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An Investigation on Real Estate Market Dynamics and Bubble Formation Modeling

Author

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  • Iancu Laura Andreea

    (Bucharest University of Economic Studies, Bucharest, Romania)

  • Croicu Andreea Elena

    (Bucharest University of Economic Studies, Bucharest, Romania)

  • Rogojan Luana Cristina

    (Bucharest University of Economic Studies, Bucharest, Romania)

Abstract

A speculative bubble arises when the market price of a financial asset diverges from its fundamental value, resulting in abrupt and disproportionate hikes that cannot be rationally explained by its underlying intrinsic value. This behavior is often followed by market crashes, as observed during historical asset bubbles such as the Dutch Tulip Mania (1634-1637), the Mississippi bubble (1719-1720), the South Sea bubble (1720), the stock-market bubble of the US (1921-1929), the Japanese stock market and real estate bubbles (1986-1991), and the recent US housing bubble and the stock market crash (2002-2006). In the housing market, speculative bubbles can be attributed to excessive public expectations of future price increases, leading to overpricing and eventually diminishing demand and instability of inflated home prices (Case and Shiller, 2003). The cycle of a housing market bubble involves individuals continuing to purchase houses despite awareness of overpricing, with the expectation of compensation through further price increases. This perception of continuous price increases leads to increased demand, which further drives up prices. However, house prices cannot increase indefinitely, and the steady increase eventually becomes unstable, resulting in a downward adjustment that may occur at a much faster pace than price increases. The existence of speculative bubbles in stock and housing markets has led academics to investigate their potential role in financial crises.

Suggested Citation

  • Iancu Laura Andreea & Croicu Andreea Elena & Rogojan Luana Cristina, 2023. "An Investigation on Real Estate Market Dynamics and Bubble Formation Modeling," Proceedings of the International Conference on Business Excellence, Sciendo, vol. 17(1), pages 1603-1616, July.
    • Handle: RePEc:vrs:poicbe:v:17:y:2023:i:1:p:1603-1616:n:30
    DOI: 10.2478/picbe-2023-0144
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    References listed on IDEAS

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    1. Efthymios Pavlidis & Ivan Paya & David Alan Peel & Alisa Yevgenyevna Yusupova, 2017. "Exuberance in the U.K. Regional Housing Markets," Working Papers 168117137, Lancaster University Management School, Economics Department.
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