Case Study Analysis of Are Housing Bubbles Contagious Social Essay

Case Study Analysis of Are Housing Bubbles Contagious
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Case Study Analysis of Are housing Bubbles Contagious
Riddel (2011) sets out to determine what happens to the peripheral housing market when the urban core experiences an appreciation of price and a rise in incomes. The paper determined that there is a price contagion between the urban core and the peripheral markets, which leads to the spillover of speculative price pressures from an urban center to the outer cities. The effect, according to Riddel (2011), is greater when there exists a relationship of either price or income between the two markets. In the paper, Riddle (2011) identified the key players to be Las Vegas, which acted as the peripheral market and Los Angeles, which represented the urban core. These two cities had registered a dramatic increase and a subsequent decline in housing prices in the period between 1978 and 2008. The price contagion between the two cities can be evidenced by the rise in incomes and prices in Los Angeles, which spilled over to Las Vegas creating an unprecedented rise in the prices of houses in the peripheral market. It was Riddel’s (2011) understanding that the distorted housing prices were as a result of irrational exuberance which was not backed by any identifiable market fundamentals.
Description of the Scope of Real Estate Bubbles
Real Estate bubbles are supposed to be temporary, but recent occurrences have shown that it can persist for many years. Housing bubbles are caused by increased levels of investment, speculation, and demand, and these can increase the unsustainability of prices. Studies done by Vansteenkiste and Hiebert (2011), Stevenson (2004), among others, highlights the reality of housing price shocks originating from one area and reverberating to other areas. For instance, the study by Vansteenkiste and Hiebert (2011) looked at about ten countries in the European Union and discovered that there is a co-movement of housing prices across the nations due to the increased linkage in the countries financial markets and trade. Although the spillover was limited across nations, the effect was much greater with countries that were nearby. Another study by Meen (1999) identified a ripple effect or a housing price diffusion in Britain, which registered a cyclical upswing that originated from the southeast area of the country and spread to other regions. Moreover, the scope of housing bubbles can be affected by factors such as wealth effect of housing, informational factors, economic interdependence, the structural deviations in regional markets, and migration which can further explain why when price changes in a central area the effect is felt in surrounding regions (Teng, Chang & Chen, 2016).
Additionally, the rent-seeking behavior of investors can be a major factor contributing to price contagion. Investors seek opportunities that lower the cost and increase returns and this pushes them to outside markets. Rent-seeking behavior counteracts productive activity and also harms innovation (Teng, Chang & Chen, 2016). To elaborate, speculators, unlike housing consumers, do not contribute to the housing market, and consequently, their behavior of seeking out houses in periph...