Thursday, February 7, 2013

The Housing Bubble that Wasn't

We had a lot of fun doing a back and forth with imminent economist John Quiggin when we first started the blog (here, here and here).  John is adamantly opposed the the Efficient Markets Hypothesis.  An argument commonly featured in his book is that some asset will go up and then go down, which we in retrospect call an asset price bubble.  For instance, the Tech bubble boom and burst and the recent housing bubble boom and burst in the U.S.  What would be more impressive for John to do (and more lucrative for the reader), would be for John to have written a book predicting large asset bubble crashes, and then he could publish a second book to gloat.

Fortunately, we have the next best thing, which is blogging.  And Quiggin has made some predictions on his blog, for instance, this post called "The Housing Bubble" on Australian housing (Aug. 2003):
All of these factors have combined to produce a bubble in the residential housing market that can fairly be described as unprecedented. As measured by the REIA median house price series, average house prices nearly doubled in most Australian cities between 1997 and 2003...
There can be little doubt that the prices of houses and urban land have reached unsustainable levels, and that they must decline in real terms. The main concerns for economic management relate to the speed and extent of this decline. If prices fall 40 per cent over one or two years, which would only bring them back to the levels prevailing in 2000, widespread financial distress is certain and a recession highly probable.

Thanks to some nifty work by the economist and a hat tip to Scott Sumner, we can look back and see how valid Prof. Quiggin's bubble seeing glasses were: 


Turns out the bubble didn't pop.  So if it doesn't pop, is it really a bubble?  If we can only recognize bubbles after they've popped, then the term bubble really has no meaning at all.  Unpredictable falls in the prices of assets certainly doesn't violate the EMH.  


  1. Australian House price statistics are full of traps for the unwary. Most of the series don't take account of quality improvement, so you need to look at hedonic data, or better still, data based on resales. That's much harder to get, but it shows that prices have been declining in real terms for some time, contrary to the graph above.

    They still have some way to go, by most estimates

    Still, Australia was certainly the worst country in the world to be, if you're writing about asset bubbles. Bubbles everywhere else have burst, while ours has deflated very gently.

  2. Can you link to the hedonic or comparison data you would consider more appropriate? Neither of the articles you linked seems appropriate as both discuss small changes over quarters or at most two years.

    The Australian Bureau of Statistics has prices up 71% across an eight city index since 2003. Interestingly, that data catches the 3% decline since 2010 the articles you linked discuss.