Real estate bubble

A real estate bubble or property bubble (or housing bubble for residential markets) is a type of economic bubble that occurs periodically in local or global real estate markets, typically following 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 in a bubble.

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. The financial crisis of 2007–08 was related to the bursting of real estate bubbles which had begun during the 2000s around the world.

Bubbles in housing markets are more critical than . Historically, equity price busts occur on average every 13 years, lasts 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 (IMF World Economic Outlook, 2003). A recent laboratory experimental study also shows that, compared to financial markets, real estate markets involve longer boom and bust periods.

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 (where real estate is then considered in a similar vein to stocks and other financial assets) 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.

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