1
ERES 2009 Stockholm, Sweden Haven’t Learnt from Past?
A Common Symptom of Asset Bubble Implosions
section 6-B (1) Cycles and Crises, Room Q34
CY YIU, Sherry YS Xu and Coune YJ CaoDepartment of Real Estate and Construction
The University of Hong Kong25 June 2009
2
Research Questions
Can Asset Price Bubble Implosions be predicted?
If yes, can it be prevented?
3
Predatory Lending?
DIRECT
REAL ESTATE
Mortgages / Collaterals
MBS / REITs / ABS
CDO / CDS / Minibonds
Market Plummets
Sub-prime Crisis
Financial Institutions Quake
Global Financial Tsunami
4MBS/REITs/ABS CDO / CDS / Minibonds
AAA
DIRECT
REAL ESTATE MORTGAGE
?
Credit Ratings?
5
Other suggested causes
• Irrational Exuberance?! - dot-com bubble• Contagion?! - Asian Financial Crisis• Slow Government Response?! - Japan Lost Decade• Greediness?!• Globlization?! Deregulation?!• Saving too much?! Spending too much?! • Unknown?! No cause?!
• Every bubble implosion has a unique cause?• Is there any common symptoms?• Any tests conducted across bubbles?
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Causes of Asset Price Bubbles
• Irving Fisher (1911), John M. Keynes (1936), Milton Friedman (2003): – Asset Price:
• Interest Rate, Inflation Rate, Risk Premium, Expected Growth
– Money/Credit Supply and Demand,– Information Asymmetry and Availability,– Risk Assessment and Leverage,– Expectations and Regulatory.
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What’s New?
Discount Rate
RiskPremium,
Interest Rate, r
Inflation Rate, i
Expected Growth, g
Money/Credit Supply
RiskAssessment or
Leverage
Money/Credit Demand
Expectations / Experience
Shadow Banking
Fiat Money
Bank Money
Bubble-Credit Spiral
Information Asymmetry and
Availability
Moral Hazard
Pre-emptive Policy
Credit Derivatives
SIVs
Credit Ratings
Scarcity of Resources
Savings
Permanent Income Growth
Global Fund Flows
Exchange Rate
Trade Surplus /
Deficit
Short Term Interest Rate
Long Term Interest Rate
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What is a bubble?
• A bubble is defined as – “an upward price movement over an extended
period of 15 to 40 months that then implodes.” and
– “in the 20th Century most of the manias and bubbles have centered on real estate and stocks.”
(Kindleberger and Aliber, 2005)– magnitude of change of the asset price
exceeds 40%
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A study across 3 bubbles
• Japan (The Lost Decade) in 1989,
• Hong Kong (Asian Financial Crisis) in 1997,
• The US (Subprime Crisis) in 2008.
• Any common symptoms across the 3 bubbles, happened in 3 cities, in 3 decades, and of 3 different causes.
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Japan Land Price BubbleIndex of Urban Land Price (Residential)
Japan (1980 -- 2008)
40.0
50.0
60.0
70.0
80.0
90.0
100.0
110.0
120.0
130.0
140.0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Up from 60 to 126 (110%) in 11-year time, and then dived into 72 (43%) continuously for 17-year
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Housing Price Index Hong Kong (1980 -- 2008)
40
80
120
160
200
1993Q
1
1994Q
1
1995Q
1
1996Q
1
1997Q
1
1998Q
1
1999Q
1
2000Q
1
2001Q
1
2002Q
1
2003Q
1
2004Q
1
2005Q
1
2006Q
1
2007Q
1
2008Q
1
Hong Kong Property Price Bubble
Up from 85 to 170 (100%) from 93 to 97 (5-year), then dropped to 60 (99%) in 2003 (6-year). Up again to 123 (105%) to 2008 (5-year), and is now dropping…
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US Home Price Index 1970 - 2008
0
50
100
150
200
250
300
350
197
0
197
1
197
3
197
4
197
6
197
7
197
9
198
0
198
2
198
3
198
5
198
6
198
8
198
9
199
1
199
2
199
4
199
5
199
7
199
8
200
0
200
1
200
3
200
4
200
6
200
7
The US Property Price Bubble
Up from 32 to 294 (819%) from 1970 to 2007 (37-year), then plummeted in 2007/2008 …
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A unique cause of the Japan Land Price Bubble?
• The Plaza Accord signed in Sep. 1985,
• Yen to US$ exchange rate dropped continuously and substantially,
Exchange Rate of Yen to US dollar Japan (1980 -- 2008)
0
50
100
150
200
250
300
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
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A unique cause of the Hong Kong Property Bubble?
• Asian Financial Crisis (Currency) started in Thailand in July 1997,
• but Hong Kong dollars is pegged to the US$, no currency risk,
• the bubble burst was said to be a contagious effect of the whole region
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A unique cause of the US Property Bubble?
• Subprime mortgages– High risk loans
• Credit derivatives– Alphabet soup (CDO, CDS, MBS, TABX…)– Credit Risk Transfer by Securitization
• Deregulation of banking industry– Shadow Banking
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Any Common Symptom?Real Interest Rate in Japan (1982 -- 1996)
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
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Real Interest Rate in Hong Kong (1993 -- 2008)
-8
-6
-4
-2
0
2
4
6
8
10
12
14
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Any Common Symptoms?
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Real Interest Ratein U.S. (1991 -- 2008)
-5.00%
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Any Common Symptoms?
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Why Cut Interest Rate?
• Curing bubbles:– the year-2000-bug in 2000 (US), – the dotcom bubble in 2004, etc (US).
• Currency board arrangement (HK):US and HK interest rates (1993 -- 2008)
0.00
2.00
4.00
6.00
8.00
10.00
12.00
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
HK r
US r
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Why Cut Interest Rate?2
• cushion the effect of the strong currency :– 1980 - 1989 (JAP)
Basic Loan Rate in Japan (1980 -- 2005)
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
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Return v Real Interest Rate, Japan
Scatterplot of Housing Return v Real Interest Rate in Japan (1980 - 1992)
y = -1.2102x + 0.0874
R2 = 0.0432
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00%
Real Interest Rate (%)
Ho
us
ing
Re
turn
(%
)
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Return v Real Interest Rate, Hong Kong
Scatterplot of Housing Return v Real Interest Rate in Hong Kong (1993-2008)
y = -0.0056x + 0.0163
R2 = 0.1349
-0.25
-0.2
-0.15
-0.1
-0.05
0
0.05
0.1
0.15
0.2
-10 -5 0 5 10 15
Real Interest Rate (%)
Ho
usin
g R
etu
rn (
%)
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Return v Real Interest Rate, the US
Scatterplot of Housing Return v Real Interest Rate in the US (1991 - 2007)
y = -0.2091x + 0.0156
R2 = 0.1191
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
-3.00% -2.00% -1.00% 0.00% 1.00% 2.00% 3.00% 4.00%
Real Interest Rate (%)
Ho
usin
g R
etu
rn (
%)
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Why haven’t learnt from past?
• A drug addiction model. • A growth of the economy achieved by credit expansion
works like drug addiction, • as it provides a pleasant reinforcer of further growth, and • an unpleasant symptom of recession associated with
withdrawal. • Unfortunately, with repeated drug use results in
addiction, and • which would intensify the magnitude and the duration of
the unpleasant symptom. • In other words, with more successful preventions of
recession by credit expansion, more substantial credit supply is necessary to keep the bubble booming, and the more torturous the results of a bubble implosion would be.
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The End
For enquiries, please send email to
Dr Edward CY YIU
Department of Real Estate and Construction
The University of Hong Kong
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