[lewis500]

This whole piece makes me ask what a bubble really means. The author admits to having been wrong about housing prices since 2000. But that’s okay because bubbles can, apparently, last decades. If a bubble can last a very long, but totally indeterminant amount of time, does it have any reality?

[setr]

Im no economist but intuitively i would think the key piece is that they “pop”; that is, the market corrects itself ib a sudden and aggressive fashion. That its a “correction” necessitates that the valuation is divorced from its “real” value, the primary mechanic allowing this being speculation.

And ofc, since speculation and correction is always a market, the final piece of the dish is that the speculation (and thus, the eventual correction) is significantly large.

And then given that the market itself lasts long (substantially longer than decades), and that we rightfully fear, not the existence of, but the crash, then it seems fine to claim a bubble lasting decades, and even centuries.

And like all predictions of the future, there’s money to be made in the difference between its actual popping and its predicted pop, if you choose to make the bet. Ofc, money to be lost too. And if you expect it to last a century... then just make sure your grandchildren get out before it bursts (and hope it doesn’t take everything else with it). Doesn’t matter to you particularly at that time scale, but it still exists (unless ofc it corrects slowly... but hey, hindsight is 20/20)

[a008t]

Houses have intrinsic value, which comes from future rental cashflows. Let's ignore the premium that some people would pay over that just because they want to be owners of a house.

Then, it seems to me that house prices can be approximated as a function of rents, interest rates (determining required return on owning a house), and anticipated growth in house prices (which again can be decomposed into growth in rents, reduction in interest rates and 'irrational' growth). Using London as an example. Rental yields appear to be around 3.5% in London at the moment, which suggests to me that a good deal of anticipated growth is priced in. But where can that growth come from? Rents are a function of incomes and are unlikely to outpace inflation. Interest rates seem to be more likely to go up than down. So it seems that house prices are unlikely to rise, and once that is realized by the market, prices may even come down as participants stop anticipating growth just because "London house prices always go up".

So a bubble means that house prices are disconnected from fundamentals, that some irrational assumptions are built into the price. I am not entirely sure that there is a bubble - it seems to assume that you need to assume that there is also a sovereign debt bubble, i.e. the "risk-free rate" or the treasury yields are irrationally low. I am not sure if that is the case or not, but that is the subject for a different discussion.

[dafrie]

I can not really give you an intuitive explanation, but economists usually refer to bubbles (or disequilibrium), when actual asset prices deviate from the prices estimated based on the identified long term equilibrium properties of often co-integrated variables.

To identify such models, VAR and SVAR (Structural Vector Autoregressive) analysis are often used, where up to 15-20 time series fed into. Such approaches of course come with their sets of necessary assumptions, but wich are in the case of VAR in levels quite reasonable...

Basically the assumption behind such kind of analysis is, that in the long run, there is some kind of equilibrium path were forces of nature/system are pushing towards to, but to identify disequilibria, you need to look at the whole system and not only 1 or two (as a ratio) variables.

An interesting application about identifying "bubbles" in housing prices with VAR you can find here [1].

[1] https://docs.google.com/viewer?a=v&pid=sites&srcid=ZGVmYXVsd...

[MrKristopher]

It's all guesswork, right? Someone says these house prices don't make sense; someone else says they do make sense. If enough people agree that the house prices don't make sense, then the market would correct, then someone can say that really was a bubble after all.

[AnimalMuppet]

Prices go up for some reason. That's not a bubble.

People want to buy that asset because that's where the returns are (because the price is going up). Those people drive the price up further. That's still not a bubble.

People see that the returns are really good in that asset class, so they borrow money to buy into that asset class, so a ton more money moves in, limited only by banks' willingness to lend against that asset class. Now it's a bubble.

And the problem with bubbles is not that people lose money when they pop. It's that people lose borrowed money when they pop, and if it's a big bubble, that threatens the banks, which can threaten the whole economy (not just that asset class). And, because people invested borrowed money, as the bubble starts to pop, they panic sell, which drives the price down further, which leads more people to panic sell, so the whole thing comes apart very quickly.