Whenever housing prices soar -- in Shanghai, San Francisco or Santiago -- experts wonder whether the cause is a speculative bubble that could eventually burst, causing widespread distress. Such frenzied swings are not confined to real estate alone, of course, as any investor who lost his shirt during the dot-com mania of the 1990s knows. What causes such bubbles? Is there a way of spotting them while the bubble is actually being formed -- rather than after the fact? A new research paper that examines volatility in Hong Kong's residential market between 1992 and 1997 offers interesting insights into these questions.
In "The Anatomy of a Housing Bubble" Grace Wong, a professor of real estate at Wharton, offers ways to spot future real estate bubbles in time to introduce corrective measures before the damage takes its toll. Wong's research explores the Hong Kong housing market, which saw a "real increase" in prices of 50% from 1995 to 1997, followed by a "real decrease" of 57% from 1997 to 2002. (Real increases and decreases refer to changes adjusted for inflation.) Transaction volumes, too, rose dramatically from 68,000 in 1995 to more than 172,000 in 1997, but fell to 85,000 the following year.
Wong says the movements in the underlying market and macro-economic fundamentals in Hong Kong during the period studied do not fully justify the dramatic price upswing or the changes in the volume of trading in homes. She says her study offers "a potentially powerful tool" to define, track and look for evidence of speculative activity in the housing markets. "My paper can be used as a diagnostic tool and not after the fact. We can track these movements when a price upswing is actually happening." That ability, she says, will arm policy makers, developers and others in the housing market to reassess their plans much before a bubble bursts. Central banks also could use such real-time market analysis to check for any wanton speculation in the housing market, and intervene with monetary policies like interest rate changes.
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