The Economist magazine cover (16 June 2005) for the article "After the fall: Soaring house prices have given a huge boost to the world economy. What happens when they drop?".

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. It is characterized by rapid speculative increases in the valuations of real property such as housing until they reach unsustainable levels relative to incomes and other economic elements, followed by decreases (also known as a house price crash or a market correction) that can result in many owners holding negative equity (a mortgage debt higher than the value of the property). Just like any type of economic bubble, it is difficult for many to identify except in hindsight, after the crash. Image File history File links Economist-06-15-2005. ... Image File history File links Economist-06-15-2005. ... Currier & Ives print on economic bubbles, 1875. ... Real estate is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings. ... A real estate appraisal is a service performed, by an appraiser, that develops an opinion of value based upon the highest and best use of real property. ... Real property is a legal term encompassing real estate and ownership interests in real estate (immovable property). ... Houses in Fishpool Street, St Albans, England For other meanings of the word house, see House (disambiguation). ... Negative equity is a term used in the housing market, usually following a general fall in property prices, to mean that the market value of a mortgaged house or flat is less than the amount outstanding on the loan used to purchase it. ... A mortgage is a method of using property (real or personal) as security for the payment of a debt. ... Hindsight bias, sometimes called the I-knew-it-all-along effect, is the inclination to see past events as being predictable and reasonable to expect, perhaps because they are more available than possible outcomes which did not occur. ...

The Economist magazine said that "the worldwide rise in house prices is the biggest bubble in history" [1], and real estate bubbles are believed to exist in many parts of the world, especially in many areas of the United States, Great Britain, Australia, New Zealand, Ireland, Spain, South Africa, India and China. U.S. Federal Reserve Chairman Alan Greenspan said in mid-2005 that "at a minimum, there's a little 'froth' (in the U.S. housing market) … it's hard not to see that there are a lot of local bubbles" [2]. The crash of the Japanese asset price bubble from 1990 on has been very damaging to the Japanese economy and the lives of many Japanese who have lived through it [3], as is also true of the recent crash of the real estate bubble in China's largest city, Shanghai [4]. The Economist is a weekly news and international affairs publication of The Economist Newspaper Ltd edited in London, UK. It has been in continuous publication since September 1843. ... Alan Greenspan (born March 6, 1926) is an American economist and was Chairman of the Board of Governors of the Federal Reserve of the United States from 1987 to 2006. ... 2005 (MMV) was a common year starting on Saturday of the Gregorian calendar. ... Inflation-adjusted home home prices in Japan (1980–2005) compared to home price appreciation the United States, Britain, and Australia (1995–2005). ... Japans industrialized, free-market economy is the second-largest in the world after the United States in terms of international purchasing power. ... Shanghai (Chinese: ; pinyin:  ; Wu (Long-short): ZÃ¥nhae; Shanghainese (IPA): ), situated on the banks of the Yangtze River Delta in East China, is the largest city of the Peoples Republic of China and the eighth largest in the world. ...

Unlike a stock market crash following a bubble, a real-estate "crash" is usually a slower process, because sellers just decide not to sell. Historically due to inflation, prices do not fall in nominal terms, rather they stay "flat" for a period of 3-5 years. In select markets though, housing prices have fallen in real and nominal dollars, such as Los Angeles during the early to mid 1990s. Due to low inflation in most countries, future corrections may result in a fall in both real and nominal house values. Black Monday (1987) on the Dow Jones Industrial Average A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a market. ... In economics, the distinction between nominal and real numbers is often made. ...

Other sectors such as office, hotel and retail generally move along with the residential market, being affected by many of same variables (incomes, interest rates, etc.) and also sharing the "wealth effect" of booms. Therefore this article focuses on housing bubbles and mentions other sectors only when their situation differs from housing. Wealth effect is the name in economics for spending rising with wealth. ...

Housing market indicators

UK House Prices between 1975 and 2006.

Robert Shiller's plot of U.S. home prices, population, building costs, and bond yields (from Irrational Exuberance, 2d ed. Princeton University Press). Shiller shows that inflation adjusted U.S. home prices increased 0.4% per year from 1890–2004, and 0.7% per year from 1940–2004, whereas U.S. census data from 1940–2004 shows that the self-assessed value increased 2% per year.

In attempting to identify bubbles before they burst, economists have developed a number of financial ratios and economic indicators that can be used to evaluate whether homes in a given area are fairly valued. By comparing current levels to previous levels that have proven unsustainable in the past (i.e. led to or at least accompanied crashes), one can make an educated guess as to whether a given real estate market is experiencing a bubble. Image File history File links Graph-house-prices-1975-2006. ... Image File history File links Graph-house-prices-1975-2006. ... Image File history File links Barrons_shiller_06-20-2005. ... Image File history File links Barrons_shiller_06-20-2005. ... Robert Shiller is a well-known economist and Stanley B. Resor Professor of Economics at Yale University and holds a joint appointment with the Yale School of Management. ... This article is about the book by Robert Shiller. ... Home $weet Home: cover of the June 13, 2005 issue of Time Magazine. ... A financial ratio is a ratio of two numbers of reported levels or flows of a company. ... An economic indicator (or business indicator) is a statistic about the economy. ...

Indicators describe two interwoven aspects of housing bubble: a valuation component and a debt (or leverage) component. The valuation component measures how expensive houses are relative to what most people can afford, and the debt component measures how indebted households become in buying them for home or profit (and also how much exposure the banks accumulate by lending for them).

A basic summary of the progress of housing indicators for U.S. cities is provided by Business Week [5] BusinessWeek is a business magazine published by McGraw-Hill. ...

See also: real estate economics. Real estate economics is the application of economic techniques to real estate markets. ...

Housing affordability measures

• The price to income ratio is the basic affordability measure for housing in a given area. It is generally the ratio of median house prices to median familial disposable incomes, expressed as a percentage or as years of income. It is sometimes compiled separately for first time buyers and termed attainability. This ratio, applied to individuals, is a basic component of mortgage lending decisions. According to a back-of-the-envelope calculation by Goldman Sachs economists, a comparison of median home prices to median household income suggests that U.S. housing in 2005 is overvalued by 10%. "However, this estimate is based on an average mortgage rate of about 6%, and we expect rates to rise," the firm's economics team wrote in a recent report. According to Goldman's figures, a one-percentage-point rise in mortgage rates would reduce the fair value of home prices by 8%.
• The deposit to income ratio is the minimum required downpayment for a typical mortgage (definition of "typical" varies), expressed in months or years of income. It is especially important for first-time buyers without existing home equity; if the downpayment becomes too high then those buyers may find themselves "priced out" of the market. For example, as of 2004 this ratio was equal to one year of income in the UK (Nottingham Trent University paper).
  Another variant of this ratio measures the ratio of median family income to the income necessary to qualify for a typical mortgage or a typical home; this is what the National Association of Realtors calls the "housing affordability index" in its publications. [6]. (The NAR's methodology was criticized by some analysts as it does not account for inflation [7]). Other analysts, however, consider the measure appropriate, because both the income and housing cost data is expressed in terms that include inflation and, all things being equal, the index implicitly includes inflation). In either case, the usefulness of this ratio in identifying a bubble is debatable; while downpayments normally increase with house valuations, bank lending becomes increasingly lax during a bubble and mortgages are offered to borrowers who would not normally qualify for them (see Housing debt measures, below).
• The Affordability Index measures the ratio of the actual monthly cost of the mortgage to take-home income. It is used more in the United Kingdom where nearly all mortgages are variable and pegged to bank lending rates. It offers a much more realistic measure of the ability of households to afford housing than the crude price to income ratio. However it is more difficult to calculate, and hence the price to income ratio is still more commonly used by pundits.
• The Median Multiple measures the ratio of the median house price to the median annual household income. This measure has historically hovered around a value of 3.0 or less, but in recent years has risen dramatically, especially in markets with severe public policy constraints on land and development. The Demographia International Housing Affordability Survey uses the Median Multiple in its 6-nation report.

Inflation-adjusted home prices in Japan (1980–2005) compared to home price appreciation in the United States, Britain, and Australia (1995–2005).

In probability theory and statistics, a median is a number dividing the higher half of a sample, a population, or a probability distribution from the lower half. ... Disposable income is the amount of an individuals total income left after taxes, plus any transfer payments (grants) received from the government or elsewhere. ... A First Time Buyer (FTB) is a term used in the British property market for a potential house buyer with no previous property. ... Goldman Sachs offices at the Fraumünsterplatz in Zürich (the light-colored building on the left) The Goldman Sachs Group, Inc. ... The term down payment is used in the context of buying large expensive items like cars and houses, whereby a loan is required to make the full payment. ... In finance and accounting, ownership equity, commonly known simply as equity, but also as risk capital or liable capital, is the difference in value between the assets and the claims on them (liabilities), which accrues to the owner(s). ... 2004 is a leap year starting on Thursday of the Gregorian calendar. ... Arkwright Building Nottingham Trent University (NTU) is a university in Nottingham, England. ... Look up realtor in Wiktionary, the free dictionary. ... Image File history File links Download high resolution version (1142x1179, 117 KB) Summary Plot of inflation-adjusted home price appreciation in Japan (1980–2005) and the United States, Britain, and Australia (1995–2005) given in the Economist magazine article In come the waves: The worldwide rise in house prices is... Image File history File links Download high resolution version (1142x1179, 117 KB) Summary Plot of inflation-adjusted home price appreciation in Japan (1980–2005) and the United States, Britain, and Australia (1995–2005) given in the Economist magazine article In come the waves: The worldwide rise in house prices is...

Housing debt measures

• The housing debt to income ratio or debt-service ratio is the ratio of mortgage payments to disposable income. When the ratio gets too high, households become increasingly dependent on rising property values to service their debt. A variant of this indicator measures total home ownership costs, including mortgage payments, utilities and property taxes, as a percentage of a typical household's monthly pre-tax income; for example see RBC Economics' reports for the Canadian markets (June 2, 2005 report).
• The housing debt to equity ratio (not to be confused with the corporate debt to equity ratio), also called loan to value, is the ratio of the mortgage debt to the value of the underlying property; it measures financial leverage. This ratio increases when homeowners refinance and tap into their home equity through a second mortgage or home equity loan. A ratio of 1 means 100% leverage; higher than 1 means negative equity.

RBC can mean: Real Business Cycle red blood cell Ripper-Burner-Converter Royal Bank of Canada RBC Center - indoor arena in Raleigh, North Carolina RBC Roosendaal,a Dutch football club This page concerning a three-letter acronym or abbreviation is a disambiguation page — a navigational aid which lists other pages... The debt to equity ratio (D/E) is a financial ratio indicating the relative proportion of equity and debt used to finance a companys assets. ... Loan to Value is an expression of the loan amount as a percentage of the total appraised value of a piece of real estate. ... Leverage is using given resources in such a way that the potential positive or negative outcome is magnified. ... Refinancing refers to applying for a secured loan intended to replace an existing loan secured by the same assets. ... A second mortgage is a secured loan (or mortgage) that is subordinate to another loan against the same property. ... A home equity loan is a type of loan in which the borrower uses the equity in his home as collateral. ... Negative equity is a term used in the housing market, usually following a general fall in property prices, to mean that the market value of a mortgaged house or flat is less than the amount outstanding on the loan used to purchase it. ...

Housing ownership and rent measures

• The ownership ratio is the proportion of households who own their homes as opposed to renting. It tends to rise steadily with incomes. Also, governments often enact measures such as tax cuts or subsidized financing to encourage and facilitate home ownership. If a rise in ownership is not supported by a rise in incomes, it can mean either that buyers are taking advantage of low interest rates (which must eventually rise again as the economy heats up) or that home loans are awarded more liberally, to borrowers with poor credit. Therefore a high ownership ratio combined with an increased rate of sub-prime lending may signal higher debt levels associated with bubbles.
• The price-to-earnings ratio or P/E ratio is the common metric used to assess the relative valuation of equities. To compute the P/E ratio for the case of a rented house, divide the price of the house by its potential earnings or net income, which is the market rent of the house minus expenses, which include maintenance and property taxes. This formula is:

The house price-to-earnings ratio provides a direct comparison to P/E ratios used to analyze other uses of the money tied up in a home. Compare this ratio to the simpler but less accurate price-rent ratio below.

• The price-rent ratio is the average cost of ownership divided by the received rent income (if buying to let) or the estimated rent that would be paid if renting (if buying to reside):

The latter is often measured using the "owner's equivalent rent" numbers published by the Bureau of Labor Statistics. It can be viewed as the real estate equivalent of stocks' price-earnings ratio; in other terms it measures how much the buyer is paying for each dollar of received rent income (or dollar saved from rent spending). Rents, just like corporate and personal incomes, are generally tied very closely to supply and demand fundamentals; one rarely sees an unsustainable "rent bubble" (or "income bubble" for that matter). Therefore a rapid increase of home prices combined with a flat renting market can signal the onset of a bubble. The U.S. price-rent ratio was 18% higher than its long-run average as of October 2004 (Federal Reserve Bank of San Francisco report).

• The gross rental yield, a measure used in the United Kingdom, is the total yearly gross rent divided by the house price and expressed as a percentage

The net rental yield deducts the landlord's expenses (and sometimes estimated rental voids) from the gross rent before doing the above calculation.

Because rents are received throughout the year rather than at its end, both the gross and net rental yields calculated by the above are somewhat less than the true rental yields obtained when taking into account the monthly nature of the rental payments.

• The occupancy rate (opposite: vacancy rate) is the number of occupied units divided by the total number of units in a given region (in commercial real estate, it is usually expressed terms of area such as square meters for different grades of buildings). A low occupancy rate means that the market is in a state of oversupply brought about by speculative construction and purchase. In this context, supply-and-demand numbers can be misleading: sales demand exceeds supply, but rent demand does not.

It has been suggested that this article or section be merged with rental agreement. ... A tax cut is a reduction in the rate of tax charged by a government, for example on personal or corporate income. ... An owner-occupier is a person who lives in a house that he or she owns. ... An interest rate is the price a borrower pays for the use of money he does not own, and the return a lender receives for deferring his consumption, by lending to the borrower. ... Sub-prime lending can be defined as lending to borrowers who have less than ideal credit. ... In finance, the PE ratio of a stock (also called its earnings multiple, just multiple, or P/E) is used to measure how cheap or expensive share prices are. ... In finance, the P/E ratio of a stock (also called its earnings multiple, or simply multiple, P/E, or PE) is used to measure how cheap or expensive share prices are. ... Ownership equity, commonly known simply as equity, also risk or liable capital, is a financial term for the difference between a companys assets and liabilities -- that is, the value that accrues to the owners (sole proprieter, partners, or shareholders). ... In economics and business, the price is the assigned numerical monetary value of a good, service or asset. ... Earnings per share (EPS) are the earnings returned on the initial investment amount. ... Net income is equal to the income that a firm has after subtracting costs and expenses from the total revenue. ... It has been suggested that this article or section be merged with rental agreement. ... In finance, the P/E ratio of a stock (also called its earnings multiple, or simply multiple, P/E, or PE) is used to measure how cheap or expensive share prices are. ... The Bureau of Labor Statistics was founded in 1884 by President Chester A. Arthur. ... In finance, the PE ratio of a stock (also called its earnings multiple, just multiple, or P/E) is used to measure how cheap or expensive share prices are. ... The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). ... The facade of the Federal Reserve Bank of San Francisco. ... The theory of supply and demand describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). ...

See also

As of 2006, several areas of the world are thought by some to be in a bubble state, although the subject is highly controversial; see: 2006 is a common year starting on Sunday of the Gregorian calendar. ...

• Economic bubble
• United States housing bubble
• Danish property bubble
• British property bubble
• Irish property bubble
• New Zealand property bubble
• Japanese asset price bubble
• Spanish property bubble
• Chinese property bubble
• Indian property bubble
• Italian property bubble
• Russian property bubble
• South Korean property bubble
• Real estate pricing
• Real estate appraisal
• Real estate economics
• Deed in lieu of foreclosure
• Foreclosure consultant

Currier & Ives print on economic bubbles, 1875. ... Home $weet Home: cover of the June 13, 2005 issue of Time Magazine. ... Many commentators believe that a British property bubble has existed since about 1998 in the British property market. ... As of 2006 the current state of the property market in the Republic of Ireland is described by some as the Irish Property Bubble. ... This article or section does not cite its references or sources. ... Inflation-adjusted home home prices in Japan (1980–2005) compared to home price appreciation the United States, Britain, and Australia (1995–2005). ... Please wikify (format) this article or section as suggested in the Guide to layout and the Manual of Style. ... A U-turn in real estate prices in Chinas biggest city has driven many buyers straight into negative equity. ... Of all the global house price bubbles, Russia has fared particularly well. ... Homes in Monterey County, California, are some of the most expensive in the Unites States. ... A real estate appraisal is a service performed, by an appraiser, that develops an opinion of value based upon the highest and best use of real property. ... Real estate economics is the application of economic techniques to real estate markets. ... A Deed in lieu of foreclosure is a deed instrument in which a mortgagor (i. ... Foreclosure consultant means any person who makes any solicitation, representation, or offer to any owner to perform for compensation or who, for compensation, performs any service which the person in any manner represents will in any manner do any of the following: (1) Stop or postpone the foreclosure sale. ...

References

• Barron's Magazine
• John Calverley (2004), Bubbles and how to survive them, N. Brealey. ISBN 1-85788-348-9
• The Economist, December 8th, 2005, "Hear that hissing sound?."
• The Economist, June 16th, 2005, "After the fall."
• The Economist, June 16th, 2005, "In come the waves."
• The Economist, April 20th, 2005, "Will the walls come falling down?"
• The Economist, May 3d, 2005, "Still want to buy?"
• The Economist, May 29th, 2003, "House of cards."
• The Economist, May 28th, 2002, "Going through the roof."
• The New York Times, December 25th, 2005, Take It From Japan: Bubbles Hurt.
• Robert Kiyosaki (2005). All Booms Bust, History in the Making, All Booms Bust: Making Myself Clear.
• Burton G. Malkiel (2003). The Random Walk Guide to Investing: Ten Rules for Financial Success, New York: W. W. Norton and Company, Inc. ISBN 0-393-05854-9.
• Robert J. Shiller (2005). Irrational Exuberance, 2d ed. Princeton University Press. ISBN 0-691-12335-7.
• John R. Talbott (2003). The Coming Crash in the Housing Market, New York: McGraw-Hill, Inc. ISBN 0-07-142220-X.
• Andrew Tobias (2005). The Only Investment Guide You'll Ever Need (updated ed.), Harcourt Brace and Company. ISBN 0-15-602963-4.
• Eric Tyson (2003). Personal Finance for Dummies, 4th ed., Foster City, CA: IDG Books. ISBN 0-7645-2590-5.
• Benjamin Wallace-Wells, "There goes the neighborhood", Washington Monthly, 2004 April.
• Elizabeth Warren and Amelia Warren Tyagi (2003). The Two-Income Trap: Why Middle Class Mothers and Fathers are Going Broke, New York: Basic Books. ISBN 0-465-09082-6.
• Dean Baker, Financial Bubbles (Stocks and Housing) and How You Can Protect Yourself Against Them, Center for Economic and Policy Research Economics Seminar Series.
• House Price Graphs HousePriceCrash.co.uk

Barrons magazine is an American weekly newspaper covering U.S. financial information, market developments, and relevant statistics. ... The Economist is a weekly news and international affairs publication of The Economist Newspaper Ltd edited in London, UK. It has been in continuous publication since September 1843. ... 2005 (MMV) was a common year starting on Saturday of the Gregorian calendar. ... The Economist is a weekly news and international affairs publication of The Economist Newspaper Ltd edited in London, UK. It has been in continuous publication since September 1843. ... 2005 (MMV) was a common year starting on Saturday of the Gregorian calendar. ... The Economist is a weekly news and international affairs publication of The Economist Newspaper Ltd edited in London, UK. It has been in continuous publication since September 1843. ... 2005 (MMV) was a common year starting on Saturday of the Gregorian calendar. ... The Economist is a weekly news and international affairs publication of The Economist Newspaper Ltd edited in London, UK. It has been in continuous publication since September 1843. ... 2005 (MMV) was a common year starting on Saturday of the Gregorian calendar. ... The Economist is a weekly news and international affairs publication of The Economist Newspaper Ltd edited in London, UK. It has been in continuous publication since September 1843. ... 2005 (MMV) was a common year starting on Saturday of the Gregorian calendar. ... The Economist is a weekly news and international affairs publication of The Economist Newspaper Ltd edited in London, UK. It has been in continuous publication since September 1843. ... 2003 (MMIII) was a common year starting on Wednesday of the Gregorian calendar. ... The Economist is a weekly news and international affairs publication of The Economist Newspaper Ltd edited in London, UK. It has been in continuous publication since September 1843. ... For album titles with the same name, see 2002 (album). ... The New York Times is a newspaper published in New York City by Arthur Ochs Sulzberger Jr. ... 2005 (MMV) was a common year starting on Saturday of the Gregorian calendar. ... Robert Kiyosaki Robert Toru Kiyosaki (born April 8, 1947) is an investor, businessman, self-help author, and motivational speaker. ... 2005 (MMV) was a common year starting on Saturday of the Gregorian calendar. ... Burton Gordon Malkiel (born August 28, American economist and writer, most famous for his classic finance book A Random Walk Down Wall Street (now in its 8th edition, 2003). ... 2003 (MMIII) was a common year starting on Wednesday of the Gregorian calendar. ... Robert Shiller is a well-known economist and Stanley B. Resor Professor of Economics at Yale University and holds a joint appointment with the Yale School of Management. ... 2005 (MMV) was a common year starting on Saturday of the Gregorian calendar. ... 2003 (MMIII) was a common year starting on Wednesday of the Gregorian calendar. ... Andrew Tobias (born April 20, 1947) is an American journalist, author and columnist, whose main body of work is on investment, but who has also written on politics, insurance and other topics. ... 2005 (MMV) was a common year starting on Saturday of the Gregorian calendar. ... 2003 (MMIII) was a common year starting on Wednesday of the Gregorian calendar. ... 2003 (MMIII) was a common year starting on Wednesday of the Gregorian calendar. ...

External links

• Center for Economic and Policy Research CEPR regularly releases reports on the U.S. Housing Bubble.
• Is the Housing Bubble Collapsing? 10 Indicators to WatchPDF Report by Dean Baker, June 2006
• When Bubbles BurstPDF, World Economic Outlook, International Monetary Fund, April 2003.
• The Global House Price BoomPDF, World Economic Outlook, International Monetary Fund, September 2004.
• California’s Real Estate Bubble by Fred E. Foldvary, covers the California, U.S., and global bubble from a libertarian perspective.
• The Sun Also Sets: Never before have real house prices been rising so fast in so many countries, The Economist, September 9, 2004.
• Demographia International Housing Affordability Survey Comparative housing affordability measured using the median multiple (median house price divided by median household income). Data for 100 large markets in the United States, the United Kingdom, Canada, Australia, New Zealand and Ireland.