Before proceeding towards the details of real estate bubble, let's first try and understand what an economic bubble is. An economic bubble is an economic phenomenon wherein the trade in a particular good or utility, whether tangible or otherwise, takes place at an accelerated rate and at an inflated price per unit. Although there is much debate upon the reason behind the appearance of these bubbles and most agree that there is an absence of certainty, predictability and speculative factor behind their occurrence, a careful look at the pattern and timing of the appearance of various economic bubbles would reveal that they usually appear at times when excess money is in circulation within a particular economy.
The reason behind such excess money being in circulation can be inflation, low interest rates, etc. Despite different economic schools of thought differ in their opinion of the exact impact of economic bubbles, one thing is for sure that nothing good has ever come of these - there have always been somewhat negative impacts of these bubbles, the degree of negativity varying in each case, but nothing good has ever come out of an economic bubble. Now that we have got in the flow, let's get to the details of real estate bubble and what it does, followed by a brief glance at a couple of global examples of real estate bubble.
Real Estate Bubble Lifting the Veil
A variant of economic bubble, real estate bubbles are specific periods of inflated valuations of real estate including housing property, housing plots and similar immovable assets. The chief characteristic of a real estate bubble, or any economic bubble for that matter, is that every valuation boom is followed by a quick succession of price dips once the inflated value reaches staggering, unsustainable levels against the relative levels of income and other economic factors. This consequent period of dipping or deflation of the prices after surpassing the zenith of sustainability is known as the bursting of the bubble. Most of the time, the onset or initial stages of a bubble is difficult to discern and it's not till the prices of the commodity in question have crossed credulous limits that people come to suspect it as being a bubble. As such, its onset cannot be prevented and usually, the only thing that can be done about it is to clean up after it has burst.
Although not considered a major concern till now, the real estate bubble has led to quite a few serious global economic situations in the recent times. Most mainstream economic thinkers hold that these bubbles occur as a balancing act - they serve to adjust the excesses in the economy and restore a more or less stable current by absorbing the additional money that saturates the economy and threatens it with unbridled inflation. These are cyclical conditions which, many experts believe, can be tackled by formulating and applying counter-cyclical monetary and fiscal policies such as progressive taxation (fiscal policy). Read the Buzzle article on monetary policy vs fiscal policy to know more on this subject.
The most prominent characteristic of a real estate bubble is believed to be its speculative or credit oriented nature. Most property buyers resort to borrowings and mortgages to acquire ownership of these properties. In order to reap maximum benefits in the course of a commercial real estate bubble, builders embark upon constructing numerous buildings, sometimes unnecessarily. This gives rise to a situation of misallocated resources as some of the capital, resources and efforts go waste when not as many properties are taken up as are constructed. There comes a period of supply exceeding demand, after which, in order to dispose of the remaining property, prices start going down drastically. This has often led to serious economic slumps that lasted long and impacted a good part of the global economy.
Global Instances of Land Property Bubble
As mentioned earlier, there have been quite a few prominent instances of real estate bubble that started from one corner of the world but impacted many nations in its course. The following list enumerates some major global instances of the real estate bubble.
- United States Housing Bubble (2007-Present)
- Japanese Asset Price Bubble (1986-1991)
- Australian Property Bubble (1986-Present)
- Chinese Property Bubble (2005-Present)
- Indian Property Bubble (2005-Present)
- Lebanese Housing Bubble (2005-Present)
- Irish Property Bubble (2000-2006
- Danish Property Bubble (2001-2006)
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