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Trading Lessons

House Prices - Tulip Mania - A lesson from History !

Housing-Market / UK Housing Sep 14, 2005 - 08:25 PM GMT

By: Sarah_Jones

Housing-Market Holland in the early 17th century was embarking on its Golden Age. Resources that had just a few years earlier gone toward fighting for independence from Spain now flowed into commerce. Amsterdam merchants were at the center of the lucrative East Indies trade, where a single voyage could yield profits of 400%. They displayed their success by erecting grand estates surrounded by flower gardens. The Dutch population seemed torn by two contradictory impulses: a horror of living beyond one's means and the love of a long shot.

Enter the tulip. ''It is impossible to comprehend the tulip mania without understanding just how different tulips were from every other flower known to horticulturists in the 17th century,'' says Dash. ''The colors they exhibited were more intense and more concentrated than those of ordinary plants.'' Despite the outlandish prices commanded by rare bulbs, ordinary tulips were sold by the pound. Around 1630, however, a new type of tulip fancier appeared, lured by tales of fat profits. These ''florists,'' or professional tulip traders, sought out flower lovers and speculators alike. But if the supply of tulip buyers grew quickly, the supply of bulbs did not. The tulip was a conspirator in the supply squeeze: It takes seven years to grow one from seed. And while bulbs can produce two or three clones, or ''offsets,'' annually, the mother bulb only lasts a few years.



Bulb prices rose steadily throughout the 1630s, as ever more speculators wedged into the market. Weavers and farmers mortgaged whatever they could to raise cash to begin trading. In 1633, a farmhouse in Hoorn changed hands for three rare bulbs. By 1636 any tulip--even bulbs recently considered garbage--could be sold off, often for hundreds of guilders. A futures market for bulbs existed, and tulip traders could be found conducting their business in hundreds of Dutch taverns. Tulip mania reached its peak during the winter of 1636-37, when some bulbs were changing hands ten times in a day. The zenith came early that winter, at an auction to benefit seven orphans whose only asset was 70 fine tulips left by their father. One, a rare Violetten Admirael van Enkhuizen bulb that was about to split in two, sold for 5,200 guilders, the all-time record. All told, the flowers brought in nearly 53,000 guilders.

Soon after, the tulip market crashed utterly, spectacularly. It began in Haarlem, at a routine bulb auction when, for the first time, the greater fool refused to show up and pay. Within days, the panic had spread across the country. Despite the efforts of traders to prop up demand, the market for tulips evaporated. Flowers that had commanded 5,000 guilders a few weeks before now fetched one-hundredth that amount.


Disclaimer - All statements and expressions are the opinion of Marketoracle.co.uk and are not meant to be investment advice or solicitation or recommendation to establish market positions.  Our opinions are subject to change without notice.We recommend that independent professional advice is obtained before you make any investment or trading decisions.



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