MARKETS REWIND | History of Property Bubbles
Living in a
Bubble
Property as an asset class has seen some of the greatest bubbles in
history when values crashed through the floor. Here is a glimpse
April 2016 | www.wealth-monitor.com
would be in the know of the bubble
which rose in the late 1980’s coming to
the fore in the early 1990’s. The same
traces itself back to a province, Hainan
Island, emerging as the epicenter to the
bubble burst. Estimates peg the housing
prices in the region having moved from
Yuan 300 a square meter in 1989 to Yuan
7,500 in 1992. The irrational buoyancy
crept to other part of the economy which
compelled People’s Bank of China initiate
a tight monetary policy, raising interest
rates and controlling credit growth. The
bubble burst.
prices and credit leading to another
misalignment of property prices and
eventual burst that causes large losses in
the banking sector. This is a stark reminder
of the period between 1997-2007 which
saw the economy witness a massive house
price boom, recognized amongst the
longest and biggest in Europe. The boom
was fueled by strong economic growth, a
low interest rate regime and loose credit
conditions. This bubble burst in 2008.
In a recently released report, UBS Global
Real Estate Bubble Index, notes that
quantitative easing across the world has
UBS Global Real Estate Bubble Index
Latest index scores for the housing markets of selected world cities
–1.5
–0.5
0.5
1.5
London
Hong Kong
Sydney
Vancouver
San Francisco
Amsterdam
Geneva
Zurich
Paris
Sources:
Sources:UBS
UBS
I
nvestopedia defines a housing bubble
as ‘a run-up in housing prices fueled by
demand, speculation and the belief that
recent history is an infallible forecast of the
future’. At some point demand decreases
or stagnates amidst abundant supply,
resulting in the bubble bursting. While
the asset class, given its inherent nature
of larger sized transaction and carrying
costs, is less prone to witnessing bubbles,
the scale and aftermath of the incidents
occurred have left indelible marks on the
financial course of the world. What more
of evidence to this than the US Housing
market collapse in 2007-2008, plunging
the world into an economic crisis from
which it is still recovering.
While real estate bubbles over the last
century can be traced back to as early as
a precedence to the Great Depression in
1929, recent history has been replete with
a number of cases.
Japan: The Bank of Japan had lowered
interest rates from 5% in 1985 to 2.5%
by early 1987. This meant Japanese
banks were flush with cheap liquidity,
which found its way to the real estate
segment. The Japan Real Estate Institute
(2004) recorded 6 major cities having
experienced a commercial land price
increase to the tune of 302.9% in 1991
compared to 1985, while residential land
and industrial land price jumped 180.5%
and 162.0%, respectively. The vicious cycle
led to an eventual bust leading to what
has come to be known as Japan’s ‘lost
decade’.
China: China has had its share of asset
price surges, including real estate, most
recent of which has been documented
in the period 2005-2011. However, few
Frankfurt
Tokyo
Singapore
New York
Boston
Chicago
Ireland: In a recently released report,
OECD Economic Surveys Ireland warns
Irish property prices have strongly risen
since their trough in early 2013. Such
strong price rises may again spark a
reinforcing spiral of higher property
bubble risk (>1.5)
overvalued (0.5 to 1.5)
fair-valued (–0.5 to 0.5)
undervalued (–1.5 to –0.5)
depressed (<–1.5)
seen central banks more than triple the
global monetary base since 2008, leading
to lowered real interest rates. Inexpensive
financing combined with bullish
expectations has led to real estate prices
decoupling from the real economy.
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