Monday, May 09, 2005

One More Bubble Thought

One More Bubble Thought

Grace Wang, professor of Real Estate at Wharton recently published an article entitled "The Anatomy of a Housing Bubble."

"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."

"There is likely to be some speculative demand in the market at all times, but bubbles form only when there is substantial speculation. What we can do is to keep track of changes in turnover volume, separate increases in turnover due to speculation and those due to other factors, and therefore get a sense of how much speculation there is. When there is a frenzy of trading, a red flag should be raised and we should take a careful look at the fundamentals (which are difficult to measure) and housing prices."

So in other words, when rapidly rising prices are accompanied by rapidly rising transaction rates, watch out. Alas, this condition almost precisely describes the current market in the Bay Area.

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