Mr. Sykes was the after-dinner speaker at the 2003 Annual Conference of the Reserve Bank of Australia. He began by saying, "My one simple theme tonight is that in the financial world, no one learns from history.  And this is nowhere more evident than in the history of booms and busts. They've been going on for centuries. The cause, the cycles, and the end result are always the same and nobody ever learns because they all think this time is going to be different."

He told a story of the tulip craze in Holland of 1636-1637. All the world seemed to have gone mad for tulips. Anyone who could buy and then resell tulips was guaranteed a fortune, because there seemed to be no top-end to the market prices. Everyone who could scrape together a few guilders, and convince a gullible lender to supply even more, was speculating in the tulip market.  Finally, tulips became so expensive that the poor people not yet in the market could not afford to buy anything.  The market place ran out of the bottom rung of investors, of fresh blood and fresh money. Is this starting to sound like a pyramid scheme?  Of course it is, that's the point.  Just because there wasn't a master-mind con artist to start the ball rolling, doesn't make it any less of a pyramid scheme. The drama is the same:  The first entrants build up slowly and then start to make massive profits. Other people get excited (greedy) and join the game. They convince others to join, either by example or by persuasion. Finally, there are no gullible fools left and the bottom drops out of the market. The early entrants took their profits and either retired or entered a new boom industry. The late entrants lost everything.

I remember this same cycle with the tax-leveraged real estate limited partnerships of the early 1980's. Deals were done at prices that made no economic sense except for the ability to grab tax advantages that could, and did, disappear in a blink of Congress' collective eye. Then came the real estate crash of 1987.  In the 1990's we had the dot.com boom, with high tech stocks selling for outlandish prices that could never be justified by the dividends investors might expect to earn. That's because they did not expect to hold stocks long enough to earn dividends, but just to flip them to a Greater Fool. That's the Greater Fool Theory of Investing--it's okay to spend too much to buy something, because a Greater Fool will stumble along and pay even more than you did.  Now, the Greater Fools who felt they didn't act quickly enough to take advantage of the dot.com craze have jumped on the condo boom. Having jumped on, most of them rode it down to the bottom.

I'm paraphrasing below what Mr. Sykes says about the boom bust cycle. He says all of them have four things in common.

1. They start with a long period of prosperity in which the investing classes gain more and more disposable income.  The longer the period of prosperity, the more segments of the population have disposable income. This includes those with no prior experience in making financial or investment decisions and poorly equipped to tell the difference between true value and boom/bust hype.
2. Next, there is the arrival of an exciting new commodity or product. Something with sex appeal, in other words. Tulips, real estate limited partnerships, dot.com stocks, condos, for example. Early investors are known to have made substantial returns on their investments.
3. Third, within that industry there should be some star performers--something to which we can all aspire and from whom we can take comfort. If they, with all their money and knowledge and experience, are in this industry, shouldn't the rest of us be there, too?
4. Finally, that industry should be liquid enough and unregulated enough for prices to explode.  After all, if cash if plentiful and if there is nothing but the imagination of investors to determine the true value of commodities, how will anyone know when they are paying too much?

Everything was in place in Holland in 1636, and in the United States condo market in the early 2000's.  The bust was inevitable. (To read the entire speech by Mr. Sykes, which is incredibly interesting and insightful, click here.)

What does that mean to you?  After a bust, investors and lenders take a huge hit when values seem to disappear overnight. Everyone panics, and more product is dumped on the market at ridiculously low prices. Core value is always there, though, whether talking about tulips or condos.

So, the bottom line is that NOW is a great time to buy a condo or town home if you want to use it as your primary or secondary residence or if you have a realistic plan to rent it out and hold it long term.  Prices are at, or close to, rock bottom.  In fact, prices in most places are far less than it costs to build condos. Sure, there is a lot of product on the market right now, but that will reverse. Buyers will absorb the existing condos, and then builders will begin building new ones.  You, in the meantime, will have already purchased one and owned it for several years in the most desirable locations obtained by the last generation of condo developers.  If you think you will own and live in the condo for the next five years then, by all means, BUY.

And, buy a copy of my book, How to Buy a Condominium or Townhouse.  All the core concepts explained by me are the same today for long term investors or owner/occupants. Although I touch on cooperative apartments in my book, they are relevant only to a limited part of the United States and space would not allow me an in-depth treatment of this very tricky field. The best book I've found so far on the subject is by Sylvia Shapiro and is called The New York Co-op Bible, available from all major outlets. The link here will take you to Amazon.

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