Not all bubbles are the same, but I believe they do share some common characteristics, namely:
1) easy credit
2) buying on the expectation of future gains
4) panic buying - buy now or get 'priced out of the market'
5) rampant speculation
6) believing past performance DOES guarantee future returns
7) the shoe-shine guy gets in
The Japan housing bubble experience is amazing - an incredible rise followed by a spectacular fall. Phoenix is a perfect example here - up 55% in one year solely due to speculation. And likely down 30% in the following two, just to get back to where it started.
Here's a few quotes from this excellent read (hat-tip to HP reader Adrian):
With housing prices in the United States looking wobbly after years of spectacular gains, it may be helpful to look at the last major economy to have a real estate bubble pop: Japan. What Americans see may scare them, but they may also learn ways to ease the pain.
Their experiences contain many warnings. One is to shun the sort of temptations that appear in red-hot real estate markets, particularly the use of risky or exotic loans to borrow beyond one's means. Another is to avoid property that may be hard to unload when the market cools.
Most of all, economists say, Japan's experience teaches the need to be skeptical of that fundamental myth behind all asset bubbles: that prices will keep rising forever. Like their United States counterparts today, too many Japanese homebuyers overextended their debt, buying property that cost more than they could rationally afford because they assumed that values would only rise. When prices dropped, many buyers were financially battered or even wiped out.
December 25, 2005
Posted by blogger at 12/25/2005