?Property and construction market fluctuations and instability are driven primarily by irrational exuberance.? Discuss.
To answer this question – examine empirical trends in housing, property and/or construction markets both before and after the 2007/2008 Global Financial Crisis (GFC). Analyse the key drivers of trends focusing in particular on sources of instability.
Here we decide to focus on the US.
There is no correct answer to this question ? you can either agree, disagree or something in between. The challenge will be to apply the key insights from lectures to your analysis of trends.
For your background reading, the module reading list will provide a guide. You are not expected to cover all these readings in your own paper but those who demonstrate a good command of this reading list will do well. You can also find your own readings using standard literature search engines ? for example:
http://ideas.repec.org http://scholar.google.co.uk
Length: 3,000 words, not counting abstract, diagrams, figures and tables
Note: Please focus on discussing and analyzing, not too much definition!!!
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Please refer to Course Notes for further details including sections on Term Paper Mode of Assessment, Word Count, Timing of Submission and Referencing and Plagiarism.
PS: Irrational exuberance would generate volatility so will be associated with both dramatic rises and dramatic falls. Following Minksy’s ideas, dramatic rises are fuelled by excessive optimism and dramatic falls when people start to realise that their past optimism was excessive (i.e. they were suffering optimism bias).
The other factor to consider links into Graham Ive’s point about markets and sectors being related to each other so fluctuations in one market may reflect what’s going on elsewhere. This also connects to a point made by Richard Barkham: rapid rises in property prices especially in places like London may reflect a flight to safety if other financial assets such as shares and some bonds are looking too risky.
Advce tips:
Remember to write relationship between the irrational behavior and the booms and slumps of the property and construction instabilities
The sources of Irrational
The irrational behavior
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SUGGESTED READINGS
Akerlof G & R J Shiller (2009) Animal spirits: how human psychology drives the economy, Princeton UP, Princeton.
1. Baddeley M (2013). Behavioural Economics and Finance, Routledge, London. Chapters 6 and 11.
2. Baddeley M (2009). Running Regressions: a practical guide to quantitative research,
Cambridge: Cambridge University Press. Chapter 5.
3. Baddeley M (2005) ?Housing bubbles, herds and frenzies: evidence from British housing markets?, University of Cambridge, Dept, of Land Economy, Centre for Economic and Public Policy Brief No. 02/05
4. Ball M and Wood A (1998) ‘Housing investment: long-run international trends and volatility’, Housing Studies, vol. 13
5. Bank for International Settlements (BIS) (2003) Real estate indicators and financial stability, BIS Papers No. 21.
6. Barkham R (2012), Real Estate and Globalisation, Wiley Blackwell.
7. Barkham R and Ward CWR (1999), Investor sentiment and noise traders, Journal of Real Estate Research, vol. 18(2), pages 291-312.
8. Barkham R (2001), ?Office Market Analysis?, in Developers and Development, J Hennebury and N Guy (eds).
9. Barker K (2004), Review of housing supply, HM Treasury.
10. Barras R (1994) ‘Property and the economic cycle: building cycles revisited’, J of Property Research, vol. 11, pp 183-97
11. Golland A and Boelhouwer P (2002) ?Speculative housing supply, land & housing markets?, Journal of Property Research, 19(3), pp 231-251
12. Hillebrandt PM (1985) Economic theory and the construction industry, Basingstoke, Macmillan (part 2)
13. Ive G and Gruneberg S (2000) Economics of the modern construction sector, Macmillan. Chapter 10.
14. Kindleberger C et al (2005), Manias, panics and crashes: a history of financial crises, (fifth edition) John Wiley, NY.
15. Malpezzi S and Maclennan D (2001) ?Long-run price elasticity of supply of new residential construction in the US and the UK?, Journal of Housing Economics, vol.10, pp 278-306
16. McGough A and Tsolacos S (1997) ?The stylized facts of UK commercial building cycles?, Environment and Planning A, vol. 29, pp. 485-500
17. Minsky H (2008), Stabilising an unstable economy, Yale UP, New Haven.
18. Muellbauer J and Murphy A (1997) ?Booms and busts in the UK housing market?, Economic Journal, vol. 107, pp. 1701-27
19. Romer PM (1994). The origins of endogenous growth. Journal of Economic Perspectives, vol. 8(1), pp. 3-22.
20. Reichstein T, Salter A and Gann DM (2005). Last among equals: a comparison of innovation in construction, services and manufacturing in the UK, Construction Management and Economics, vol. 23(6), pp. 631-44.
21. Romer, P. M. (1994). The origins of endogenous growth. Journal of Economic Perspectives, vol. 8(1), 3-22.
22. Shiller R J (2008) The subprime solution: how today?s global financial crisis happened, and what to do about it, Princeton UP.
23. Shiller RJ (2003), From efficient markets theory to behavioral finance, Journal of
Economic Perspectives, vol. 17(1): 83-104.
24. Summers LH, Minsky HP, Samuelson PA, Poole W and Volcker PA (1991), Macroeconomic Consequences of Financial Crises, in Feldstein M (ed), The Risk of Economic Crisis, http://www.nber.org/chapters/c6231.pdf
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