it has been nothing more than a scheme of the “haves” constantly devising ways to trick the “have-nots” out of more and more of their hard-earned wages and paltry retirement “investments”. Like one poster said on here, you CAN make money on bubbles, if you’re the ones creating them and popping them at will or in the loop of those in the know. And inflation IS at double digits and has been for quite sometime, what changed is how the government reports it. And deregulation is to blame for all of it. Government on the take, conspiring with the “haves” to take even more from the “have-nots”.

Will it change? Hopefully. Because when inequity this large and this fast has happened in the past, it did NOT stop itself, and the result wasn’t very civilized.

#16 Chinstrap on 05.29.08 at 9:35 am

What’s with blaming everyone – Greenspan, real estate agents, central bankers and government? I believe people need to assume more personal responsibility for their own finances, education and decisions.

Why should Mark Carney tell you whether to buy or sell a piece of property? Ridiculous.

#17 Bruce on 05.29.08 at 11:17 am

The Global Economic System is inherently corrupt. I say let it crash, and let it crash hard. Clean the whole damn system out. Weed out all the crooks, cheats, liars, loan sharks, and everyone else who was out to screw “Joe Average”. It’s time to give power back to the “little people”. The game has gone on long enough…

I challenge anyone to do the following: Pull a $20 out of your wallet and really look at it. Study it. Examine it. What’s it made out of? PAPER. Question#2: What is all this paper–trillions of dollars worth–being backed with? What is its actual value? What is it REALLY worth? The answer might surprise and shock you. Most people fail to realize that our money is only worth something as long as the government and Bank of Canada says it is. The “Amero” may be closer than any of us realize, and I fully expect the North American-if not the entire global economy-to become a vastly different ballgame in my my lifetime. It’s closer than any of us want to believe.

The game of Monopoly we’ve seen over the past few years, combined with the folly and greed that is Wall and Bay Street will be exposed soon enough. But to all you good time Charlie’s, I say the party was fun while it lasted, eh? Bring it on. It’s time we got a serious reality check in this delusional, fairy-tale, throw-away, mass-consumption society we call Canada.

#18 SMWhite on 05.29.08 at 12:03 pm

This was perpetrated by all central banks because its a problem all over the anglo world right now, not just Alan Greenepan, we would have had a deeper recession in 2002 if rates hadn’t been dropped to rock bottom aka printing money. So in order to appease the public and give them a false sense of security, the sense of wealth without having to actually raise salaries, drop interest rates. Works in the short term, long term issue is inflation of commodities.

Fact is the general public aren’t educated enough to realize that lower rates to the point they did, didn’t create a lack up supply in housing, it just put more money in people’s hands to bid up assets.

Its called inflation…

Very easy for Chinstrap to throw it back on the general public but when your central bank, your bank, your government funded corporations like CMHC(whom are supposed to have the public’s best interest in mind) and the general media do nothing more but help blow up a bubble, does the general public really have a chance at making an informed decision?

Nobody bitches when they look on the MLS and their neighbor made a 30% on their home in 5 years for doing nothing.

High school education gives you no knowledge of basic finance as does university unless you focus on finance(even at that is debatable because a lot of highly educated people all over the world walked into this trap). So if your a trades person or high school educated and the media and banks along with CREA and CMHC are telling you “get into the market now before its too late” or “by now or miss ever owning a home” what are you supposed to do, not everyone like myself has a contrarian/negative outlook of the big machine, and will do the research required, in fact its 1/8 that will(Look it up). Also being a history buff helps!

Chinstrap, if my mechanic tells me the brakes on my car are A1, should I believe him or should I go an take an auto-maintenance course? If I get into the car and the brakes are shot is it my fault for not doing my homework? Maybe a second opinion?

Those in position of power(or those that claim to be experts in their field) have a moral responsibility to make their clients aware of the pros and cons, this is why Garth’s blog is a benefit to both RE bulls and bears.

For every article in the news that said their is a housing bubble, their were ten that laughed at that one authored calling their opinion down. Same with inflation, I’m wondering where Lawrence is nowadays, he I had debated inflation on a couple occasions, and I’m always happy to point out how WRONG he is…

So if the majority of RE agents are either ignorant to economic fundamentals or dishonest to their clients how is a person supposed to make an informed decision when the ones we trust are advising us?

Chinstrap its easy, don’t trust anybody… and Canada would have been able to weather the storm until CMHC blew up a bubble and came out with the 40 year rent trap. By now we would have been entering a soft RE landing (As stated by the IMF) so expect all the gains from 2005 till now to disappear, that’s my EDUCATED opinion. I agree that the public has to take responsibility for some of this but so do all the other players, especially the ones that had a vested interest in pushing people into these bad decisions using fear at a tactic.

#19 Milorad on 05.29.08 at 3:14 pm

Reports from Toronto Real Estate Board in 2008:
Mid-May 2008 decreased resales 12%
April 2008 decreased resales 7.3%
March 2008 decreased resales 22.2%
February2008 decreased resales 11.2%
January 2008 decreased resales 2.1%
Inventory listings increased more than 11%, and
“logic” trend again prizes still up 6% and alredy
hit over $ 400 000 per resale unit.
From last January 2007 to December 2007 average prize had jumped up more than $ 41 000,and prize is still going up,when resale is down,inventory is up?
Comments from presidents of TREB and CREA:
Currently buyers have more choises (Rip off choises)?
I don’t have any choise because the prize is too,too high and I’m desparete to find something cheaper but
RE Mafia and Banks still not released any sign that we can expected lower and affordablle prize. The prize correction will be at September 2009 but if they drop the prize for 10 to 20 k and until 2009 the prize will jump again 40K, so will be sellers market forever..

#20 Dave in Calgary on 05.29.08 at 6:07 pm


How can it be a sellers market forever? Who are they going to sell to forever?

#21 snapshot on 05.29.08 at 7:06 pm


I completely agree that north america has become a ‘delusional, fairy-tale, throw-away, mass-consumption society. But, the established class and the quicker, nastier people have largely been exploiting everyone else for the last 5,000 years in other ways- and before that there was just normal jungle law where the bigger and stronger and quicker dominate everything else. That’s not new ‘this time’. It’s just that people have much better information now (if they care to dig for it) and can be better educated, so more people realize that they’re being taken for a ride.

The trick is to be able to deal with it, and fight back. -Turn off the TV advertising, don’t eat junk food, exercise, learn things, keep an eye out for better jobs, get to know better people, stay away from debt as much as possible, pay attention to what’s going on so you don’t get sick or hurt, etc, etc.

It’s always going to rain (or snow) from time to time. Best to just deal with it as you can, assume it will continue to occur, and deal with it as you can. Just don’t be stupid enough to ignore it and hope it all goes away.

#22 snapshot on 05.29.08 at 7:15 pm


The ‘best banking system in the world’ has scalped billions of dollars in excess profits from the general public in the last couple of years – excess profits like no one has ever seen before.

They’re like organized crime syndicates holding all the cards and oppressing entire societies, compared to the smaller U.S. banks that have to be more competitive and might be likened to simple small-time thieves.

#23 moxie on 05.29.08 at 8:28 pm

^^ the banks are hurting now with all their loan write-downs

#24 Peter on 05.29.08 at 11:44 pm

CMHC are NOT helping anyone of US except they are helping the banks to make more money by doing all these frenzy out of you guys and gals who are willing to suck in the market to go into a 40 yr mortgage and no money down (subprime or Alt-a-Loan)…

#25 EJ on 05.30.08 at 1:29 am

Moxie: While the banks may be hurting, they’re starting to recoup some of those losses by gouging their customers. My account type was retired and the alternatives all cost me more because they exchanged the features that I used for ones that I don’t. Visa interest rates are up (though I’m not sure how much the banks themselves profit on this one), and interest rates on savings accounts are down.

If their bottom line gets worse, I expect we’ll see more of this. It always flows downhill…

#26 Terry on 05.30.08 at 3:19 am

Let see, if you took all the Canadian banks rolled into one it would not even have the stock market value of Citi Bank. Is this the small US bank your referring to. I guess like many other Canadians I like my Canadian bank dividends I’ve received in the last ten years in my RRSP’s. I take it you invested in those great US bank stocks now rolling in billions upon billions of worthless paper. I guess myself and a million other investors who hold the stock are the “simple small-time thieves”. Even though Canadians banks have taken losses in US mortgages the size of the loses pales in comparison to US bank loses, some of the worst loses are in those small regional banks.

#27 Terry on 05.30.08 at 3:36 am

The ‘best banking system in the world’ has scalped billions of dollars in excess profits from the general public in the last couple of years – excess profits like no one has ever seen before.

Might want to take a look at Shell or Exxon Mobil profits, oh sorry I guess there not Canadian companies.

#28 moxie on 05.30.08 at 10:05 am


i refuse to play the bankers’ game of gouging it’s customers. like you, i recently got my bank accounts reorganized with ‘new’ fee structures.
my ‘grandfathered’ bank accounts with no-fee, unlimited transactions was ‘retired’ since “there was little or no demand for these types of accounts” —-> meaning the bank was making any money off me, so i just closed them, took all my money out, transferred all my RRSPs, etc. and went to a no-fee, low-cost virtual bank. I also told my former bank why i was doing this and they would be losing more than my account as i was telling everybody i know to do the same.
when customers leave in droves to no-fee alternatives, the banks are gonna get the message.

#29 moxie on 05.30.08 at 10:06 am

correction: should read ‘wasn’t making money off me’

#30 Terry on 05.30.08 at 3:09 pm


Try looking at Credit Unions, right now I am getting 4.03% interest on my saving account and I pay no fees on my checking account. There are all sorts of options available if you start looking for them including low interest credit card rates, some as low as prime plus 1%.

#31 Islander on 06.01.08 at 5:18 am

Actually, SMWhite, judging by your rant, it’s not “the majority of RE agents (who) are either ignorant to economic fundamentals or dishonest to their clients,” it’s you who are either economically clueless, financially irresponsible or in denial about free will.
Nobody forces anybody to buy a house. Stop blaming others for your own actions. It’s pathetic.