Real estate bubble


A real estate bubble or property bubble is a type of economic bubble that occurs periodically in local or global real estate markets, and typically follow a land boom. A land boom is the rapid increase in the market price of real property such as housing until they reach unsustainable levels and then decline. This period, during the run up to the crash, is also known as froth. The questions of whether real estate bubbles can be identified and prevented, and whether they have broader macroeconomic significance, are answered differently by schools of economic thought, as detailed below.
Bubbles in housing markets are more critical than stock market bubbles. Historically, equity price busts occur on average every 13 years, last for 2.5 years, and result in about 4 percent loss in GDP. Housing price busts are less frequent, but last nearly twice as long and lead to output losses that are twice as large. A recent laboratory experimental study also shows that, compared to financial markets, real estate markets involve longer boom and bust periods. Prices decline slower because the real estate market is less liquid.
The financial crisis of 2007–2008 was related to the bursting of real estate bubbles that had begun in various countries during the 2000s.

Identification and prevention

As with all types of economic bubbles, disagreement exists over whether or not a real estate bubble can be identified or predicted, then perhaps prevented. Speculative bubbles are persistent, systematic and increasing deviations of actual prices from their fundamental values. Bubbles can often be hard to identify, even after the fact, due to difficulty in accurately estimating intrinsic values.
In real estate, fundamentals can be estimated from rental yields or based on a regression of actual prices on a set of demand and/or supply variables.
Within mainstream economics, it can be posed that real estate bubbles cannot be identified as they occur and cannot or should not be prevented, with government and central bank policy rather cleaning up after the bubble bursts.
American economist Robert Shiller of the Case-Shiller Home Price Index of home prices in 20 metro cities across the United States indicated on May 31, 2011 that a "Home Price Double Dip Confirmed" and British magazine The Economist, argue that [|housing market indicators] can be used to identify real estate bubbles. Some argue further that governments and central banks can and should take action to prevent bubbles from forming, or to deflate existing bubbles.

Macroeconomic significance

Within mainstream economics, economic bubbles, and in particular real estate bubbles, are not considered major concerns. Within some schools of heterodox economics, by contrast, real estate bubbles are considered of critical importance and a fundamental cause of financial crises and ensuing economic crises.
The pre-dominating economic perspective is that increases in housing prices result in little or no wealth effect, namely it does not affect the consumption behavior of households not looking to sell. The house price becoming compensation for the higher implicit rent costs for owning. Increasing house prices can have a negative effect on consumption through increased rent inflation and a higher propensity to save given expected rent increase.
In some schools of heterodox economics, notably Austrian economics and Post-Keynesian economics, real estate bubbles are seen as an example of credit bubbles, because property owners generally use borrowed money to purchase property, in the form of mortgages. These are then argued to cause financial and hence economic crises. This is first argued empirically – numerous real estate bubbles have been followed by economic slumps, and it is argued that there is a cause-effect relationship between these.
The Post-Keynesian theory of debt deflation takes a demand-side view, arguing that property owners not only feel richer but borrow to consume against the increased value of their property – by taking out a home equity line of credit, for instance; or speculate by buying property with borrowed money in the expectation that it will rise in value. When the bubble bursts, the value of the property decreases but not the level of debt. The burden of repaying or defaulting on the loan depresses aggregate demand, it is argued, and constitutes the proximate cause of the subsequent economic slump.

Housing market indicators

In attempting to identify bubbles before they burst, economists have developed a number of financial ratios and economic indicators that can be used to evaluate whether homes in a given area are fairly valued. By comparing current levels to previous levels that have proven unsustainable in the past, one can make an educated guess as to whether a given real estate market is experiencing a bubble. Indicators describe two interwoven aspects of housing bubble: a valuation component and a debt component. The valuation component measures how expensive houses are relative to what most people can afford, and the debt component measures how indebted households become in buying them for home or profit. A basic summary of the progress of housing indicators for U.S. cities is provided by Business Week. See also: real estate economics and real estate trends.

Housing affordability measures

Another variant is what the United States's National Association of Realtors calls the "housing affordability index" in its publications..
compared to home price appreciation in the United States, Britain, and Australia

Housing debt measures

Measures of house price are also used in identifying housing bubbles; these are known as house price indices.
A noted series of HPIs for the United States are the Case–Shiller indices, devised by American economists Karl Case, Robert J. Shiller, and Allan Weiss. As measured by the Case–Shiller index, the US experienced a housing bubble peaking in the second quarter of 2006.

Recent real estate bubbles

The crash of the Japanese asset price bubble from 1990 on has been very damaging to the Japanese economy. The crash in 2005 affected Shanghai, China's largest city.
, real estate bubbles had existed in the recent past or were widely believed to still exist in many parts of the world, especially in Austria, the United States, Malta, Argentina, Britain, Jamaica, Micronesia, Ethiopia, Netherlands, Italy, Equatorial Guinea, Monaco, Turkey, Faroe Islands, Brazil, Denmark, Sweden, Philippines, Fiji, Dominica, Iceland, Nauru, Greenland, Liechtenstein, Canada, Germany, Portugal, New Zealand, Zaire, Latvia, Ireland, Spain, Sri Lanka, Guinea-Bissau, Indonesia, Lebanon, Japan, Bahrain, Iraq, Iran, Timor-Leste, Afghanistan, Luxembourg, Bangladesh, Tuvalu, Andorra, Azerbaijan, Jordan, Oman, Venezuela, Mexico, Gibraltar, Poland, South Africa, Turkmenistan, Israel, Greece, Outer Mongolia, Mozambique, Bahamas, Mali, El Salvador, Botswana, Algeria, Laos, Yemen, Bulgaria, Norway, Singapore, South Korea, North Korea, Baltic States, Thailand, Swaziland, India, Hong Kong, Romania, Zimbabwe, Vatican City, Ukraine, China and Croatia. Then U.S. Federal Reserve Chairman Alan Greenspan said in mid-2005 that "at a minimum, there's a little 'froth' … it's hard not to see that there are a lot of local bubbles." The Economist magazine, writing at the same time, went further, saying "the worldwide rise in house prices is the biggest bubble in history".
In France, the economist Jacques Friggit publishes each year a study called "Evolution of the price, value and number of property sales in France since the 19th century", showing a high price increase since 2001. Yet, the existence of a real estate bubble in France is discussed by economists.
Real estate bubbles are invariably followed by severe price decreases that can result in many owners holding mortgages that exceed the value of their homes. 11.1 million residential properties, or 23.1% of all U.S. homes, were in negative equity at Dec. 31, 2010. Commercial property values remained around 35% below their mid-2007 peak in the United Kingdom. As a result, banks have become less willing to hold large amounts of property-backed debt, likely a key issue affecting the worldwide recovery in the short term.
By 2006, most areas of the world were thought to be in a bubble state, although this hypothesis, based upon the observation of similar patterns in real estate markets of a wide variety of countries, was subject to controversy. Such patterns include those of overvaluation and, by extension, excessive borrowing based on those overvaluations.
The U.S. subprime mortgage crisis of 2007–2010, alongside its impacts and effects on economies in various nations, has implied that these trends might have some common characteristics.
For individual countries, see:
The Washington Post writer Lisa Sturtevant thinks that the housing market of 2013 was not indicative of a housing bubble. "A critical difference between the current market and the overheated market of the middle of last decade is the nature of the mortgage market. Stricter underwriting standards have limited the pool of potential homebuyers to those who are most qualified and most likely to be able to pay loans back. The demand this time is based more closely on market fundamentals. And the price growth we’ve experienced recently is 'real.' Or 'more real.'" Other recent research indicates that mid-level managers in securitized finance did not exhibit awareness of problems in overall housing markets.
Economist David Stockman believes that a second housing bubble was started in 2012 and still inflating as of February 2013. Housing inventory began to dwindle starting in early 2012 as hedge fund investors and private equity firms purchase single-family homes in hopes of renting them out while waiting for a housing rebound. Due to the policies of QE3, mortgage interest rates have been hovering at an all-time low, causing real estate values to rise. Home prices have risen unnaturally as much as 25% within one year in metropolitan areas like the San Francisco Bay Area and Las Vegas.