Real Estate Bubble and The Stock Market

Posted in Finance Articles, Total Reads: 6858 , Published on 27 January 2011

“A little bubble once came sailing by”…..and when it crashed it made everyone cry.


This is the story of the economic bubbles from as early as the 18th century.

Both the real estate and the stock market mirror the economy of a country. Real estate exerts a strong influence on the stock markets and by analyzing the real estate cycle in the economy one can better forecast the stock market movements and profit from it.


Real Estate Bubble

An economic bubble in Japan from 1986 to 1991 resulted in real estate and stock prices getting greatly inflated. With more money in banks, loans and credit became easier to obtain, and banks started sanctioning increasingly risky loans.  With so much money readily available for investment, speculation became inevitable, particularly in the Tokyo Stock Exchange and the real estate market. Eventually the real estate markets plunged leading to a similar fall in the stock markets.


In USA, in 2008 similarly, the stock market crashed as a result of the sub-prime crisis caused due to low interest rates and large inflows of foreign funds creating easy credit conditions for a number of years prior to the crisis which fuelled a housing market boom and encouraged debt-financed consumption.


Strong economic growth and urbanization supported house prices in India; while in city centers a housing bubble was encouraged by inadequate infrastructure, lack of planning, rapid growth in capital of developers and inflow of foreign funds due to opening up of FDI in real estate. The capital of developers grew rapidly as their stock prices increased. Developers used this capital to bid high prices for huge plots of land, and sold these properties at very high prices.

The real estate prices in India had started softening before the market reached its peak in Jan-08 and eventually the markets crashed in view of the global meltdown caused due to the economic crisis.


The real estate cycle may provide a very early signal that an asset bubble might be forming. If a nation’s stock market goes into all time highs and the banks are permitted free reign to create credit it is possible that asset speculation will run wild.

Today with Russia, China and India furiously selling off more and more of their real estate and building massive infrastructure projects a process that will at least triple land values of each of these nations over the next two decades the next real estate cycle will be truly global.

If the major banks once again get back to creating all the credit as they have done in every past cycle, we are in for some real fireworks at the end of the next cycle.

About the Author : Bhavin Chotai is an Assistant Manager (Taxation and Finance) with Gupta Coal India Ltd. Views are personal.


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