Housing bubble
The – rapid, sharp increase in the price of developed – sometimes including ready-to-build and undeveloped – land, – which cannot be explained by ordinary conditions of supply and demand in the real estate market, and – which thus indicates temporary speculative buying, – which will sooner or later be followed by sudden sales on a large scale. – To mitigate real estate bubbles, capital requirements for real estate buyers would have to be increased worldwide; more precisely, by setting loan-to-value limits that depend on the speed at which real estate prices have increased over a given period. Such limits should be introduced either directly by all the world’s regulators, or indirectly through risk-weighted funding rules to lending banks. With the same policy in all countries, this would reduce the liquidity that buyers use to fuel the asset price boom. – Of course, financial history teaches us that small investors in particular, with euphoric expectations of profit and wealth, will not let themselves be stopped by anything or anyone; bubbles will therefore occur again and again. – Experience shows that interest rate hikes by the central bank hardly hold back real estate speculators. But such a policy would hit hard many sectors of the economy that rely on affordable credit to improve or expand their capacity. The impediment to such investment is bound to have an impact on business competitiveness sooner or later. That, in turn, has consequences, especially for employment. – See equity bubble, targeting, asset-based, construction investment, construction land, concrete gold, bubble, speculative, stock market price, boom-bust cycle, carry trades, complacency, deflation, bad, dotcom bubble, Erstraten default clause, commercial real estate, gold price, Hindsight, Home Mortgage Disclosure Act, mortgage debt, real estate credit constraint, real estate collateral, Vacancy rate, market intelligence, central banking, rental yield, Mortgage Equity Withdrawal, low interest rate policy, zero interest rate, Real Estate Investment Trust, repression, financial, feedback loop, panic selling, portfolio reshuffling, subprime crisis, underpinning, wealth effect, homeownership, interest rate allocation function, interest rate incentive, interest rate differential, interest rate, kept low. – Cf. ECB Monthly Bulletin of April 2005, pp. 53 ff, Deutsche Bundesbank Monthly Report of July 2007, pp. 15 ff. (relationship between real estate market and money demand; many overviews), ECB Monthly Report of September 2010, pp. 60 ff. (real estate market in the euro area since 1997; overviews), ECB Monthly Report of November 2010, pp. 75 ff. (textbook account of asset bubbles), pp. 96 f. (money demand and real estate assets), Financial Stability Report 2011, pp. 43 f. (real estate market in Germany stable; overviews), pp. 67 ff. (detailed treatise with many overviews; comparisons with the U.S.; remaining uncertainties), Financial Stability Report 2013, p. 17 (residential real estate prices rising; dangers).
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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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