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2000–2003 real estate bubble in the UK but not in the USA

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  • Zhou, Wei-Xing
  • Sornette, Didier

Abstract

In the aftermath of the burst of the “new economy” bubble in 2000, the Federal Reserve aggressively reduced short-term rates yields in less than 2 years from 61/2 to 11/4% in an attempt to coax forth a stronger recovery of the US economy. But, there is growing apprehension that this is creating a new bubble in real estate, as strong housing demand is fuelled by historically low mortgage rates. Are we going from Charybdis to Scylla? This question is all the more excruciating at a time when many other indicators suggest a significant deflationary risk. Using economic data, Federal Reserve Chairman A. Greenspan and Governor D.L. Kohn dismissed recently this possibility. Using the theory of critical phenomena resulting from positive feedbacks in markets, we confirm this view point for the US but find that mayhem may be in store for the UK: we unearth the unmistakable signatures (log-periodicity and power law super-exponential acceleration) of a strong unsustainable bubble there, which could burst around the end of the year 2003.

Suggested Citation

  • Zhou, Wei-Xing & Sornette, Didier, 2003. "2000–2003 real estate bubble in the UK but not in the USA," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 329(1), pages 249-263.
    • Handle: RePEc:eee:phsmap:v:329:y:2003:i:1:p:249-263
    DOI: 10.1016/S0378-4371(03)00600-9
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    References listed on IDEAS

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    1. D. Sornette & A. Johansen, 2001. "Significance of log-periodic precursors to financial crashes," Quantitative Finance, Taylor & Francis Journals, vol. 1(4), pages 452-471.
    2. Wei-Xing Zhou & Didier Sornette & Vladilen Pisarenko, 2003. "New Evidence Of Discrete Scale Invariance In The Energy Dissipation Of Three-Dimensional Turbulence: Correlation Approach And Direct Spectral Detection," International Journal of Modern Physics C (IJMPC), World Scientific Publishing Co. Pte. Ltd., vol. 14(04), pages 459-470.
    3. D. Sornette & A. Johansen, 2001. "Significance of log-periodic precursors to financial crashes," Papers cond-mat/0106520, arXiv.org.
    4. Anders Johansen & Olivier Ledoit & Didier Sornette, 2000. "Crashes As Critical Points," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 219-255.
    5. D. Sornette & J. V. Andersen, 2001. "A Nonlinear Super-Exponential Rational Model of Speculative Financial Bubbles," Papers cond-mat/0104341, arXiv.org, revised Apr 2002.
    6. D. Sornette & J. V. Andersen, 2002. "A Nonlinear Super-Exponential Rational Model Of Speculative Financial Bubbles," International Journal of Modern Physics C (IJMPC), World Scientific Publishing Co. Pte. Ltd., vol. 13(02), pages 171-187.
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