A Nobel-Laureate’s Warning on Real Estate Bubbles

Written by | Wednesday, October 16th, 2013

This year’s Nobel Prize in Economics goes to three American professors – Eugene F. Fama of the University of Chicago, Lars Peter Hansen of the University of Chicago and Robert J. Shiller of Yale University. All economists have been awarded the prize for “for their empirical analysis of asset prices”, which “laid the foundation for the current understanding of asset prices” according to the Nobel Committee. Their research showed that though it is hard to predict asset prices in the short run, prices can be predicted over longer periods, such as three to five years.
Professor Shiller is, in addition, famous for his warnings of the housing and Internet bubbles. He specifically said that the economic stimulus package of the U.S. Federal Reserve along with its growing market speculations was creating a property boom bubble.
A ‘bubbly’ speculation occurred while the U.S. housing market was collapsing, which helped trigger the 2008 global financial crisis. According to Mr. Shiller, global markets are at risk of committing the same mistake now. Moreover, he assumes that the financial crisis of 2008 has shown the lack of our understanding of price movements. Fed warns that some prices in real estate markets have been rising too fast and too high due to the very loose monetary policy of Fed. Standard & Poor’s 500 index hit a record in September, yet it is not considered overvalued.
In Shiller’s opinion, there are many countries having problems with ‘bubbly’ prices, such as China, India, Brazil, Australia, or Norway. Placing more stress on tackling asset price bubbles as well as financial regulation in general has been controversial. Central banks, especially FED, have been busy fighting the bubbles using interest rates but this monetary policy might cause unintended implication which might harm the housing market conditions.

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