Welcome back to the Deep Dive. I have to admit,
the prep for today's session felt a little bit
like doom scrolling. Oh, I know that feeling.
You know that feeling when it's like 1130 at
night, you should be asleep, but instead you're
on Zillow just looking at houses you can't afford
in cities you don't even live in. Oh, absolutely.
It's the modern American pastime. It's real estate
voyeurism. It is. It's almost a competitive sport
at this point. Exactly. But for most of us, it's
not just voyeurism. It's anxiety. We are tackling
a topic today that I think occupies about, I
don't know, 50 % of our collective brain space.
At least. We are talking about the housing market.
And specifically, we are taking a hard, unflinching
look at the concept of the housing bubble. It
is the specter haunting every homeowner and every
hopeful buyer. It's, uh... The ghost at the banquet.
It really is. Because housing isn't just shelter
anymore. I mean, somewhere along the line, we
developed this massive cultural narrative that
housing is the safe investment. Right. The one
thing that always goes up. It's the retirement
plan. It's the legacy. For a huge chunk of the
population, it is the single biggest financial
asset they will ever own. Which puts a tremendous
amount of psychological and financial pressure
on that one asset. Totally. If your stock portfolio
drops 10%, you're annoyed. Maybe you skip a vacation.
But if your house value drops 10 % or worse,
if you buy at the peak and it drops, you feel
like your life is falling apart. You feel trapped.
Precisely. And the terrifying question that keeps
people up at night, whether they just bought
a place or are desperately trying to, is this.
Is the price I'm paying actually real? Is it
tangible? Is this value tangible? Or is it just
hot air that's about to pop? That is the multi
-trillion dollar question. And frankly, it's
a question that economists, sociologists and
regular homebuyers have been wrestling with for,
well, for centuries. It's not a new anxiety.
So here is our mission for this deep dive. We're
going to move beyond the scary headlines. We
are ignoring the clickbait that says crash imminent
every single Tuesday. We have a massive stack
of research here. anchored by a really comprehensive
breakdown from Wikipedia that aggregates work
from Nobel laureates like Joseph Stiglitz, housing
experts like Lind, Mayer, Schiller. And we're
going to break down the mechanics of a bubble.
We're going to look under the hood. We want to
understand the engine, you know, not just the
shiny paint job. We need to strip away the emotion
and look at the gears turning underneath. We
want to equip you, the listener. With the tools
to spot the difference between a market that
is just expensive. Because sometimes things are
just expensive, right? Right. You pay a lot for
a Ferrari because it's a Ferrari, not because
it's in a bubble. Correct. High prices do not
automatically equal a bubble. That is probably
the most critical distinction we need to make
right up front. So we're going to find that line.
Yeah. And we are going to try to answer the big
one. Can we actually predict when the pop is
coming? That's a tall order. Economists are notoriously
bad at predicting the future. Yeah. Wasn't there
an old joke about that? There is. The old joke
is that economists have predicted nine of the
last five recessions. But the data we have today
regarding housing is actually quite fascinating
when you strip away the panic. OK, so here is
the roadmap for our journey today. First, we
are going to find what a bubble actually is.
And I learned in the prep for this that it is.
way more controversial than you might think.
It is. There isn't just one definition. There's
a bit of an academic brawl over it. A very polite,
very nerdy brawl, but a brawl nonetheless. The
best kind. Then we're going to get into the checklists.
These are the tools researchers use, and they
range from hard math to checking what people
are talking about at dinner parties to spot the
warning signs. From the quantitative to the qualitative.
Exactly. And finally, we are going to take a
tour of history. We have actual numbers from
the past 40 or 50 years of OECD data to see just
how high the highs go and how low the lows crash.
And looking at that history is so vital. It reminds
us that we aren't the first people to go through
this, and we certainly won't be the last. The
patterns repeat because, well, human nature repeats.
So let's unpack this. Let's start at the very
beginning. If I asked you to define a housing
bubble stripped down the elevator pitch, what
are we looking at? Okay. If you want the most
basic fundamental concept, a housing bubble shares
the same DNA as any asset bubble. It operates
in two very distinct phases. Two phases. Phase
one is the run -up. Prices increased dramatically.
And I don't mean they just tick up with inflation
or because the neighborhood got a new park. I
mean, a surge driven by speculation, investing
and frankly, frenzy. OK, so up goes the rocket.
Exactly. And then phase two, the correction.
Prices fall dramatically. The bubble bursts and
housing, in theory, becomes affordable again.
But here's the kicker. And this is why we care
so much about housing specifically. What's that?
Housing bubbles affect the real economy much,
much more than other assets do. When you say
real economy, you mean the grocery store, the
car dealership, the jobs report, the stuff that
affects my day to day life. Precisely. Compare
it to the stock market. If a, say, a tech stock
crashes, it hurts the people who own that stock.
Maybe a few venture capitalists lose their shirts.
Maybe some day traders have a bad month. But
housing bubbles are credit fueled. They involve
mortgages. They involve the entire banking system.
And they involve a massive number of regular
households. Right. If I buy a stock that crashes,
I lose my initial investment, but I don't usually
owe anyone more money unless I'm doing something
fancy like trading on margin. Right. But with
a house, I've signed a 30 -year contract to pay
back a specific amount of money. Regardless of
what the house is worth tomorrow. Exactly. If
your house value crashes, you might go underwater
owing more than the house is actually worth.
And even if you don't sell, you stop spending
money. You feel poorer. You feel poorer. You
stop renovating the kitchen. You stop going out
to eat. You delay buying that new car. That's
something called the wealth effect. And it is
so much larger for housing than for other financial
assets. Why is that? Because for most people,
the house is their wealth. So when your house
feels worth less, you feel poorer and the whole
economy can grind to a halt because of it. It's
like the house is the battery of the consumer
economy. And when the bubble bursts, the battery
just dies. That is a very, very apt metaphor.
OK, so that's the general vibe. We know it's
big. We know it hurts. But let's get into the
nitty gritty of the definition, because you mentioned
there is a debate here. There is. We have two
heavyweights in the source material regarding
the definition of a bubble. Joseph Stiglitz and
H. Lind. Yes. And this is essentially the battle
between the why and the what. It's a philosophical
divergence on how we should even view economic
events. The why versus the what. Let's start
with Stiglitz. He's a Nobel Prize winner, wrote
about this way back in 1990. What was his take
on it? So Joseph Stiglitz takes a very psychological
and fundamental view. For him, a bubble is defined
by the intent of the buyer. The intent. OK. He
argues that a bubble exists if the price is high
today only because investors believe it will
be selling for even higher tomorrow. So it's
purely speculative. The asset itself doesn't
even matter. It could be a house. It could be
a fidget spinner. It could be a tulip bulb. Exactly.
He says you have a bubble when fundamental factors
do not justify the price. The only justification
is the belief in the future price rise. He's
looking for that disconnect between sort of the
utility of the thing and the price of the thing.
It's like buying a ticket to a concert, not because
you want to see the band, but because you think
a scalper will pay you double for it next week.
That is a perfect analogy. You don't care about
the utility of the ticket. You only care about
the resale value. If the music or the shelter,
in the case of a house, doesn't justify the price
tag, Stiglitz says that is a bubble. It implies
that people are buying... Just to pass the hot
potato to someone else down the line. The greater
fool theory. Exactly. I buy it for $100 because
I think a greater fool will buy it from me for
$200. Okay, that makes a lot of intuitive sense.
If I'm buying a shack for $1 million just because
I think it'll be $2 million next year, that feels
like a bubble. But then comes H. Lind in 2009,
and he's essentially the anti -Stiglitz. He is.
What's his problem with that definition? Lind's
problem is practical. He looks at Stiglitz's
definition and says, That's great philosophy,
Joseph. But how on earth do we measure it? He
argues that the concept of fundamentals is way
too vague to be useful in the real world. I mean,
who decides what the fundamental value of a house
in San Francisco or London is? Right. Is it the
sunshine? Is the job market? Is it the fact that
there's a cool coffee shop on the corner? How
do you put a number on that? You can't. It's
subjective. It's messy. One person's overpriced
shack is another person's green renovation project
in a prime location. Lind argues that if we rely
on fundamentals, we'll just never agree on when
a bubble actually exists. We'll be arguing about
it forever. So if you can't measure the fundamentals,
you can't prove it's a bubble until after it
pops. Exactly. Stiglitz's definition leaves you
arguing about feelings and intentions. It's not
empirical. So Lind proposes a definition based
solely on price movement. Just the data. Just
the data. He says, stop worrying about why the
price is moving. Just look at the chart. His
definition is simply a bubble is a dramatic increase
in real prices over a period of months or years,
followed by an immediate dramatic fall. He's
saying, I don't care about your feelings or your
psychology. Show me the geometry. That's a great
way to put it. Don't worry about the cause. Verify
the existence by the shape of the data. If it
looks like a mountain, a steep climb up and a
steep fall down, it was a bubble. It's a retrospective
data driven definition. That seems a lot easier
to measure. And speaking of measuring, the source
material actually gives us some hard numbers
from a couple of researchers, Aust and Rafelson
in 2017. Yes. And I love this because it finally
puts a number on the word dramatic. Yes. We aren't
just using adjectives anymore. Yes. They tried
to operationalize Lynn's definition. They created
specific mathematical thresholds for what counts
as a large bubble versus a small bubble. So it's
a binary check. Is it or isn't it? Pretty much.
It gives us a ruler to measure history with.
Okay. Lay it on us. What is a large bubble in
the eyes of an economist? To qualify as a large
bubble, you need real prices. And that's inflation
adjusted prices, mind you. So we aren't just
looking at nominal dollars. Important detail.
A very important detail. Real prices have to
rise at least 50 % over a five year period. Or
if it's a shorter, more intense boom, 35 % over
a three year period. Let's pause on that. A 50
% increase in five years after inflation. That
is a massive jump. It is. If your house is worth
$500 ,000. Five years later, it's $750 ,000 adjusted
for inflation. That is wealth creation literally
out of thin air. Correct. It's compounding at
a rate that far, far outstrips wages or normal
economic growth. It's an anomaly, but that's
only half the definition. Right. It has to pop.
It has to pop. So they define the fall as an
immediate drop of at least 35%. Oof. That is
painful. That wipes out almost all the gains.
It does. It essentially resets the market, but
it leaves a trail of bankruptcy and financial
pain in its wake. And what about a small bubble?
What are the thresholds for that? A small bubble
is a rise of at least 35 percent over five years
or 20 percent over three years. And that's followed
by a fall of at least 20 percent. I really appreciate
that they put numbers to this. It gives us that
measuring stick so we aren't just using vibes.
It allows us to look at history objectively and
say, okay, 2008 in the U .S. was a large bubble,
but maybe, you know, 1995 was just a blip. It
does. But it also highlights the tricky problem
with Lynn's definition, which you pointed out
earlier. What's that? You only know for sure
it was a bubble after it has crashed. Right.
Until it crashes, it's just a dramatic rise.
You're standing at the top of the mountain, but
you don't know if you're about to fall off a
cliff or just walk onto a plateau where prices
stay. Exactly. And that brings us to the most
critical part of our discussion today. How do
we identify the bubble before the crash? We need
to distinguish between something being just expensive
or overpriced versus being in an actual bubble.
This is a distinction that I think gets completely
lost in the media frenzy. Every time prices go
up, someone screams, bubble. It feels like crying
wolf after a while. It does. But as our expert
sources note. Overpricing is necessary for a
bubble. You can't have a bubble without overpricing,
but it is not sufficient. Not sufficient. You
can have overpricing without a bubble. Explain
that. How can something be overpriced but not
be a bubble? That seems contradictory. Think
of overpricing as a deviation from the equilibrium
price. A fever is a good analogy here. A fever
is a symptom. You can have a fever because you
just ran a marathon in the heat. That's overpricing
due to temporary supply and demand issues. Maybe
a big factory opened in town and there aren't
enough houses yet. So prices go up. Prices go
up. That's a fever. But that's rational, right?
High demand, low supply, price goes up. That's
Econ 101. Exactly. That fever will break naturally
as more houses are built. But a bubble. A bubble
is a specific disease that causes the fever.
It's when the price goes up, not because of the
new factory, but because everyone believes prices
always go up. So the fever becomes self -sustaining.
The fever becomes self -sustaining. The disease
is the expectation, not the underlying reality.
That's a great way to put it. So to diagnose
the disease, researchers first need to determine
what the equilibrium price should be. How do
they know what the body temperature is supposed
to be in the first place? Well, Christopher Mayer,
back in 2011, surveyed the research and found
three main approaches to finding this equilibrium.
These are the three litmus tests economists use
to see if the patient is sick. Okay, let's walk
through them. Method number one. The finance
-based method. This treats a house exactly like
a stock or a bond. How does that work? If you
are valuing a company, a share of stock, you
look at the discounted sum of its future dividends,
right? Right. The cash it's going to pay you.
But houses don't pay me dividends. I pay it.
I pay for the roof, the boiler, the property
taxes. Well, actually, in economic terms, it
does pay you a dividend. The dividend is the
rent you save by living there or the rent you
could earn by leasing it out. Okay. Economists
call this imputed rent. It's the value of the
service the house provides you, which is shelter.
So the price of the house... should theoretically
equal the discounted value of all those future
rent payments. Exactly. And this gives us a really
powerful tool. The price to rent ratio. This
is your P .E. ratio for housing. Price to earnings
for a house. Precisely. If house prices skyrocket,
doubling, tripling, but rents in the same area
stay flat, the finance based method says, hey,
this asset is getting overvalued relative to
the cash flow it generates. Like a stock with
a P .E. ratio of a thousand. It just doesn't
make sense mathematically. At some point, you'd
be better off renting the house next door and
investing the difference. Precisely. If the price
-to -rent ratio gets way out of whack, the market
is signaling a disconnect from reality. If it
costs $5 ,000 a month to own but only $2 ,000
to rent the identical house next door, why would
anyone buy? The only reason they'd buy is if
they think the price is going to keep rocketing
up so they can sell to that greater fool. Exactly.
You found the bubble. It's speculation. Okay,
that makes sense. What's method number two? The
construction cost method. This one is really
interesting because it relies on physical reality.
The logic is simple. Why would a used house be
worth drastically more than the cost to build
a brand new one right next to it? Right. If a
30 -year -old house on the market costs a million
dollars, but I can buy a plot of land and build
a replica for $500 ,000, the market is broken.
Arbitrage should kick in. Exactly. Competition
from new construction should, in a rational market,
drive the price of existing homes down to the
cost of construction. If used houses are too
expensive, developers will just build new ones
until the price drops. But there's a nuance here,
isn't there? Something called the kinked supply
curve. Yes. I'm glad you brought that up. It
was described by Glazer and Yurko in 2005, and
it explains why crashes happen the way they do.
The kinked supply curve. It sounds like a bad
dance move, but I have a feeling it's important.
It's very important. The theory is that supply
is highly elastic, meaning it's flexible when
prices are high. If prices are above construction
costs, builders rush in. It's relatively easy
to build more houses. You see cranes everywhere.
Put up the drywall, pour the concrete, expand
the suburbs. Let's go. But, and this is the critical
part, when prices fall below construction costs,
supply is inelastic. It is stuck. Because houses
are durable. They don't just disappear when the
market goes down. Precisely. You can't unbuild
a house to reduce supply. You can't just delete
it from the server like a failed crypto coin.
So in a down market, you have all this inventory
that won't go away. So prices can shoot up, but
they can't fall as easily. Well, what it implies
is that on the way down, the recovery is incredibly
slow because that excess supply hangs over the
market like a dark cloud for years. That explains
why the bust feels so heavy and just drags on
and on. The houses are just sitting there waiting
for buyers who don't exist. And builders stop
building completely because it costs more to
build than to buy. So the market freezes. That
is the kink in the supply curve. OK, that's a
powerful concept. And the third method. for finding
that equilibrium price the affordability method
this is the one most listeners probably use intuitively
when they're looking at zillow at midnight you
compare prices to income the price to income
ratio right or price to wage the logic is undeniable
Ultimately, housing must be paid for by wages.
If prices get too high relative to what people
earn, they simply cannot consume the same level
of housing services. You hit a mathematical wall.
You hit a mathematical wall where people literally
cannot get a loan to pay the mortgage. So if
the average person in a city makes $50 ,000 and
the average house is $2 million, something has
to break. It doesn't matter how much hype there
is. The math just doesn't work. Exactly. That
is a clear sign of deviation from equilibrium.
When you need three generations of income to
buy a one -bedroom apartment, you are very likely
in a bubble. The fundamental utility of housing
is clashing with the financialization of housing.
Okay, so those are the mathematical ways to spot
if prices are out of whack. But markets are made
of people. And people are. Well, they're emotional.
They're weird. They get FOMO. They get jealous.
They make bad decisions because their brother
-in -law did something. Which brings us to the
entire behavioral side of things. It's arguably
the more important part. Yes. Section three of
our dive, the vibe check. We're looking at Robert
Schiller's checklist from 2010. Schiller is famous
for predicting the 2008 crash. He literally wrote
the book Irrational Exuberance. He did. And he
didn't just look at spreadsheets. He looked at
people. He looked at the culture. He did. He
identified the social contagion aspect of bubbles.
He argues that a bubble is essentially a sociological
phenomenon. It spreads like a virus. It's a narrative
that takes hold of a society. So he has a checklist
of seven signs. I want to walk through these
and I want you to tell me why each one matters.
Sign number one. Sharp increases in the price.
This is the catalyst. The chart goes vertical.
It creates the momentum that draws people in.
You see the movement and it catches your eye.
It's the initial spark that gets the fire going.
OK, that makes sense. Sign number two. Great
public excitement. This is when housing stops
being a utility, a place to sleep and eat, and
becomes the main topic of conversation. This
is the cocktail party indicator. Right. When
everyone, regardless of their job teachers, mechanics,
doctors, people who have... never looked at a
financial statement in their lives, is talking
about real estate prices at a barbecue. Oh, I've
been to those parties. Oh, did you see what the
house down the street went for? Exactly. When
the conversation shifts from how are the kids
to what's your zestimate? Huh. Schiller says
you should be watching out. Which leads right
into number three on his list, an accompanying
media frenzy. The news cycle feeds the beast.
It creates a feedback loop. You see headlines
about record prices every day. You see TV shows
about house flipping proliferating. You see magazine
covers about how to get rich in real estate.
It normalizes it. It amplifies the signal and
validates the obsession. It makes it feel like
the whole world is participating. And you're
missing out if you're not. Okay, number four
is really interesting. Stories of people earning
a lot of money causing envy. The envy factor
is so powerful. Schiller specifically points
this out. We are competitive creatures. When
you see your neighbor, who you know isn't smarter
or harder working than you, make $100 ,000 in
a year just by sitting in their living room because
their house appreciated. It drives you crazy.
It triggers a psychological need to participate.
You feel like a sucker for working a 9 -to -5
job while they get rich doing nothing. You feel
like you're losing by not playing the game. Precisely.
It challenges your sense of fairness. And the
only way to resolve that internal conflict is
to jump in and get your slice of the pie. FOMO
weaponized. Okay. Number five, growing interest
in the asset class among the general public.
This is when you see people who have no business
being real estate investors becoming real estate
investors. The classic dentist buying five condos
in Miami scenario. When amateurs flood the market,
it's usually a sign the top is near. Why is that?
Because they are the greater fools we talked
about. They're entering the market late, driven
by the envy and the media hype, not by any sound
financial analysis. Okay, number six is my favorite
because it sounds so dangerous. New era. This
is the most dangerous one of all. This is the
intellectual justification for the madness. It's
when people start inventing reasons why this
time is different. The old rules don't apply
anymore. Exactly. They'll say prices will never
go down because land is scarce or because of
the new tech economy or because demographics
have changed forever. They invent a narrative
to explain why price to rent ratios don't matter
anymore. It's the denial of gravity. It's people
convincing themselves that the laws of economics
have been repealed just for them, just this once.
It is the rationalization of the irrational.
It soothes the anxiety of paying an insane price.
You tell yourself, it's OK, I'm overpaying because
we are in a new era. And finally, number seven
on Schiller's list, a decline in lending standards.
This is the fuel on the fire. When the banks
start giving money to anyone with a pulse because
they, too, believe the collateral, the house
will never lose value. It becomes suspiciously
easy to get a loan. Suspiciously easy. No income
verification. No problem. No down payment. Sure.
That's the financial system pouring gasoline
on an already raging fire. So Schiller's List
is basically a guide to spotting social hysteria.
It is. It's about spotting when a market has
detached from reality and is running on pure
emotion and cheap credit. It's a qualitative
assessment of the market's sanity. Now, for the
listener who really wants to look under the hood,
the one who isn't satisfied with just the vibe
or the general map, we have another layer. Yes.
This comes from Lind, the same guy who gave us
the anti -stiglitz definition. He outlined some
deep dive indicators that are much more technical.
These are excellent because they cut through
the noise. They break down into four specific
groups of warning signs. If Schiller measures
the emotion, Lind measures the structural fragility
of the market. Let's hit group one. Interest
payments and income. What are we looking for
here? So we're looking at whether interest payments
are eating up a larger and larger percentage
of household income. But there is a crucial check
here that I absolutely love. What's that? Lynn
suggests asking this question. What payments
be increasing if we applied historical interest
rates to today's prices? Oh, that's smart. So
it's the stress test. It spots if. Artificially
low interest rates are masking the affordability
problem. Exactly. Let's say interest rates today
are 2%. So the monthly payment on an $800 ,000
house looks affordable. You think, I can afford
this. But historical rates are closer to, say,
6%. If you apply that 6 % rate to the current
home prices and the payment suddenly becomes
impossible, you are in a danger zone. Because
rates won't stay at 2 % forever. Right. It's
a stress test for the entire market. If the market
only functions at emergency low interest rates,
it's not a healthy market. It's a bubble on life
support waiting for the Fed to pull the plug.
Okay, that's a great tool. Group two is buyer
expectations and risk. This goes back to the
psychology. Do buyers expect prices to rise forever?
Do they view housing as risk -free over a short
horizon, like three to five years? But Lind also
looks for a specific behavior he calls impatience.
Impatience, like people are rushing to close
deals. Yes, but also financial impatience. Are
people buying at a younger age than they usually
do? Are they buying more house than they actually
need, stretching their budgets to the absolute
limit? Okay. And crucially, are they amortizing
less? Meaning, are they paying off the principle
of the loan or are they just paying the interest?
Correct. If you see a rise in buyers switching
to interest -only loans or 40 -year mortgages
just to make the monthly payment fit. That is
a massive red flag. Why is it such a red flag?
It means they aren't buying the house to pay
it off and own it free and clear someday. They
are essentially renting money from the bank to
hold the asset while it appreciates. They are
betting entirely on capital gains, not on building
equity through payments. That is risky business.
You're betting the farm that the value goes up
before that loan comes due or the rate adjusts.
It's the definition of speculation. OK, group
three is bank behavior. This one is counterintuitive.
Normally, when prices are high, you'd think banks
would be more cautious, right? The asset is expensive,
so it's risky. If a stock shoots up, a margin
lender might get nervous and ask for more collateral.
Right. You'd think they'd tighten up lending
standards to protect themselves from a potential
fall. But in a bubble, you see the exact opposite.
Banks increase their loan -to -value, or LTV,
ratios. They get more liberal as prices rise.
They're willing to lend you more money against
the same asset. Yes. They are chasing market
share. They have the same FOMO as the buyers.
If you see banks competing to give the most reckless
loans during a boom, that is a classic, classic
bubble sign. They're abandoning their own risk
models. And group four is simple. Speculation.
Simply put. Are buyers planning to sell quickly?
The fix and flip mentality. Housing is naturally
a long term asset. It has high transaction costs,
realtor fees, taxes, closing costs. It's not
meant to be day traded. Not at all. If a large
share of the market is treating it like they're
day trading stocks, the stability is gone. The
market becomes a casino. The source also mentions
a few other statistical indicators that I think
are worth rapid firing through. First one. Vacancy
rates. High prices plus high vacancy rates equals
danger. This was the story in parts of Spain
and more recently China. If prices are going
up but nobody's actually living in the houses,
it means supply exceeds real organic demand.
You have purely speculative ghost towns. Next
one. Demography. Is there actually a net inflow
of people to the area? If a city's population
is shrinking but its housing prices are doubling,
the math doesn't work. Who is going to live in
all these expensive homes? It seems like there
are so many flashing red lights if you just know
where to look. There are. The problem is when
the party is going and the punch bowl is full,
no one wants to look at the warning lights. We
are all too busy dancing. Well, let's look at
what happens when the music stops and the lights
go out. We're moving into Section 5, historical
case studies. Yes. The source material has this
incredible table from Alston Raffingsolson covering
OECD countries from 1970 to 2015. This is where
the rubber meets the road. We can talk theory
all day, but these are the actual scars on the
economy. These are the large and small bubbles
we defined earlier playing out in the real world.
Let's talk about the big ones, the large bubbles.
The champion, the undisputed heavyweight of the
data set seems to be Ireland, peaking in 2007.
Oh, Ireland is the textbook example of a massive
boom and a truly devastating bust. It was the
Celtic tiger economy. And just look at the numbers.
The rise lasted 56 quarters. 56 quarters. That's
14 years. 14 years of straight winning. An entire
generation grew up thinking real estate only
goes up. And how much did prices go up in that
time? They... Increased by a staggering 235 .6%.
Wait, say that again? 235%. That is insane. That's
just, I can't even wrap my head around that.
It is. Imagine buying a house for 100 ,000 euros
and watching it go to 335 ,000 without doing
a single thing. You feel like a genius. You feel
invincible. But then, the fall. How bad was it?
Prices collapsed by 53 .6%. They lost more than
half their value. Yes. And you have to consider
the leverage. If you bought near the top with
10 % down payment and the value of your asset
drops 50%, you are completely wiped out. You
owe the bank vastly more than the house is worth.
That's national insolvency. It was. It bankrupted
the Irish banking system and required a massive
international bailout. That is wealth destruction
on a scale that just ruins a generation. What
about Finland? I see they had a peak back in
1989. Finland is interesting because it was almost
perfectly symmetrical. Prices rose about 68 %
over 15 quarters and then fell about 50 % over
the next 26 quarters. It was a classic mountain
shape, a quick up and a slightly slower, but
just as brutal, down. It shows that what goes
up doesn't just come down. Sometimes it comes
down just as hard. And the Netherlands in the
late 70s. A huge rise, almost 139 % increase.
and then a 52 % fall. You start to see a pattern
here. When these large bubbles pop, they tend
to cut prices roughly in half. It's a reversion
to the mean, but it's a violent one. We have
to talk about the USA, the 2006 peak, the great
financial crisis. Of course. The rise was 92
.9 % over roughly a decade, from the mid -90s
to 2006, and the fall was 39 .6%. You know, compared
to Ireland's 53 % drop, the U .S. drop of around
40 % sounds... Well, I won't say better, but
less catastrophic on paper. Percentage wise,
yes. But context is everything. Because the U
.S. economy is the engine of the world and because
that housing debt was packaged into these incredibly
complex financial instruments, mortgage backed
securities. The things from the big short. The
very same. Yeah. And they were sold globally.
So that 40 percent drop in U .S. housing prices
triggered a global financial crisis that we're
still feeling the effects of today. It shows
that even a smaller crash in percentage terms
can be systemic if the debt is toxic enough.
Now let's look at the small bubbles category
and specifically Japan. Japan is fascinating.
Everyone talks about the Japanese asset bubble
of the late 80s, and it was massive. But in terms
of housing -specific data in this study, the
rise was about 80 % into the 1990 peak. That
qualifies as a bubble. But the fall is what stands
out to me in the data, the duration. Yes. Look
at the duration of the fall. It lasted 74 quarters.
74 quarters. That's almost 19 years. 19 years
of sliding prices. The aggregate drop was around
50%, similar to what Finland experienced. But
instead of a sudden crash over a few years, it
was a slow, grinding bleed that lasted for two
decades. That sounds almost worse. A sudden crash
is painful. but a generational stagnation. It
changes the psychology of a nation. If house
prices fall for 20 consecutive years, nobody
views housing as an investment anymore. It becomes
a liability. It changes how people save, how
they retire, how they view wealth for their entire
lives. And then you have a country like Denmark.
peaking in 2006. A massive rise there, 180%,
but the fall was only about 28, 29%. So it didn't
really correct. It didn't. Prices stayed elevated
relative to where they started. That's an important
nuance. Not every bubble bursts all the way back
to zero. Sometimes it just corrects and then
stabilizes at a new higher plateau. So buying
in a bubble isn't guaranteed ruin, but it's a
massive, massive gamble. One thing that was pointed
out in the notes is the duration analysis. Yes.
Generally speaking, the rise phase lasts longer
than the fall phase. For the USA, the rise was
38 quarters. The fall was 23. Bubbles take time
to inflate. It takes years to build that confidence
and supply that easy credit. But fear is fast.
But fear, fear strikes quickly. When the sentiment
turns, the elevator cable snaps. Escalator up,
elevator down. In many cases, yes. Though as
Japan shows us, the elevator can sometimes get
stuck between floors and just slowly, painfully
slide down for two decades. This brings us to
section six. We need to put all of this in a
broader perspective. Because when you're in a
bubble, it feels unique. You think, we've invented
a new economy, the internet changed everything.
But history says otherwise. Bubbles are not new.
They are not a modern invention. The Wikipedia
source lists them going back centuries. This
is a recurring feature of human economics. We
love to get excited about things and bid them
up to insane prices. I was surprised to see the
1810s Alabama real estate bubble on the list.
Slaps, yes. Alabama fever, they called it. It
shows that as long as there has been land to
speculate on, Americans have been speculating.
What drove that one? It was driven by high cotton
prices after the War of 1812. Everyone thought
cotton would stay high forever, so the price
of land you could grow cotton on skyrocketed.
Then the price of cotton crashed in a panic and
the land market collapsed. Same story, different
century. And the 1830s Chicago bubble? That was
driven by urbanization. Everyone was betting
on the future of the city. as a major hub. People
were buying lots in Chicago without ever having
seen them, just based on a map. The 1920s Florida
land boom. Oh, that's the classic. Selling swampland
in Florida to people in New York who had never
seen it, that was pure mania. Promoters were
literally hiring buses to drive people down from
the north to these lavish parties to sell them
land. And then we see a shift in the 1990s and
2000s to these global bubbles. It mentions the
Baltic states, China, Romania, Poland. It went
from being a localized phenomenon like Florida
or Chicago to a globalized credit -fueled contagion.
As finance became global, bubbles became global.
The same cheap money could flow from New York
to Dublin to Madrid in an instant. I want to
touch on the comparison to non -housing bubbles,
just for context. We've all heard of tulip mania
in the 1630s or the dot -com bubble in the late
90s. How is a housing bubble different? The key
difference is utility. You cannot live inside
a tulip bulb. True. You can't shelter your family
in a website or a share of pets .com. Housing
has immense undeniable utility. You need it to
survive. Okay. And this makes housing bubbles
stickier. People fight to keep their homes. They
don't just sell them at a loss the way they dump
a crashing stock. This is why that kink supply
curve we talked about matters so much. The asset
is essential and it's durable. That makes the
pain of the crash much more visceral and long
lasting for society. It's not just losing. points
on a screen in your brokerage account it's losing
your roof it rips entire communities apart exactly
it has a human cost that's just on a different
scale so we've covered the definitions the math
the vibes and the history let's bring this all
together into the outro and synthesize this for
the listener let's do it if we have to summarize
what we've learned a bubble is a specific economic
event It's when prices decouple from the fundamentals,
things like rents and incomes. And it is fueled
by a toxic cocktail of cheap credit and human
psychology. And the aha moment for me throughout
all this research is always the new era theory.
The single most dangerous indicator is the belief
that the rules have changed. When you hear people
saying prices only go up, that is the siren song
of the bubble. It is. Gravity always wins in
the end. So for the listener. The learner. What
is the practical application here? You're thinking
of buying a house or you own one and you're nervous.
What should you do with this information? The
main takeaway is don't just look at the price
tag. Look at the context. Look at rents. That's
the finance method. Is it significantly cheaper
to rent the same house? If yes, be careful. That
gap matters. And historically, it tends to close.
And look at construction. Is there a massive
supply of new homes coming online? Are there
cranes everywhere in your city? Remember the
supply curve. If supply floods the market, prices
will soften. Look at your neighbors. Yes. Use
Schiller's checklist. Are they buying out of
envy? Is the dinner party chatter at a fever
pitch? Are people panic buying houses they haven't
even seen? And look at the bank. This might be
the most important one. If the bank is offering
you money too easily, be suspicious. If they
are letting you borrow 100 % of the value or
offering interest -only terms because they know
you can't afford the real payment. Run. Don't
walk. Run. They are setting you up to fail. It's
about being a critical thinker in a market that
can sometimes feel like it's full of sheep. Don't
let the FOMO drive the bus. Precisely. Knowledge
is your best defense against the hysteria. Do
the math. Check the vibe. I want to leave everyone
with a final provocative thought, something that
jumped out at me from the source list. In the
section on modern bubbles, it mentions cryptocurrency
bubbles and AI bubbles. Yes, the information
age section. If bubbles are driven by human psychology,
this innate belief that we can get rich quick
and that this time is different, have we actually
learned anything from the housing crashes of
the past? Or is the wealth effect, that feeling
of getting rich for free, just too addictive
to quit? Are we just moving the bubble from houses
to coins to algorithms? That is the multi -trillion
dollar question, isn't it? The asset changes,
but human nature, that seems to stay exactly
the same. We love the write -up far too much
to worry about the inevitable fall. On that cheery
note, thank you for diving deep with us. Go check
your price to rent ratios, everyone. We'll catch
you on the next one. Stay grounded.