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Real Estate Bubbles and Urban Development

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  • Edward L. Glaeser

    (Harvard University and National Bureau of Economic Research)

Abstract

Real estate booms have regularly occurred throughout the world, leaving painful busts and financial crises in their wake. Real estate is a natural investment for more passive debt investors, including banks, because real estate's flexibility makes it a better source of collateral than production facilities built for a specific purpose. Consequently, passive capital may flow disproportionately into real estate and help generate real estate bubbles. The preference of banks for more fungible real estate assets also explains why real estate is so often the source of a financial crisis. Real estate bubbles can be welfare enhancing if cities would otherwise be too small, either because of agglomeration economies or building restrictions. But given reasonable parameters, the large welfare costs of any financial crisis are likely to be higher than the modest benefits of extra building. The benefits of real estate bubbles are welfare “triangles,” while the costs of widespread default are welfare “rectangles.”

Suggested Citation

  • Edward L. Glaeser, 2017. "Real Estate Bubbles and Urban Development," Asian Development Review, MIT Press, vol. 34(2), pages 114-151, September.
  • Handle: RePEc:tpr:adbadr:v:34:y:2017:i:2:p:114-151
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    Cited by:

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    2. Glaeser, Edward L., 2022. "What can developing cities today learn from the urban past?," Regional Science and Urban Economics, Elsevier, vol. 94(C).
    3. Mustafa Özer & Serap Kamişli & Muhammed Aslam Chelery Komath & Özlem Sayilir, 2022. "Asymmetric Causal Relations Between COVID-19 Economic Supports and Real Estate Price Shocks," International Real Estate Review, Global Social Science Institute, vol. 25(4), pages 479-498.
    4. Antczak-Stępniak Agata, 2021. "Absorption Rate as a Tool for Assessing the Dynamics of Development Activity," Folia Oeconomica Stetinensia, Sciendo, vol. 21(2), pages 1-20, December.
    5. Patrick Bergmann & Endre Kamarás & Werner Gleißner & Edeltraud Guenther, 2020. "Enhanced Cash Flow Valuation in Real Estate Management by Integrating Innovative Materials and Risk Assessment," Sustainability, MDPI, vol. 12(6), pages 1-26, March.
    6. Feng Dong & Yumei Guo & Yuchao Peng & Zhiwei Xu, 2022. "Economic Slowdown and Housing Dynamics in China: A Tale of Two Investments by Firms," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(6), pages 1839-1874, September.

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    More about this item

    Keywords

    agglomeration economies; financial crises; real estate bubbles;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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