Nobel-winning economist sounds alarm over 'bubbly' global housing prices
Robert Shiller warns that a shift to a 'more speculative attitude' and easy monetary policy create risk of markets making same error that triggered 2008 financial crisis
One of three US economists who won this year's Nobel Prize for economics on Monday for research into market prices and asset bubbles expressed alarm at the rapid rise in global housing prices.
Robert Shiller, who shared the 8 million Swedish krona (HK$9.6 million) prize with fellow laureates Eugene Fama and Lars Peter Hansen, said the US Federal Reserve’s economic stimulus and growing market speculation were creating a “bubbly” property boom.
The Royal Swedish Academy of Sciences lauded the economists’ research on the prices of stocks, bonds and other assets, saying “mispricing of assets may contribute to financial crises and, as the recent global recession illustrates, such crises can damage the overall economy”.
This was the case in the collapse of the US housing market, which helped trigger the 2008-2009 global financial crisis.
Markets are at risk of committing the same error now, Shiller said after learning he had won the Nobel Prize.
“This financial crisis that we’ve been going through in the last five years has been one that seems to reveal the failure to understand price movements,” Shiller said.
Bubbles are created when investors fail to recognise when rising asset prices become detached from underlying fundamentals.
Shiller and other economists warn that prices in some markets have risen too far, too fast because of the Fed’s ultra-easy monetary policy. The benchmark US Standard & Poor’s 500 index hit a record in September, though it is generally not considered overvalued based on expectations for corporate earnings results or economic growth.
Shiller’s work led him to suggest in 2005 that the US housing market might be overheating. He helped create a closely watched gauge of housing prices, the S&P Case/Shiller Index.
In June this year, he pointed to a potential new housing bubble in some of the largest US cities.
“It is up 12 per cent in the last year. This is a very rapid price increase right now, and I believe that it is accelerated somewhat by the Fed’s policy,” he said.
China, Brazil, India, Australia, Norway and Belgium, among other countries, were witnessing similar price rises.
“There are so many countries that are looking bubbly,” he said.
The Fed has held US interest rates near zero since late 2008 and almost quadrupled its balance sheet to about US$3.7 trillion through a campaign of bond buying, or quantitative easing, to hold down long-term borrowing costs.
Placing more emphasis on avoiding asset price bubbles, and financial stability in general, has been a controversial topic for many years in policy-making circles.
Central bankers traditionally try to avoid targeting asset bubbles with a blunt instrument like interest rates. But the severe harm done when a bubble bursts means that, in the United States at least, they are thinking more broadly about the unintended consequences of their monetary policy decisions.
“When asset prices are getting way out of line, it should be cause for alarm. The monetary authorities should lean against extreme asset price movements,” Shiller said.
The bubbling housing market is not mainly the result of central bank policy, but reflects a shift toward “a more speculative attitude”, he said.
“We cannot expect monetary policy to cure all of these problems,” Shiller said.
Hansen struck a more cautious note.
“We often underestimate how much uncertainty there is in terms of our understanding of the economy,” he said. “If you pretend that we know more than we do, you are in danger of constructing policies that can be counterproductive.”
Fama has been called the father of modern finance and is well-known for thinking about markets as efficient.
This view of how assets are priced is at odds with Shiller’s belief that investors can fall prey to Irrational Exuberance, the title of his 2000 book, published shortly before the bursting of a global bubble in information technology stocks.
Hansen, who voiced caution about the ability of economists to spot asset bubbles in advance, said there were different ways to interpret evidence.
“In terms of overall understanding I guess there is a sense in which one could view them as complementary,” he said of the research of his co-winners.
“But right now, they would both have very different guesses about what is the right set of models going forward,” he said in an interview.