Real Estate Bubble Types: Price,
Supply, and Investment?
Zeppelin Real Estate Analysis Limited
Recently your humble author has read an article appearing in one of the
most popular real estate portals in China, differentiating and
describing 3 types of real estate bubbles: 1) a price bubble, 2) a
supply [or vacancy] bubble, and 3) an investment bubble.
On 1) a
= this is when real estate prices are on such a high plateau that is so
unexplainable and which crashes sooner or later, e.g. this is what Hong Kong
had experienced from mid 1997 to mid 2003 when prices dropped some 65% from
the peak price level.
On 2) a
= this is when large numbers of completed or existing properties are not
occupied / used or even bought up. This is what China may be experiencing in
part in that supply keeps on growing despite significant vacancies being
observed in some markets and sectors, notwithstanding the difference in the
definition and calculation of ”„vacancy”¦ [note = ”„vacancy”¦ in China may only
refer to those newly / recently completed properties that are not yet sold
or occupied out of the total number of newly / recently completed units for
that year or period in question i.e. it may not be based on the whole stock
of the market].
On 3) an
= this is when significant resources, capital and financing are being poured
into real estate, versus other capital investments. This may also be
reflective of certain markets in China as well since investment into real
estate has been growing year on year recently. It may also signifies that
investment outlets are fewer in China and that many people find real estate
a safe or profitable bet (note = whether this is realized is another
While it is
interesting to see such categorization of real estate bubbles, your humble
author does not think the demarcation is overly important or significant.
Here are the reasons why:
Under a capitalistic market economy, whatever bubbles end up being
reflected in the price
= via the price mechanism if it were allowed to function properly. An
oversupply will be corrected when prices drop with suppliers (real estate
developers or builders) canceling or slowing down their building projects.
An overinvestment will be corrected when prices drop and discourage further
investments. Naturally, some people (developers or investors etc) will get
burnt but eventually the market is likely to survive.
An oversupplied market cannot be sustained
= unless some administrative measures are put in place to influence the
functioning of the price mechanism. If not, i.e. that there is a functioning
market with pricing mechanism, and there is no major real estate price
(downward) adjustment despite a perceived oversupply, then perhaps the
oversupply is exaggerated. Likewise for an over-invested real estate market.
it is inconceivable that in the long run, a real estate market can endure an
oversupply and / or overinvestment situation without suffering from some
significant (downward) price adjustments, assuming a market economy price
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